Alumni in Conversation: Hotel investment, acquisition and development
In the second of our Alumni in Conversation written series, class of ’99 alumnus Rani Gharbie reveals how hotel development and investment has been affected by COVID. He shares the challenges he has faced as Head of Acquisition & Development for Pod Hotels and offers real-world advice for alumni looking to invest in properties.
Following graduation from Glion, Rani joined the Hyatt corporate management program in Dubai in 2000. From there he specialized in sales and revenue management, moving on to hotel development and eventually hotel real estate investment . After working with IHG, JLL and Virgin Hotels, he ran Cedar Funds, his own investment and advisory firm, and most recently he took on the mandate to lead the growth of a micro hotel brand, Pod Hotels (“Pod”).
“COVID has not stopped our drive to expand Pod, but it has certainly stretched a few things and made us adjust our strategy”, Rani says. “Our goal to grow the portfolio from 5 hotels to 50 is a mid to long-term strategy, not short-term, and our commitment to achieving this goal remains unshaken.”
“Our business model is to have rooms of 110 square feet, so 11 sqm. We're almost 40 percent smaller than our competitive set, driving more or less the same rates. Why? Because we designed it like the mechanics of a Swiss watch. Everything fits perfectly. And that means that you can have 40 percent more revenue in the same building envelope, which translates to about 30 percent more operating profit.”
The biggest hotel development challenges of 2020
Keeping growth on-track during COVID has been almost impossible for hospitality brands, for Rani, uncertainty has been a major factor. He shared the three biggest challenges he’s faced as Head of Acquisition and Development:
1. Less lending – “Lenders are not lending because their resources and focus is on maintaining existing loans.”
2. Underwriting uncertainty – “There's not a lot of clarity as to what the performance of hotels will be when they reopen. In the case of ground-up development, it will be in 2022, 2023 when they open their doors. Nobody knows what level of occupancy there will be, so lenders and equity partners are cautious about underwriting deals in this environment. “
3. Distressed or developed – “Development itself is a very heavy endeavor because you're building for three years and there’s a lot of risk. The capital market is wondering whether it's safer instead to wait for distressed opportunities or acquire existing assets significantly below replacement cost.”
“Consumer confidence is the foundation of everything”
The risk that Rani mentions in ground-up developments is keeping machinery off-site, as lenders look for more certainty. He believes they hold the key to the restart of hotel construction projects.
“Construction will resume when lending institutions are ready to come back to the table. And it's very linked to consumer confidence, which would trigger investor confidence. Consumer confidence is the foundation of everything. If you're not able to make money on existing hotels, it’s very difficult for investors to feel confident enough to invest in new ones.”
“I think between quarter three 2020 and quarter one 2021, you'll see a pickup in lenders’ appetites and that will have a direct correlation with our projects being closed. Moving forward, I think ground-up projects are distressed, and that's something that we’ll be pursuing as soon as they are available.”
5 ways hotel investment and development will change
Hospitality is set to change across the board, with consumer behavior leading the evolution. In terms of hospitality investment and development, Rani sees four major shifts on the horizon.
1. “I think we're morphing a little bit more from fully fledged development approach to a development and conversion growth strategy to take advantage of distressed opportunities that will eventually hit the market.”
2. “I think what we're also going to see is that some hotels will deflagged or reflagged by another brand as they trade hands due to cash flow issues and financial difficulties. We will also see hotels converted to other uses such as residential, condos or office space. For instance, Wall Street Journal reported on June 16, 2020 that as many as 25,000 rooms, or 20% of New York City’s hotel inventory might not reopen under the same operation, or simply be converted to other real estate uses.”
3. “In the US labor can be cost prohibitive to hotel investments when compared to most parts of the world. Labor unions in the US carry a significant weight on a hotel investment theses, and I believe that an open dialogue between industry stakeholders and lawmakers is paramount to ensure hotel investments remain profitable so the industry can continue expanding and creating new jobs.”
4. “One important distinction coming out of the crisis will be a better understanding of the difference between balance sheet lenders and CMBS loans. Developers and Owners who have balance sheet loans enjoy a direct relationships with their lending institution, and therefore get a much greater degree of forbearance and loan workouts during economic downturns. In other words, I think a lot of hotel owners will be more inclined to pay a slightly higher interest rate with a balance sheet lender / bank versus sourcing cheaper CMBS loans that will be packaged and sold to folks that you don't know.”
Post-covid advice for alumni
Hypotheses and predictions are useful, but now more than ever, actual real-world experience is truly invaluable when advising fellow hospitality professionals. Rani shared his advice for any alumni looking to invest in hotels or acquire new properties.
“For those looking to invest in hotels, I'd say make sure that you don’t over-leverage your assets. Leave more equity in the deal, prepare for stress periods like this pandemic, and keep your monthly repayments lower, particularly when you're approaching the end of a real estate investment cycle.
“If your investment thesis makes sense, then there'll be plenty of investors ready to back you up. Start cultivating relationships early and bring potential partners on board during the creative process of your business theses. Team up with partners that you would enjoy working with. Whether they’re equity or debt investors, they need to share your values and your vision of the concept and the brand you're developing, buying or converting. Finally, make sure you pick partners that are collaborative in nature and can add value to your business model beyond just the funding aspect. There's no reason why we can’t all come out of this stronger.”
Need to stay one step ahead? Gain more insights and advice from our Alumni in Conversation series.