8 Habits of Effective Hotel Investors

As investment strategies go, food trucks and graffiti are about as outside the box as you can get, yet these are both part of Jon Bortz’s immediate plans. Innovative property upgrades are integral to his approach in generating outsized returns from his assets. Over the past six years, the CEO of Pebblebrook Hotel Trust has cultivated a high-value portfolio of distinct upscale properties in just about every hot market in the country. “We’re very different from others investing on the hotel side,” says Bortz. “We put money into places where we can create an experience that’s unique for the customer.” The Bethesda, Md.-based firm’s approach to acquisition and property improvement has also created a unique value proposition for investors.

Bortz established Pebblebrook in 2009 as a blind-pool REIT—meaning it was just a bunch of money with no assets or pipeline—and the company has outperformed other REITs in the hotel space every year since 2012. “We like to buy properties where what we see is not what other people see,” says Bortz. That beauty-in-the-eye-of-the-beholder philosophy dictates much of how Pebblebrook operates and will be on full display later this year when the REIT reopens Vintage Plaza in Portland, Ore.—a renovated property that’s been extensively transformed to reflect local color.

Along with being a place where “weird” is a term of endearment, Portland has a long and rich history of outdoor graffiti. Bortz is looking to tap into that history by decorating the Vintage Plaza’s interiors with street art. “The idea being that if you come to Portland, this is all part of the overall experience,” Bortz says. “And you’ll get a much deeper immersion into the local culture by staying at our property as opposed to somewhere else.”

This same thinking has Bortz considering adding a food truck to Hotel Zephyr, due to open this year in San Francisco, and it has inspired an adult playroom with giant-sized games like Jenga at Hotel Zetta, another Pebblebrook property two miles away. “One of a kind, in people’s eyes, is more valuable than 5,000 of a kind,” Bortz says. While his firm’s approach may seem eccentric, it is guided by a conservative investment strategy that targets upscale full-service hotels in big cities that can be acquired for bargain prices. The REIT’s properties include the Hotel Monaco in Seattle and Washington, D.C.; the Le Meridien Delfina in Los Angeles; the Westin Gaslamp in San Diego; the Sir Francis Drake in San Francisco; the InterContinental Buckhead in Atlanta; and the Affinity Manhattan in New York.

Seeing the potential upside in properties is a key component in the company’s recent winning streak that saw a 31.4 percent growth in earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2014. Adjusted funds from operations (FFO) also grew 38 percent, and adjusted FFO per share improved 24.9 percent. Revenue per available room (RevPAR) was also up 9.2 percent for the year, which outpaced overall industry growth by 11 points.

Pebblebrook’s pristine performance is attributed to its strong fundamentals and the high demand for its properties, which has been stoked by a $57.1 million investment on capital improvements last year. It also helps that the industry is enjoying massive success across the board. REIT stocks are off to a solid start in 2015 as the economy and travel to the United States improve. The good vibes are sourced in accelerating capital markets, favorable supply and demand balances, and strong investor appetites, according to Ernst & Young hospitality forecasts. One particular report, EY’s “Global Hospitality Insights: Top Thoughts for 2015,” states, “The hospitality sector is in a strong position to make even greater leaps in 2015, as fresh capital from new locales increases the number of industry participants and creates an attractive atmosphere for acquisitions.” The report also notes that the impact of hospitality on the global economy is surging. With growth in travel and tourism expected to increase by 3.9 percent this year, the sector will be “increasingly recognized as a key driver of economic growth” at all levels.

With the lodging sector in a healthy stretch that, by all indications, is projected to continue for a few years, hotels are attracting more money than ever before, and much of it is seeking out similar opportunities in prime locations. “Good locations drive revenue, not just in the physical value of the space but also in the overall business climate as well as the local government tax policies and regulations,” says Vesta Hospitality CEO Rick Takach. His management and development firm specializes in turning troubled hotels into successful investments, and finding the diamonds in the rough isn’t as easy as it used to be. Over the next 12 months, competition among investors in high-demand markets is expected to intensify, especially for those who specialized in upscale select service assets. Wise money men like Bortz have found success by looking at investment strategies through a much different prism.

It starts by identifying properties that provide “a good box” to build upon, which includes good room sizes and excellent public areas where designers can get creative by adding amenities, like the Hotel Zetta playroom. The company also recognizes what is important to travelers and places a premium on being on the cutting edge of those demands, like providing technology that lets Zetta guests stream the shows and videos they have on their mobile devices to the flat-screen televisions in each room. “Conservatively, it’s valued at double what we invested in it,” Bortz says. “And that’s because we created something that’s unique in the marketplace.”

Finding the Right Market
Even though it is a major contributor to many firms’ success, creativity alone will only get you so far in the hotel sector. There’s also the matter of managing risk. This is something investors love to worry about. With 35 upscale properties in major cities on both coasts, Pebblebrook’s portfolio is diverse by design. As a public company, it aims to minimize the downside, which is why Bortz says its largest assets represent no more than 7 percent of the company’s EBITDA. This protects a bad performance from overwhelming the rest of its portfolio. Focusing on gateway cities also minimizes risk, since properties can leverage the traditional strength of transient travel in these markets along with growing inbound and group business. That’s where the action is, and big cities also present built-in barriers for some competitors.

“The coastlines tell a story,” says Scott Berman, U.S. Hospitality and Leisure Practice Leader at PricewaterhouseCoopers. “The rest of the country is sort of easy to figure out, but Boston down to Miami and Seattle down to San Diego are so much more complex given the inbound tourism, all the corporate business, and the convention center hubs.” Over the next few years, Berman says he’ll be looking to these coastal markets to see which way the industry is heading. “If we’re sitting here next year and 7.4 RevPAR becomes 5, we’ve got a lot to talk about.”

Performance-wise, these gateway markets aren’t showing any signs of slowing down. “Just look at top 25 markets versus the rest of the country,” says Berman. “In the last four years, there’s been about a three to four point delta in RevPAR between top 25 and the rest of the country.”