Lionstone Development CEO Talks Strategy

diegoLODGING recently sat down with Lionstone Development CEO Diego Lowenstein to discuss the company’s growth strategy, how it selects the right brand, and more.

Why is it important to build a diverse portfolio? When you’re in real estate, and particularly hospitality, you have to have very good diversity. Markets go through cycles in very different ways. Having that diversity balance out cash flow streams is very important to our approach to new transactional activity.

What is Lionstone’s growth strategy? We continue to look to opportunities where we can bring in world-class brands and management companies to operate our facilities, but we also are keen on developing our own management structure and independent approach to branding. For example, we partnered with the Virgin Group to establish Virgin Hotels. In that case, we play a role as a real estate investor, but we’re also actively involved in the management entity that will not only operate the hotels where we invest but also where other third parties fully develop those properties. Moving forward, in the next five to 10 years, we will continue to expand on transactions with unique brands or startup opportunities that lend themselves to creating brands or new management structures. At the same time, we will continue to fulfill pipeline development with established companies that we have great relationships with.

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What type of product does the company find appealing? What makes it exciting for us is product that is distinct, that is embracing innovation, because it’s becoming an increasingly competitive world in hospitality. The companies or brands that really look to innovate, not only from a physical standpoint, but also from technology and service standpoints, are the ones that are going to materially outperform the others in the future. We’re really looking to something that creates a sense of excitement and also embraces the very different generational attitudes that are out there in our client base. A baby boomer is one thing, and a millennial is another. They are very different types of consumers. It doesn’t mean one product can’t cater to both, but it needs to be respected and understood so that these different demographics can be serviced properly.

How do you select the right brand for a project? When we look at a market, we get excited when there is something unique about the property, either from a location standpoint, a brand approach, or an amenity approach. So first, we try to understand the overall opportunity, and then and only then do we start to identify a short list of brands that would be most appropriate. In the last decade, in many of the markets we play in, a lot of the large hotel companies have heavily saturated these markets with their product. Unless you’re doing greenfield development in a pioneering market, a lot of the brands are already spoken for. So you have to be much more creative in finding that niche player that has the capabilities to compete in the market and that you can align with.

Are you pulling back at all at this point in the cycle? We tend to be opposite thinkers. I think we’ll see a softer period, and then a more easy recovery; I don’t see any imminent crisis attacking hospitality. Particularly because a lot of these markets, even though they’ve had some supply growth, are still historically in check with the standards of the past. If you look at Miami Beach, there is no existing available land on the beach to develop new product—most of the product in this cycle changed hands, got converted. So as we come out of a softer macro cycle that is being affected more by things that happen outside the United States than inside, we will come out stronger in a market like Miami, because there will not be a great ability to add to supply. I see that across a number markets. But these are the years where the real interesting opportunities come to be from an acquisition and transactional standpoint. That’s been big a big part of our expertise at Lionstone—finding distressed properties and opportunities in these different markets to acquire in the down cycles, and then rebranding, remanaging, and bringing them up as the market starts to perform in a better way.

What current challenges should developers take into consideration? As the macro economy cools or we go through an election cycle, financing does become more of a concern. Given that to begin with you have a very limited universe of hospitality lenders out there, and particularly construction facilities for ground-up construction, it’s all about keeping good relationships with these banking institutions. Having a strong track record allows you to be able to present a new project even when it’s not the best of times from a general market standpoint.

Any other key advice before a developer strikes a deal? In the hotel business, you’re transacting for the very long term, so that initial due diligence work is critical and should not be underestimated. How you approach not only the acquisition or negotiation of the transaction, but also how you fit the right brand and how you build an innovative product that can stand the test of time is very significant. We’re generational, and we’ll keep assets for 20, 50 years, so we pay careful attention to a lot of details that might become important in 10 years. My advice would be to never underestimate the hard work that goes into it. And sometimes you do all this hard work to basically decide not to move forward with a transaction. And that’s part of the nature of this game. If you’re not prepared to spend that kind of money to say no, then you’re probably in the wrong business. Because many times, it’s better to say no than go into something that has all the markings of becoming an eventual failure.