Sam Nazarian compares outsourcing to a table that’s missing a leg. To maintain stability, the 37-year-old entrepreneur prefers to fill his hotels with homegrown restaurant and nightlife brands. An all-inclusive business strategy retains control of the guest experience and yields a more profitable investment, Nazarian says, which is especially attractive to developers in tier-one cities such as Los Angeles, New York, and Miami.
“The fact that we have all these brands and they’re proven and they’re international on their own gives us an interesting position in the market,” says Nazarian, founder and chief executive officer of Los Angeles-based hospitality company SBE Entertainment. SBE acquires, develops, and manages projects through its hotel, restaurant, nightlife, and real estate divisions. Founded in 2002, the company has 40 properties to date, with an additional 31 in development.
The past two years have been fruitful for SBE, from the summer 2010 launch of its second hotel brand, The Redbury (see “Scrappy Younger Brother”), in Hollywood, to the June opening of a South Beach location for SLS Hotels, its luxury brand that debuted in fall 2008 with the flagship property in Los Angeles. Other highpoints include the nationwide growth of its Katsuya sushi restaurants with eight locations thus far, the successful SBE-controlled West Coast expansion of New York mainstay Papaya King, the launch of Sayers Club and Greystone Manor nightlife venues in Hollywood, a new partnership with the Miami Heat to open Hyde AmericanAirlines Arena nightclub later this year, and an investment in the L.A.-based Umami Burger chain.
What was once a Southern California-centric company is evolving into a nationwide entity. SLS Hotel New York is slated to open in 2013, followed by SLS Hotel & Casino Las Vegas in 2014. In August, Nazarian traveled to China to begin international expansion of his growing empire.
A BROADER REACH
As China experiences a major boom in domestic tourism and its rapidly emerging middle class has more disposable income to spend, SBE is joining other U.S. hotel chains to push expansion in the country.
“We see this as a big piece of our growth over the next five years for SBE Entertainment and SLS Hotels,” Nazarian says, speaking from his hotel room in Shanghai.
SBE has secured a yet-to-be disclosed distribution and operation joint-venture partner in China, he says, and the company intends to announce a number of SLS Hotels within the next 12 to 18 months. “We feel we’ll have some very exciting news here in the next six months about the first SLS in mainland China, probably in Shanghai or Beijing,” Nazarian says, “and the announcement of our Hong Kong office imminently, which will give us reach to the international markets, not just in the Pan Pacific area but also India, Malaysia, Singapore, Indonesia—the whole rim.”
The Hong Kong office will handle a big piece of distribution for SBE’s brands, specifically SLS Hotels and SLS Residences. Serviced apartments and condos will give the company an opportunity to grow the brand in another hospitality category that’s both profitable and in demand, Nazarian says. “Right now we’re getting a lot of inquiries on serviced apartments,” he says. “In that net of how we’re seeing growth in the U.S. and in international markets is really the desire for the developer or the owner to see a fully synergistic product.”
For the expansion of SLS in the U.S., SBE expects to acquire a high profile asset in Miami, and is targeting New York as one of the most important cities for growth. The company is also considering markets like D.C., Chicago, Seattle, Dallas, Austin, and Houston. “I think we’re really focused on the core urban markets,” Nazarian says. “We’re not really looking to go to tier-two cities in the U.S. as of yet, but I think in the next 12 months you’ll see a huge pipeline of SLS Hotels integrated with SBE food and beverage concepts.”
Up until now, SBE has been focused on acquiring and redeveloping existing properties, but the company recently announced that it will be taking on a ground-up project for SLS Residences soon. The timing is right, Nazarian says. “We have so many brands that we can sometimes get in the front of the line because developers can deal with one operator for the majority of their needs.”
Nazarian says the industry has reached a fork in the road, as lifestyle becomes the next generation of boutique hotels. “The forefathers of our business, whether it be Hilton, Starwood, Hyatt or Marriott, are really pushing their lifestyle brands, in addition to blocking and tackling with their more well-known brands,” he says.
The success of a lifestyle property relies partly on its intangible assets, and Nazarian says food and beverage experiences are a key driver in the current landscape. Since its beginnings in 2002, SBE has settled into a position where the brands in its portfolio are mature and relevant in the lifestyle sector, he adds.
“That’s really given us the ability to have a seat at the big table with every major developer that we’re talking to, from when they’re [issuing a Request for Proposal] for a new operating company,” he says. “That’s been a really interesting growth model for us in the last 12 months.”
Whereas big hotel companies usually require brand standards, SBE has the flexibility to take a more entrepreneurial approach. “From our standpoint, there is a lot of space and noise and crowdedness in the lifestyle sector,” Nazarian says. “I think now it’s just going to be the proof in the pudding in the next two to three years of which lifestyle product actually resonates the most in this new era of lifestyle and boutique hotels and the emergence of all these new brands that are going to come out.”
SBE may not have millions of customers in its distribution channel, but Nazarian says his team has found a way to make owners and developers comfortable with what he calls its scalpel-versus-the-hammer approach. “Our scalpel goes into our customer base and we’re filling up our hotels and growing in markets and RevPAR year-over-year better than our comp set in every one of our hotels,” he says.
SBE has an exclusive agreement with French designer Philippe Starck for the creation of hotels, restaurants, and lounges in North America. Starck helped introduce the original boutique hotel design concept to the industry while working with hotelier and developer Ian Schrager to redesign the Royalton Hotel in New York City in 1988.
Starck fueled the artistic vision behind the 142-room SLS Hotel South Beach, a $45 million renovation of the former Ritz Plaza. Since opening in June, the hotel is above budget in both rate and occupancy, Nazarian says. The renovation marked Starck’s return to Miami, where he designed the Delano Hotel in 1995, and the two hotels are now neighbors.
The SLS Hotel South Beach has a single kitchen with three food and beverage outlets owned and operated by SBE. James Beard award-winning chef José Andrés, the property’s creative director of food and beverage, opened the second location of The Bazaar, which blends traditional Spanish cuisine with local Latin flavors. Andrés’ previous experience in the hotel industry includes opening Jaleo and China Poblano restaurants at The Cosmopolitan in Las Vegas.
“Jose and I have a great relationship and he’s probably one of the strong reasons why SLS Beverly Hills and Miami are where they are today from a product standpoint. His growth and our growth were parallel,” Nazarian says.
Hyde Lounge, which was already established as a nightlife destination in Los Angeles and at the Bellagio in Las Vegas, debuted its first oceanfront location, Hyde Beach, at the hotel. The property also has a Katsuya restaurant in partnership with master sushi chef Katsuya Uechi.
With plenty of successful South Beach hotels already in operation, Nazarian relied on elevated service as a differentiator. “I think people really appreciated a new design from Starck and a new comprehensive host of brands within one building that are focused on service.”
Since the opening of SLS Hotel at Beverly Hills, SBE has learned a lot from a development perspective. With the first location of any brand, Nazarian says companies cast a wide net to see what it brings in and where gaps exist in the market. SBE perceived an unaddressed market between the boutique and luxury sectors in Beverly Hills, and positioned a property to fill that need. The top-to-bottom renovation of the former Le Méridien cost $230 million, and Nazarian had to restructure the property mortgage amid a massive financing crunch.
“I’m sure a lot of people in 2006 that built a hotel for 2008 probably felt some of those same challenges,” Nazarian says. Ultimately, the project has been successful from an investment standpoint with all of the partners, he says, and the hotel is resonating with guests due to a consistent four-star food and beverage program.
Since the opening, the surrounding areas have been undergoing major construction and development of super luxury product, Nazarian says, most notably a 100-key apartment building from high-profile developer Rick Caruso, whose projects have included The Grove retail and entertainment complex in Los Angeles.
WORKS IN PROGRESS
In April, SBE and real estate investment firm Stockbridge Capital Group LLC secured $300 million in new funding for the redevelopment of the Sahara Hotel & Casino into the SLS Hotel & Casino Las Vegas. JP Morgan Securities LLC raised the funds in about a two-week period. SBE and Stockbridge had purchased the hotel and casino in 2007 with plans of turning it around, but shuttered it in May 2011 because it wasn’t economically viable.
SBE enlisted Gensler Architects and Las Vegas-based Penta Building Group to assist in the redevelopment of the property, which is slated to open in 2014. Construction is expected to begin in December, Nazarian says. This will be Starck’s first Vegas resort and largest hospitality project to date. Once complete, it will feature a mixed-use resort and casino with more than 1,600 guestrooms and suites and a collection of SBE’s signature restaurant and nightlife brands, reimagined for Vegas. This will include The Bazaar by Andrés, Katsuya by Starck, a reinvention of SBE’s original nightlife concept, Shelter, and new brands currently in development. In total, Nazarian says there will be 12 restaurants, four nightclubs, and two pools.
SBE named hospitality and gaming industry veteran Rob Oseland, formerly of Wynn Resorts, as president and chief operating officer. SBE will run all aspects of the property, including its F&B, gaming, and nightlife outlets and front- and back-of-house operations.
“The Vegas SLS will really put us in a unique space as a hospitality company. When it opens we will be the only gaming company that has a major Las Vegas Strip presence combined with a brand that has distribution into the key core urban markets of the U.S. and internationally,” Nazarian says.
The Las Vegas market has been showing a month-over-month recovery for the last two years, Nazarian says. According to the most recent data from the Las Vegas Convention and Visitors Authority, visitation in June was up 2.1 percent for the month (up 2.4 percent year-to-date) and ADR was up 8.5 percent versus last year (up 4.3 percent year-to-date). Visitor volume in 2011 rose 4.3 percent over 2010.
“I think Vegas is in need of a new idea,” Nazarian says. The last major resort and casino to open in Las Vegas was the Cosmopolitan in December 2010, and Nazarian hopes SLS Las Vegas will be the first to open in four and a half years. “There’s been a level of absorption in the market of all the new product that’s come in,” he says, “and then I think everybody else in that market will be reshuffling and reintroducing their brands and hotels.”
In July, SBE announced the acquisition of and initial development plans for SLS Hotel New York, in collaboration with Manhattan-based Moin Development. It will be a converted office building situated within Manhattan’s Park Avenue South corridor. When the redesign is completed in mid-2013, the hotel will feature 190 guestrooms and suites, and SBE’s restaurant and nightlife concepts in the lobby and on the rooftop. Following Starck’s dream world design at SLS Hotel South Beach, the SLS Hotel New York will reflect both the core DNA of the SLS brand and its Manhattan locale, and will feature an entirely new guestroom look.
New York City has one of the highest hotel occupancy rates in the country. In 2011, occupancy rates were 85 percent, compared to a national average of 60 percent. “New York is the mecca of the hotel business,” Nazarian says. “We’ve been trying to find a hotel asset site in New York for many, many years.”
The project continues the company’s skill set of adaptive reuse, taking a pre-worn 14-story building and transforming it into a product that will yield maximum return on investment and deliver positive guest experiences, Nazarian says. “Because we’re operating with all the food and beverage, the nightlife, the spa, the rooftop experience and the rooms under one management contract, we beat out a lot of suitors for this project.”
Moving ahead, the hotel platform will lead the overall growth of SBE, which is something Nazarian had hoped for since founding the company. “The hotel growth will definitely be the main driver for our business,” he says. “Really growing these amazing food and beverage concepts that have worked and are proven within them will give us the leg up in some of these scenarios.”