After Hurricane Irene swept through the East Coast in late August 2011, the 22-year-old, 200-room Sheraton Atlantic Beach Oceanfront Hotel in North Carolina suffered extensive water damages and had to close its doors. The Newport Group, a real estate development and management firm, acquired the property at the end of 2012 and converted it to the DoubleTree by Hilton Oceanfront. The firm had converted a former Sheraton in its headquarters city of Augusta, Ga., to the DoubleTree brand just a few years prior and had a successful experience. But in North Carolina, expansive renovations and compliance with the property improvement plan (PIP) were complicated by the fact that storm-related repairs also had to be made. The new owners ended up investing $5 million in the hotel, which reopened for business in June.
Buyers typically change flags because they want to reposition an asset, moving it up a notch or two to a higher price point. In other cases, the new brand may simply work better in a particular market or add value by complementing the rest of the buyer’s portfolio. Whatever the motivation, buyers understand the conversion is likely to take capital in terms of upgrades and renovations, as well as to meet any of the new brand’s PIP requirements. The transition may also come with unexpected minefields, whether they entail timing, coordination, communication, or simply the need for more investment dollars.
Industry experts expect to see in the second half of the year and continuing into 2014 a spike in the number of hotels being bought and sold, a result of the ongoing industry rebound. And accompanying the spike in transactions is an increase in the number of conversions. In the full-service realm, a small number of brands have become known in the past year or two as conversion brands. Chief among these has been DoubleTree. In 2012, for example, the brand opened 49 hotels, 85 percent of which were conversions from either another brand or an independent, a torrid pace DoubleTree expects to meet or exceed this year. Other popular conversion brands include the core Marriott brand, Sheraton, and Westin. Conversion brands play an important business role because they allow hotel companies to expand their global footprints at a faster pace while strengthening corporate brand awareness. For owners and developers, conversions are typically more cost-effective than ground-up construction and offer owners entry into established loyalty programs.
THE COOKIE TRAIL
Ask DoubleTree brand global leader John Greenleaf about DoubleTree’s track record, and he chalks it up to the brand’s development model. “One of the reasons is that there’s no one DoubleTree brand prototype that all the hotels have to conform to. There are brand standards certainly but no one look or feel,” Greenleaf explains. “If the hotel is the right size and location and the partner seems to be a good fit with the brand, we’ll look at the hotel in detail, develop a PIP, and give the owners the opportunity to cost it out.”
The parties then have a discussion about the renovations the brand is insisting on. “It’s up to the owners to make a determination whether financially that’s the kind of investment they’d be willing to make,” Greenleaf says. “It really depends on what their desired outcome for the asset is. They may want to continue to own it, or they may plan to sell it at some point.”
Newport Group Executive VP of Operations Marty Matfess recalls how the firm initially walked the Atlantic Beach, N.C., property with the DoubleTree team, performing due diligence of what key guest impact items had to be fixed. The firm also got the approvals for repairs early on to ensure the building was watertight. “Even prior to signing a franchise agreement, DoubleTree signed off that the improvements we were making were acceptable and consistent with the PIP,” Matfess says. “So open and frequent communication is critical.”