Skift Take

For hoteliers in slow-to-rebound U.S. markets, forced sales will be more likely as costs and debts rise. That's one of a few insights from the top boss of First Hospitality, which is an active owner and manager.

Series: Early Check-In

Early Check-In

Editor’s Note: Skift Senior Hospitality Editor Sean O’Neill brings readers exclusive reporting and insights into hotel deals and development, and how those trends are making an impact across the travel industry.

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The hotel sector has become more specialized. Companies increasingly focus on just one thing, whether it’s ownership, operations, franchising, or third-party management. So First Hospitality stands out for its contrarian approach. It keeps a hand in almost everything.

First Hospitality’s diverse business interests in the U.S. give it a broad view of hotel deals and development.

  • The Chicago-based company is a real estate investor with a portfolio worth “hundreds of millions of dollars.”
  • It’s also a third-party operator of just over 50 hotels. It has an ownership interest in about half of those.
  • The company — backed by Stephen L. Schwartz’s family — develops hotels, too.
  • Last year, First Hospitality signed a deal with The Georgetown Company, a real estate investor.
  • Georgetown plans to invest upwards of $1 billion in upscale and luxury hotels.
  • First Hospitality will manage those hotels with, or for, Georgetown.

I interviewed president and CEO David Duncan for his insights.

  • Over his career, Duncan has coordinated more than $10 billion of real estate and capital market transactions.

Duncan said many hotels’ failure to maintain their properties would haunt them.

  • During the pandemic, capital expenditure often evaporated as owners paid debt service or distributed money to investors.
  • The big brands have been flexible, letting owners delay spending on property improvement plans.
  • But beat-up hotels tarnish a brand’s reputation. So the big hotel groups will have to crack down on negligent owners.
  • First Hospitality has avoided getting overleveraged, Duncan said. That has let it make fewer trade-offs between servicing debt, making quarterly distributions to investors, and maintaining properties.
  • “Owners with a long-term perspective know that you may have to forgo distributions for a couple of quarters if you want to keep the guest service scores high,” Duncan said. “But a lot of private equity owners have shorter-term focuses and are much more motivated for quarterly distributions.”
  • The property upkeep burden — made more daunting by inflation and postponed projects — may push casual investors to accept modestly discounted prices for their properties.

“The debt side of the capital markets will push hesitant sellers to sell,” Duncan said.

  • During the pandemic, debt balances went up for most hotel real estate.
  • Temporary forbearance let loan balances balloon.
  • Now debt issuers want to be repaid. They’re eager to deploy the capital in fresh loans at today’s higher interest rates.
  • So casual hotel investors, especially those with properties in urban markets that have uncertain demand recoveries, may be prompted by lenders to become more flexible.
  • “There will be more forced sales, though not necessarily at distressed prices,” Duncan said.
  • Ducan’s analysis echoes one Baron Ah Moo of the consultancy PKF recently shared with me.

First Hospitality has been expanding its third-party management.

  • So far this year, it has grown its portfolio under management “by 20 percent.”
  • “We’re hearing on the operating side a fair amount of owner displeasure with their current operators,” Duncan said. “So we see an opportunity to win business.”
  • “Some third-party management firms have grown too big,” he said. “They’re ignoring smaller customers.”
  • “Other firms didn’t use the pandemic as a time to invest in their operational technology and efficiency,” he said.

First Hospitality is doing selective hotel development in markets with high growth, such as sunny resort destinations.

  • “In some markets, buying an existing product hasn’t necessarily been a bargain because there’s been too much capital chasing relatively little supply,” Duncan said.
  • Transactions have been elusive. First Hospitality has only bought one hotel this year, but it underwrote more than 100 deals that fell through.
  • This perspective is echoed by recent data on California from Atlas Hospitality Group. This year so far, hotel transactions have dropped 9.9 percent, and total dollar volume is down by a third, year-over-year.
  • As a developer, the biggest risk is not being able to service your debts because building and conversion require a lot of upfront capital. You need high-paying guests to show up quickly to be able to pay the mortgage. So it’s critical to choose markets where you can quickly get a property in the black.

The company is ideally looking for properties with about 200 to 300 keys in major cities, especially on the East Coast or in Chicago.

  • “Large urban markets have been slower to recover in demand, and there isn’t a lot of capital necessarily chasing the urban recovery,” Duncan said. “So we’re trying to find better value there than elsewhere.”
  • In markets that have roared back strongly, it’s often cheaper to build than to buy once everything is added up, Duncan said. That’s true despite supply-chain issues disputing construction and other obstacles.

First Hospitality has no plans to change its strategy of being both an owner and an operator of hotels.

  • “I love the balance,” Duncan said. “I like that half of our portfolio is third-party because I believe third-party ownership gives us additional insight into best practices and industry dynamics that we can use to inform how we run the hotels we own.”
  • “You’re getting sort of a daily report card, where sophisticated institutional investors are setting the benchmarks for your own performance on every attribute,” he said.
  • The company treats owning and third-party management as equal priorities.
  • “All of our operating team is focused on the same plan regardless of who owns the asset because all our teams are compensated exactly the same,” Duncan said.
  • First Hospitality is more incentivized to invest in its technology and processes for the third-party management business on the cutting edge than a pure-play third-party management company would be, Duncan said. After all, it uses the same software for the hotels it owns, letting it directly sees the added efficiencies pay off on the bottom line.
  • Most of its properties are franchised, and that lets the company learn best practices from the big brands for use in its independent hotels.

First Hospitality used the pandemic to fine-tune its business practices, such as how it sets room rates.

  • The company doubled its revenue management team and increased its sales team.
  • Almost every one of the hotels it has taken over or opened over the past two years has gotten more than 100 percent of its “fair share” of revenue in the market, as benchmarked by business intelligence firm STR, within three months instead of the customary six to 12 months, Duncan said.
  • What’s new? The company has been watching the total cost of distribution like a hawk. It keeps a sharper eye on bottom-line margins. It chooses to expand segments, such as business transient, group, or leisure, that won’t disproportionately add to costs and eat up profit.
  • Far too many hotel revenue managers don’t measure the net revenue from any book of business, he said. They’re often incentivized and trained just to drive topline revenue numbers.
  • “For our franchised properties, we pride ourselves on generating a higher share of ‘’ bookings than the brand averages,” Duncan said — noting that direct bookings save the company from paying commissions to online travel agencies.

First Hospitality moved in June its headquarters from the Chicago suburbs to downtown, kitty-corner from the Willis Tower.

  • “It’s been interesting the see the level of energy in the office turn on like a light switch, with more dynamism in the new quarters,” Duncan said.
  • “Our ‘butts-in-seats index’ is probably 60 percent of pre-pandemic norms on any given day,” he said. “We’ve left unassigned about a third of the seating because we’ve bet that hybrid work and hot-desking are here to stay.”

I always read tips and feedback. Contact me at [email protected] or via LinkedIn.


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Tags: ceo interviews, Early Check-In, hotel investments, hotel operations, Skift Pro Columns

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