[Houston19514]

The New Juniper, on Thursday, July 12th, 2007 @ 9:19am, said:

OK. I apologize in advance for the posting, but i can only take so much.

I will not tell you that i know everything about the future of Houston real estate. But, I do know more than most. Don't believe me, just stop reading here.

I will not tell you that i know everything about the economics of hotel development. But, I do know welllllll more than most. Again, same admonition regarding leaving the post at this time.....

However, anyone who uses the logic (<- term used loosely) that hotels should merely lower their rates to increase demand knows NOTHING about the hotel business). It was at this point in the previous post that hopefully most of you hit the "back" button on your browser. Hotels have certain fixed costs and certain variable costs. By way of a very basic example, hotels would MUCH rather sell one room for $100 than 100 rooms for $1 each. Same amount of revenue generated, but much higher variable costs per room on the 100 rooms. So, a novice might say, "Well, if you can't fill your rooms at $150 per night, sell them for $75 and you'll be full." Half right. You'd be full. BUT, you would actually be worse off than if you closed the doors completely. Nice hotels such as Alden, Icon, Lancaster, have high fixed and variable costs.

Their staff per occupied room is very high. (Thus the difference between full service and limited service - but that is a story for another day). Turning a room (transitioning from one guest to another), by way of example, in a limited service should run about $35 - $40 per room. In a full service boutique, it may be twice that. So, selling a room for $75 is actually a money loser just on that alone. Then figure in the staff that you wouldn't have to pay if you were not full of $75 per night guests, and it furthers the problem.

Lastly on rate. Few things in the hotel business are as studied and cherished as rate integrity. You have to build rate up and condition your customers to expect to pay a certain amount. Then, slowly, you can bump rate up without much push back. However, drop your rate drastically and here is what you get: business conditioned to pay $75 per night (money loser) that will jump ship the minute you try to push rate up again. Oh, and those that were paying $150 and happy to do so, resent the lowering of the rate, realize there is a problem, and go to the Four Seasons. The knee jerk reaction to declining occupancy is to dump rate. Biggest problem/mistake in hotel management. GM's want to be able to show owners that they have 85% occupancy and to heck with the ADR. HUGE problem if not caught early. It is a vicious, downward spiral.....
And, while i'm at it. Making a call on Wednesday to get a hotel room downtown and learning your hotel is full is not exactly a leading indicator of the hotel market in CBD. Business travelers are the bread and butter of downtown hotels. Staying full Tuesday, Wednesday and Thursday evenings is not the problem. It is the other four nights that kill these places.

Making the decision between losing $1MM per year and spending another $10MM to upgrade with the prospect of STILL losing money is not as easy as you make it sound. Just consider if it were your money. And, while i'm on it, your statement of "the remodeling costs would not be huge" is equally as baffling. Have you ever recarpeted 250,000 sf of floor? How about new wallpaper for 150 rooms? Nevermind, let's say, just new bedding, towels, sheets. How about upgrading the HVAC system? The hot water delivery system? All of these things would help the guest experience but are VERY expensive.

Staying full for business travel and/or special events is easy. It is the other days that bankrupt a property.

Downtown, unflagged hotels lose money. Period.

I am certain of very few things in life. This one i know.

I don't want to go off on a rant here Dennis Miller style, but goodness gracious.

Sorry if the post skipped around a bit. However, just too much to address for one monring.

If I'm wrong, I'm wrong. Happy to admit it. However, at least prove me wrong based on some, reasonable, sound, based on some sort of reality, logic.....

Respectfully,
TNJ

First off, cut the attitude, sister. If you're bitter about having been decisively proven wrong on your predictions of multiple downtown hotel closings, I'm sorry, but get a grip already. I laid out some very respectful, and yes, logical questions regarding the hotel operations. A respectful and logical response would have been nice. (Sort of like The Niche gave last week or so).

The fact remains, these very same hotels lower their rates substantially on the weekends, and presumably are still meeting their marginal costs in doing so. There is nothing illogical about this concept. Successful businesses do it every day, including successful hotels. I discussed this concept of cutting rates but still remaining above marginal (or variable) costs in an earlier post. I never suggested they should cut their rates to below marginal costs. I suggested that if they were losing huge sums of money with the status quo, they would surely move their rates in the direction of their weekend rates, which I presumed are still above marginal costs. I understand wanting to protect "rate integrity". But not if it means continuing a losing battle. As you know, but blithely ignored, I didn't say anybody should cut their rates to $75. Nice straw man attempt, but I'm not letting it fly. Nor did I ever suggest they cut their rates in half. (Most of them are charging well over $150 for weekday rooms. They could do a lot of cutting and still be well above $75.) AND, even if they cut into their "rate integrity", once their market improves, they can start inching their rates up, and those rates will be accepted, as you said in your post.

Also, I am well aware that redecorating a 200 room hotel can get expensive. But if a business is losing money at the rates you suggest, and the future holds nothing but more of the same, as you also suggest... and if, meanwhile, the chain-flagged hotels in your market are doing well. Well, it seems rather obvious, the investment would be pretty much a no-brainer. (Especially when one considers that, in order to maintain their high weekday rates, they are soon going to have to do all of that redecorating anyway. (Anybody who knows the hotel business as well as you claim to also knows that luxury hotels have significant "spruce-ups" every 5-7 years or less, regardless of whether they are changing chains or trying to upgrade.) Besides which, none of the hotels being discussed are run-down flop-houses. It seems unlikely they would be required to install new water heating or climate control systems just to join a chain.)

If, as you say, downtown unflagged hotels lose money, period, then one would think the investment to flag would be a good one And I doubt it would run as much as $10 million, but whatever . . . as I said above, most of that they will have to spend soon anyway, just to stay in the luxury hotel market. It does not cost $50,000 per room to do a redecorating job ($10,000,000 divided by 200 rooms), and most of these hotels have well under 200 rooms. Your choice of numbers suggests you may be intentionally setting up straw men. . . or you don't know nearly as much about the hotel business as you say.

My bottom line question is, and the reason for my skepticism that the Alden, the Inn at the Ballpark, the Magnolia, the Lancaster and the Icon are all losing money hand-over-fist: Why would a hotel operator/owner who is losing big money with no end to the losses in sight, continue operating in the exact same manner, making no adjustments, even in rates? OR just shut the darned thing down already?... I can imagine that one hotel perhaps, for some set of idiosyncratic circumstances, will just continue merrily on its way losing huge sums year after year, but it just seems a little unlikely that we have FIVE such operators in downtown Houston. Businesses just don't go on year after year losing the same money year after year, without making (often drastic) changes to try to end the losses. With the exception of the Icon, none of these hotels have done so. What's up with that?

This post has been edited by Houston19514: Thursday, July 12, 2007 at 5:27 PM

[houston-development]

Houston19514, on Thursday, July 12th, 2007 @ 12:39pm, said:

First off, cut the attitude, sister.

wow, pot meet kettel.

let me ask you... what industry do you work in and how many years have you been doing it?

you are constantly over-critical of posts from reputable people who specialize in a certain product/industry. when your OPINION differs from their "real world" experinces and insight, you attempt to berate them into submission. the information we provide isnt always 100% accurate and you should take it FWIW. however, more time than not, its pretty much on the money. i never see you post inside information; only questioning and belittining the poster who does.

go back and count how many times you've bashed tnj in this thread... geeze, look at all of the threads in which bash inside intel with your opinions..

its almost napoleon-like.

maybe im wrong. you could have years upon years of experience in all professions. perhaps your opinions are based upon vast first hand knowledge and from people in the know. if you do and im mistaken, you have my sincere apologies.

to make a long story short, this isnt a trial, so stop badgering. your constant shooting of the messenger will inevitably hurt this fine forum because some people, myself included, are already becoming tight-lipped.

and before insight a flame war, please think twice prior to replying. nothing good will come out of it and the mods will step in.

[TheIndustry]

...Back to the W Hotel

Check this out. It looks like the newest version of Highstreet.

River Oaks District

The W is in several of the renderings and two hotels are shown in the site plan. It also has three towers (as a previous poster suggested the development that the W was part of would have) as well as a smaller office building.

The renderings show several tenants:
Prada
Burberry
Barneys (Flagship facing Westheimer?)
Rolex

From the Flash version of the Leasing Plan:
Apple
Scoop
Intermix
Ted Baker
Coach
BCBG
Tommy Bahama
Benetton
Tootsies
North Face
French Connection
Original Penguin
Burberry
Barneys

There are many more, but I can't make the names out. Who knows if they have signed anything.

This post has been edited by TheIndustry: Tuesday, July 17, 2007 at 2:20 AM

[Trae]

Damn, if this is true...

[The Great Hizzy!]

Is this the first time that they've gone to the trouble of listing actual prospective tenants? I don't recall seeing such a specified list on the website before.

[houston-development]

TheIndustry, on Tuesday, July 17th, 2007 @ 1:39am, said:

...Back to the W Hotel

Check this out. It looks like the newest version of Highstreet.

River Oaks District

i could be mistaken but looking at the aerials, this is the westcreek redevelopment, not highstreet.

[Mister X]

So is it official now? The W is going to Highstreet/Westcreek/River Oaks District? And BLVD Place is getting the Ritz?

With all the guessing and speculation about the W, I'm surprised no one posted a link to that website sooner.

[Trae]

I hadn't seen the W in the plans the first time I watched it when the site first went online. I believe they added it in.

[Houston19514]

houston-development, on Tuesday, July 17th, 2007 @ 9:54am, said:

i could be mistaken but looking at the aerials, this is the westcreek redevelopment, not highstreet.

Correct. This is the development formerly known as Westcreek (or maybe it was only known as Westcreek when they were doing the combined development with High Street. The combo development fell through. Now High Street and River Oaks District are two separate developments. High Street being immediately to the east of River Oaks District.)

TheIndustry, on Tuesday, July 17th, 2007 @ 1:39am, said:

...Back to the W Hotel

Check this out. It looks like the newest version of Highstreet.

River Oaks District

The W is in several of the renderings and two hotels are shown in the site plan. It also has three towers (as a previous poster suggested the development that the W was part of would have) as well as a smaller office building.

The renderings show several tenants:
Prada
Burberry
Barneys (Flagship facing Westheimer?)
Rolex

From the Flash version of the Leasing Plan:
Apple
Scoop
Intermix
Ted Baker
Coach
BCBG
Tommy Bahama
Benetton
Tootsies
North Face
French Connection
Original Penguin
Burberry
Barneys

There are many more, but I can't make the names out. Who knows if they have signed anything.

I saw that on their site some time ago, and would love it if that were an actual tenant layout. Unfortunately, it appears that the tenants shown on their website are aspirational, if you will. Tenants they would like to sign. The reason I say that is that they also show a DeBeers shop. DeBeers recently announced they will be opening a shop in The Galleria.

This post has been edited by Houston19514: Tuesday, July 17, 2007 at 11:21 AM

[Trae]

What store is that next to Phase II? Let's take that thing down.

[Houston19514]

Trae, on Tuesday, July 17th, 2007 @ 11:28am, said:

What store is that next to Phase II? Let's take that thing down.

I think it's Target

[banking214]

TheIndustry, on Tuesday, July 17th, 2007 @ 1:39am, said:

...Back to the W Hotel

Check this out. It looks like the newest version of Highstreet.

River Oaks District

The W is in several of the renderings and two hotels are shown in the site plan. It also has three towers (as a previous poster suggested the development that the W was part of would have) as well as a smaller office building.

The renderings show several tenants:
Prada
Burberry
Barneys (Flagship facing Westheimer?)
Rolex

From the Flash version of the Leasing Plan:
Apple
Scoop
Intermix
Ted Baker
Coach
BCBG
Tommy Bahama
Benetton
Tootsies
North Face
French Connection
Original Penguin
Burberry
Barneys

There are many more, but I can't make the names out. Who knows if they have signed anything.

The W pictured is the W in Dallas.

I do agree that this would be an awesome as well as incredible shopping destination.

[TheNiche]

Houston19514, on Tuesday, July 17th, 2007 @ 11:33am, said:

I think it's Target

It is Target. And it's unlikely to go anywhere anytime soon.

[Deut28Thirteen]

Mister X, on Tuesday, July 17th, 2007 @ 9:55am, said:

So is it official now? The W is going to Highstreet/Westcreek/River Oaks District? And BLVD Place is getting the Ritz?

This area would be good for a W, if I was visiting Houston I would want to stay in Uptown/River Oaks area more than anywhere else. So is Houston really getting Both a W and a Ritz?

[Trae]

Hopefully. I think BLVD Place could support a Ritz easily. Then, maybe a Mandarin Downtown at the Houston City Centre site (it looks just like all the other Mandarins going up).

[houston-development]

Houston19514, on Tuesday, July 17th, 2007 @ 11:20am, said:

Correct. This is the development formerly known as Westcreek (or maybe it was only known as Westcreek when they were doing the combined development with High Street. The combo development fell through. Now High Street and River Oaks District are two separate developments. High Street being immediately to the east of River Oaks District.)

its the westcreek apartments, hence the westcreek redevelopment (which i guess will be called the "river oaks district"? moo..).

there were some preliminary discussions but nothing of substance ever materialized between the two.

you are correct, they are two seperate developments.

[The New Juniper]

Been out traveling for a bit and finally made it back to my post here.....

Took me a while to catch up on my reading, but alas, here i am.

First, Houston Development, thank you for 'having my back' so to speak. Not needed, but certainly appreciated.

The statements made to refute my industry facts do nothing but emphasize my point.

Q: "why would a hotel that is losing money year after year continue to stay open?"

A: When it is cheaper to lose money each year than it is close when you are on loan guarantees.

Bottom line: My good friend 'Houston90210' or whatever very clearly lacks real world experience. I will leave it at that.

On to W. And for the sake of peace and goodwill towards men & women, i will put the economics aside....

Glad to see the recent rash of postings. My concern is this:

Everything seems to be speculation still. Once they land, I will assume they will want a splash when the decision is made. It will still be a year before they begin construction, maybe two.

Just ready for this saga to end.

Peace.

TNJ

[buildingunbuildingrebuilding]

TheNiche, on Tuesday, July 17th, 2007 @ 12:57pm, said:

It is Target. And it's unlikely to go anywhere anytime soon.

That Target was updated not too long ago.

houston-development, on Tuesday, July 17th, 2007 @ 5:27pm, said:

its the westcreek apartments, hence the westcreek redevelopment (which i guess will be called the "river oaks district"? moo..).

there were some preliminary discussions but nothing of substance ever materialized between the two.

Discussions were more than I would consider preliminary. The groups were working together on this project for quite a while, but Trademark would never ultimately pull the trigger.

[nmainguy]

ENGcons, on Thursday, July 5th, 2007 @ 7:56am, said:

No offense taken. The reason for the Hush Hush is the company I work for is in negotiations with the W people to build the thing. I do not want to jeopordize the process.

Are you afraid the editor will expose your email address which could ultimatly expose your identity? (my educated guess is no) If that is your fear why did you post at all? If I were an employee of "the company I work for" "in negotiations with the W people to build the thing." why would I jeprodize my postition?
Belay the smoke, matey. That ship has sailed on HAIF.

[Houston19514]

The New Juniper, on Tuesday, July 17th, 2007 @ 6:14pm, said:

Been out traveling for a bit and finally made it back to my post here.....

Took me a while to catch up on my reading, but alas, here i am.

First, Houston Development, thank you for 'having my back' so to speak. Not needed, but certainly appreciated.

The statements made to refute my industry facts do nothing but emphasize my point.

Q: "why would a hotel that is losing money year after year continue to stay open?"

A: When it is cheaper to lose money each year than it is close when you are on loan guarantees.

Bottom line: My good friend 'Houston90210' or whatever very clearly lacks real world experience. I will leave it at that.


TNJ

Alas indeed. Thanks for finally throwing out a not entirely unreasonable response to ONE of my questions... But I must say, it is quite amusing that the result you predicted some time ago (hotel closures) is now deemed so unlikely that one who asks why the hotels don't close is pompously branded as very clearly lacking real world experience.

Hmmmm... real world experience.... Do you mean the kind of real world experience that causes you to think it costs more than $50,000 per room to redecorate a hotel? Is that the kind of real world experience I'm lacking? Funny, the Doubletree Intercontinental just re-opened after undergoing a complete re-do. New carpeting, bedding, paint, granite, furnishings... all for less than $20,000 per room. I suppose you are right. I may lack the sort of real world experience of which you speak. And for their sake, I hope the operators of the downtown hotels do as well. ;-)

And, H-D, just so you know this is not just my OPINION (and incidentally, if you actually read my posts, you will find they are very much fact-based. Very rarely are my posts opinion-based), here is the link to the story: http://www.chron.com...ws/4969655.html

Enjoy. Peace.

This post has been edited by Houston19514: Wednesday, July 18, 2007 at 7:16 AM

[The New Juniper]

Houston19514, on Tuesday, July 17th, 2007 @ 10:17pm, said:

Alas indeed. Thanks for finally throwing out a not entirely unreasonable response to ONE of my questions... But I must say, it is quite amusing that the result you predicted some time ago (hotel closures) is now deemed so unlikely that one who asks why the hotels don't close is pompously branded as very clearly lacking real world experience.

Enjoy. Peace.

I feel like Bill Murray in the movie Groundhog Day. No matter what i do or say, i read the same statements over and over again each time i check the forum.

You clearly do lack real world experience, certainly as it relates to hotel development, financing, and operation. You may be great at, say, tennis and for this reason, i will shy away from debating you on the reasons that Roddick cannot win Wimbledon.

On this topic, however, i have limitless patience and will be happy to review the reasons for my statements.

I do not take your challenge to my statements personally or do i view them as pompous. Just like i do not believe your lack of real world experience with hospitality properties makes you a bad person. In fact, i would wager that the owners of the aforementioned properties downtown wish today they had no real world experience with them either.

In any event, i will take your advice and enjoy the peace.

TNJ

[houston-development]

buildingunbuildingrebuilding, on Tuesday, July 17th, 2007 @ 7:20pm, said:

Discussions were more than I would consider preliminary. The groups were working together on this project for quite a while, but Trademark would never ultimately pull the trigger.

think about it rationally.

westcreek has significant frontage on westheimer and some on san felipe, its about 20a and owned free/clear, and they have a stop light.

the former ford dealership is narrow and long, on a 99-year lease, only has frontage on westheimer with no light, and closer to the railroad tracks.

they may have discussed it for a while but highstreet wanted a premium, even though it has numerous negatives.

as i said, it never went beyond perliminary and the ball was not in trademark's court.

[buildingunbuildingrebuilding]

houston-development, on Wednesday, July 18th, 2007 @ 10:12am, said:

think about it rationally.

westcreek has significant frontage on westheimer and some on san felipe, its about 20a and owned free/clear, and they have a stop light.

the former ford dealership is narrow and long, on a 99-year lease, only has frontage on westheimer with no light, and closer to the railroad tracks.

they may have discussed it for a while but highstreet wanted a premium, even though it has numerous negatives.

as i said, it never went beyond perliminary and the ball was not in trademark's court.

The Westcreek owners and Trademark were discussing a joing project for quite some time, which I think is common knowledge now. Maybe its semantics as to what each of us considers preliminary, not trying to pick a fight here.

When it became apparent that there were the proverbial too many chefs in the kitchen, the Westcreek owners decided it made more sense to sell (the front half of) their land. You are correct that it was not Trademark who killed it at that point.

But, since Trademark was so deeply involved in the project, they were the logical candidate to buy and were given first shot. The sides couldn't come to an agreement so CBRE was hired to market the Westheimer frontage of Westcreek. Trademark actually made a fairly competetive bid at that point but it ultimately was sold to OM.

This post has been edited by buildingunbuildingrebuilding: Wednesday, July 18, 2007 at 10:50 AM

[Houston19514]

The New Juniper, on Wednesday, July 18th, 2007 @ 8:50am, said:

I feel like Bill Murray in the movie Groundhog Day. No matter what i do or say, i read the same statements over and over again each time i check the forum.

You clearly do lack real world experience, certainly as it relates to hotel development, financing, and operation. You may be great at, say, tennis and for this reason, i will shy away from debating you on the reasons that Roddick cannot win Wimbledon.

On this topic, however, i have limitless patience and will be happy to review the reasons for my statements.

I do not take your challenge to my statements personally or do i view them as pompous. Just like i do not believe your lack of real world experience with hospitality properties makes you a bad person. In fact, i would wager that the owners of the aforementioned properties downtown wish today they had no real world experience with them either.

In any event, i will take your advice and enjoy the peace.

TNJ

Limitless patience actually does not seem to be your strong suit. But I'll play along. Why don't you start by reviewing the reasons for your statements regarding spending $50,000 per room to remodel a hotel? Clearly not exactly grounded in real world experience in the hospitality industry... (Sorry to be the one to throw facts into the conversation.)

You see, I learned long ago that anyone can claim to be an insider in any industry they choose on these discussion boards. A part-time bartender or cocktail waitress can spin themselves into a hospitality industry insider (not referring to you, TNJ). Therefore, in order to make the forum of any use at all, I tend to look for some kind of factual backup to raw, unsupported statements and opinions. And my skepticism meter goes off the charts when I see self-proclaimed insiders post numbers that are not reflective of the real world (e.g. $50,000 per room remodeling costs).

And just for the record, I've never claimed to be an insider in the hospitality industry, or to have any experience, real-world or otherwise in the hospitality industry, but I read a lot of newspapers and gather a lot of information and know basic business economics, and can do the simple mathematics required to know that it does not take $50,000 per room to remodel a hotel. And I am experienced in the business world and know enough to know that when businesses are losing money hand over fist, with no end to the losses in sight (your judgment, not mine), they make major adjustments in their operations, or sell out, or close down. They don't tend to just keep banging their head against the wall to avoid the pain that occurs when they stop. Other than throwing out one possible (although even then a little unlikely) reason for not closing down, you have not addressed my serious and logical question of why money-losing businesses do not make significant adjustments in order to try to stop losing money, e.g., lower weekday rates in the direction of their weekend rates (but still above marginal costs), join a chain, sell the place...

FWIW, my skepticism meter goes off when self-proclaimed insiders get offended by simple and logical questions, and respond with straw men and personal attacks rather than rational discussion.

And another reason for skepticism: It is hard to imagine how any one person could know the financial results of all of these hotels. They are either privately owned, closely-held, or part of a public corporation that does not break out individual results.

I'm prepared now for your "groundhog day" response. Here, let me type it for you: "You obviously have no real-world experience in the hospitality industry." ;-)

[TheNiche]

Houston19514, I get what TNJ is saying now, and I think that there's something to it. It certainly sounds plausible, anyhow.

Put yourself in the position of a prospective buyer of one of these boutique hotels. If not for the debt service that is tied to their development, they would be profitable. And as a buyer, you aren't at all interested in compensating the current owner for their bad investment--only in the cash flows from operations that can be realized by a purchase of the facility.

So the current owner has made a terrible investment, and when he sells the hotel, he will realize a huge capital loss at present that reflects the bad investment. He'll probably be upside down on the note at this point and have to make a big cash outlay, too. But if the interest rates on his loan are reasonable, the owner also has the option of providing cash infusions each month, spreading the financial loss out over time so that the present value of the loss is reduced. Additionally, the owner and many prospective buyers may feel that even though the owner is incurring an unavoidable financial loss, that he is operating the hotel more efficiently than someone else could, and that going forward from present his cap rate would be higher than someone else's.

So to summarize, the redevelopment of these boutique hotels was a mistake, but rational owners make decisions without factoring in sunk costs from the past. It's all about the present.

Am I on the mark, TNJ?

EDIT: That explanation may also dovetail to explain why repositioning as a national chain may not be viewed as viable. If operations by themselves are bringing in positive net cash flow, then the value of converting to a chain would be the difference between the present value of cash flows from the converted hotel (including any new debt service) and the current present value of cash flows (excluding old debt service or perhaps just the interest expense at most). Conversion may not be worth the cost.

This post has been edited by TheNiche: Wednesday, July 18, 2007 at 12:31 PM

[Houston19514]

TheNiche, on Wednesday, July 18th, 2007 @ 12:11pm, said:

Houston19514, I get what TNJ is saying now, and I think that there's something to it. It certainly sounds plausible, anyhow.

Put yourself in the position of a prospective buyer of one of these boutique hotels. If not for the debt service that is tied to their development, they would be profitable. And as a buyer, you aren't at all interested in compensating the current owner for their bad investment--only in the cash flows from operations that can be realized by a purchase of the facility.

So the current owner has made a terrible investment, and when he sells the hotel, he will realize a huge capital loss at present that reflects the bad investment. He'll probably be upside down on the note at this point and have to make a big cash outlay, too. But if the interest rates on his loan are reasonable, the owner also has the option of providing cash infusions each month, spreading the financial loss out over time so that the present value of the loss is reduced. Additionally, the owner and many prospective buyers may feel that even though the owner is incurring an unavoidable financial loss, that he is operating the hotel more efficiently than someone else could, and that going forward from present his cap rate would be higher than someone else's.

So to summarize, the redevelopment of these boutique hotels was a mistake, but rational owners make decisions without factoring in sunk costs from the past. It's all about the present.

Am I on the mark, TNJ?

Thank you for a thoughtful response Niche. That all makes some sense and might explain an owner's unwillingness to sell (except is it really likely that the same scenario applies to all four hotels (Alden, Magnolia, Lancaster, and Inn @ the Ballpark?). And it also does not explain their failure to make other adjustments in their operations that I have suggested would/should be made if they are truly in the never-ending money pit situation that people have claimed (e.g. joining a chain; hopefully, my presentation of facts has put to rest the nonsense that this would cost any where near $50,000 per room).

Also, I would suggest that their willingness to continue the never-ending operating losses rather than taking a capital loss suggests that the operating losses may not be as bad as some have suggested. I mean, if things are truly as bad and hopeless as has been suggested, those capital losses are going to start looking better and better; get out and get it over with.

And one more thought. Are they really sunk costs if you're still making payments on them? It seems to me a rational owner is indeed going to be thinking about those costs on a daily basis because they are not in the past, but are very much in the present. I don't know... just some thoughts.

[TheNiche]

Houston19514, on Wednesday, July 18th, 2007 @ 12:23pm, said:

Thank you for a thoughtful response Niche. That all makes some sense and might explain an owner's unwillingness to sell (except is it really likely that the same scenario applies to all four hotels (Alden, Magnolia, Lancaster, and Inn @ the Ballpark?). And it also does not explain their failure to make other adjustments in their operations that I have suggested would/should be made if they are truly in the never-ending money pit situation that people have claimed (e.g. joining a chain; hopefully, my presentation of facts has put to rest the nonsense that this would cost any where near $50,000 per room).

Also, I would suggest that their willingness to continue the never-ending operating losses rather than taking a capital loss suggests that the operating losses may not be as bad as some have suggested. I mean, if things are truly as bad and hopeless as has been suggested, those capital losses are going to start looking better and better; get out and get it over with.

And one more thought. Are they really sunk costs if you're still making payments on them? It seems to me a rational owner is indeed going to be thinking about those costs on a daily basis because they are not in the past, but are very much in the present. I don't know... just some thoughts.

I agree that it still seems odd that these same circumstances apply to all four hotels...but of course, unless someone on HAIF is good enough to go through the tax accounts and see whether any of them have indeed been sold, it isn't conclusively proven that all of the original owners are still around. It may be that there has been a change, even if not outwardly perceptible. And while you were typing your response, I anticipated your suggestion about joining a chain. See the 'EDIT' above.

Houston19514, on Wednesday, July 18th, 2007 @ 12:23pm, said:

hopefully, my presentation of facts has put to rest the nonsense that this would cost any where near $50,000 per room).

Yeah, I'm still not very sure where that figure came from. I don't doubt that renovation costs are substantial, but $50k per room sounds a bit much unless there's something we're leaving out. TNJ, any comment?

Houston19514, on Wednesday, July 18th, 2007 @ 12:23pm, said:

Also, I would suggest that their willingness to continue the never-ending operating losses rather than taking a capital loss suggests that the operating losses may not be as bad as some have suggested. I mean, if things are truly as bad and hopeless as has been suggested, those capital losses are going to start looking better and better; get out and get it over with.

I think that there's a lot of speculation regarding the operating characteristics. I don't doubt that the owners have lost or are losing money, but the nature of how that breaks down is founded on a lot of speculation in this thread. We just don't have a lot of the facts, and some of the 'facts' that we think we have uncertainty exposure.

I was brainstorming before, and I'm brainstorming now. It's all theory.

Houston19514, on Wednesday, July 18th, 2007 @ 12:23pm, said:

And one more thought. Are they really sunk costs if you're still making payments on them? It seems to me a rational owner is indeed going to be thinking about those costs on a daily basis because they are not in the past, but are very much in the present. I don't know... just some thoughts.

Good question, but I'd think that the issue is probably between realizing a big up-front capital loss and realizing a string of smaller losses over time. If any of the loans were made while interest rates were really low and they're on a fixed-rate note, it may be to their advantage to keep paying money on cheap debt. ...besides, it just occurred to me--if operations are generating good cash flow but debt-related expenses are creating a net loss in each tax period, then there are no income taxes owed. A prospective owner, buying at the present value of cash flows such that there should be a net profit would have to pay income taxes, which would mean that the present owner has a tax advantage over a new owner.

This post has been edited by TheNiche: Wednesday, July 18, 2007 at 1:03 PM

[houston-development]

uh, back on topic and away from this "my pee pee is bigger than yours".

i was told that the W and barney's will be a part of westcreek / river oaks district development.

construction is to begin oct '08

[ArchitecturalPRGirl]

There are 5 hotels guys. You are forgetting the Icon. But the Inn at the Ball Park really isn't a boutique hotel. Not to mention it's owned by Tilman Fertitta and the Landry's Corporation.

Icon
Alden
Magnolia
Lancaster
Inn at the Ballpark

[KinkaidAlum]

ArchitecturalPRGirl, on Wednesday, July 18th, 2007 @ 2:08pm, said:

There are 5 hotels guys. You are forgetting the Icon. But the Inn at the Ball Park really isn't a boutique hotel. Not to mention it's owned by Tilman Fertitta and the Landry's Corporation.

Icon
Alden
Magnolia
Lancaster
Inn at the Ballpark

The Icon recently was sold to some group out of L.A. called Lowe's. Maybe that is why these fellas are leaving it off the list?

[Houston19514]

ArchitecturalPRGirl, on Wednesday, July 18th, 2007 @ 1:08pm, said:

There are 5 hotels guys. You are forgetting the Icon. But the Inn at the Ball Park really isn't a boutique hotel. Not to mention it's owned by Tilman Fertitta and the Landry's Corporation.

Icon
Alden
Magnolia
Lancaster
Inn at the Ballpark

Yes, indeed, there are 5 hotels. The Icon has already sold. That is the one hotel that I am certain was losing money. And it is the one hotel that has taken major steps to change things; e.g., selling, affiliating with a chain (small chain, but a chain nonetheless), changing restaurant and bar operations, and I think they may have reduced their weekday rates.

Why is the Inn at the Ballpark not a boutique hotel? And what does ownership by Landry's Corp have to do with anything?

[TheNiche]

Houston19514, on Wednesday, July 18th, 2007 @ 1:19pm, said:

Yes, indeed, there are 5 hotels. The Icon has already sold. That is the one hotel that I am certain was losing money. And it is the one hotel that has taken major steps to change things; e.g., selling, affiliating with a chain (small chain, but a chain nonetheless), changing restaurant and bar operations, and I think they may have reduced their weekday rates.

Why is the Inn at the Ballpark not a boutique hotel? And what does ownership by Landry's Corp have to do with anything?

Deep pockets can change the economics of a project because there's less risk of a single property inducing a state of financial distress with the owner. Financing is easier to arrange and is usually less expensive. The tax benefits to holding onto a money-loser that I mentioned in one of the above threads may not apply for a single hotel if it's not its own corporation.

[Houston19514]

TheNiche, on Wednesday, July 18th, 2007 @ 1:47pm, said:

Deep pockets can change the economics of a project because there's less risk of a single property inducing a state of financial distress with the owner. Financing is easier to arrange and is usually less expensive. The tax benefits to holding onto a money-loser that I mentioned in one of the above threads may not apply for a single hotel if it's not its own corporation.

Fair enough, but publicly-held companies also don't generally hang on to money-losers indefinitely. They have to meet quarterly profit goals. That would seem to make a publicly-held company all the more likely to dump a money-loser, take the write-down, and move on with profitable operations.

[TheNiche]

Houston19514, on Wednesday, July 18th, 2007 @ 1:58pm, said:

Fair enough, but publicly-held companies also don't generally hang on to money-losers indefinitely. They have to meet quarterly profit goals. That would seem to make a publicly-held company all the more likely to dump a money-loser, take the write-down, and move on with profitable operations.

True, true. ...on the other hand, mangement of publicly-traded companies aren't very keen on short-run hits for the very reason that you state--meeting quarterly profit goals--even if the divestiture does build long-term value.

[Houston19514]

houston-development, on Wednesday, July 18th, 2007 @ 1:03pm, said:

i was told that the W and barney's will be a part of westcreek / river oaks district development.

construction is to begin oct '08

Any rumor on the second hotel in River Oaks District?

[banking214]

KinkaidAlum, on Wednesday, July 18th, 2007 @ 1:15pm, said:

The Icon recently was sold to some group out of L.A. called Lowe's. Maybe that is why these fellas are leaving it off the list?

Lowe's is a great, smaller chain.
They have a great hotel in Santa Monica and Miami Beach.

[HoustonRealtor]

For those that might be trying to look it up, it's actually Loews (rather than Lowe's).

http://www.loewshotels.com

[The New Juniper]

Thank you Niche for the synopsis of my post. Well said.

TheNiche, on Wednesday, July 18th, 2007 @ 1:02pm, said:

I agree that it still seems odd that these same circumstances apply to all four hotels...but of course, unless someone on HAIF is good enough to go through the tax accounts and see whether any of them have indeed been sold, it isn't conclusively proven that all of the original owners are still around. It may be that there has been a change, even if not outwardly perceptible. And while you were typing your response, I anticipated your suggestion about joining a chain. See the 'EDIT' above.
Yeah, I'm still not very sure where that figure came from. I don't doubt that renovation costs are substantial, but $50k per room sounds a bit much unless there's something we're leaving out. TNJ, any comment?

Assume a hotel has 200 rooms at that number. You'd get a total upgrade of $10,000,000. To me, that is not a tremendously high number when talking about a full upgrade. Although, included in that number are all of the upgrades to the public areas including meeting rooms, back of house, lobby, hvac systems, etc. If you were to consider converting say the Alden to a Marriott: Marriott would send its operations guys down here, its architectural and finish standards guys, and most expensively, its life saftey guys.

They would make any owner address: Computer systems (this alone is about a $500,000 issue) in hardware, software and licensing fees; beds - each chain has specific mattress specs to meet; casegoods and softgoods in the rooms - armoirs, chairs, etc. - again chains don't look at quality as much as they look at whether they meet specs; bathroom fixtures; carpeting; wall paper - most chains now will not allow wall paper or wall vinyl b/c of mold problems; signage (at least $150K here; meeting rooms - all banquet chairs, tables, etc. have exact standards to meet. And lastly, smoke evacuation and stair pressurization. Conforming to these standards (and Hilton and Marriott will not bend even a bit) would be the lion's share of the cost.

When the total cost is spread across guest rooms, $50K a room for conversion from boutique to flag is certainly well within reason. But, i won't beat that to death b/c i don't want to be accused of just arguing with Houston19514.

Quote

Also, I would suggest that their willingness to continue the never-ending operating losses rather than taking a capital loss suggests that the operating losses may not be as bad as some have suggested. I mean, if things are truly as bad and hopeless as has been suggested, those capital losses are going to start looking better and better; get out and get it over with.

This statement makes sense. However, i would submit that the reason people don't is because they always feel like success is "just around the corner". Hotels sell based on a trailing 12 months of NOI (basically) and the statement (I believe Niche made) about the debt is exactly right. The hotel is valued off cash flow before debt service which allows a seller to show some positive cash flow and for the buyer to discount the fact that the debt service is drowning the property. Given this, the Seller thinks "if we can just put together a good 6 month run, my numbers will improve, and i can get another $2MM or so for the property." Numbers will vary, but this is the general idea. Also, no one wants to admit failure.

The same ego that caused many of these boutiques to get built stands in the way of drawing the very logical conclusion
above.

On the Inn, Fertitta can afford to ride it out. He is a long term guy. Just like some of the big apartment guys in town: they will build knowing that they may be 5 years too early to market. However, since they are in long term, they will ride out the storm until rents catch up. They do this especially in an environment where they believe land will continue to escalate. If you wait for rents to validate your land purchase, the cost of land and construction may have already priced you out of market.

That is why Finger has been so successful. But i digress....

TNJ

[Trae]

houston-development, on Wednesday, July 18th, 2007 @ 1:03pm, said:

uh, back on topic and away from this "my pee pee is bigger than yours".

i was told that the W and barney's will be a part of westcreek / river oaks district development.

construction is to begin oct '08

So, the Barney's wasn't bullshit? That is good news. I wonder what the other hotel will be. There really aren't many choices. How about a Marriot? I doubt something too high-end will go end.

[Houston19514]

The New Juniper, on Wednesday, July 18th, 2007 @ 4:27pm, said:

Thank you Niche for the synopsis of my post. Well said.
Assume a hotel has 200 rooms at that number. You'd get a total upgrade of $10,000,000. To me, that is not a tremendously high number when talking about a full upgrade. Although, included in that number are all of the upgrades to the public areas including meeting rooms, back of house, lobby, hvac systems, etc. If you were to consider converting say the Alden to a Marriott: Marriott would send its operations guys down here, its architectural and finish standards guys, and most expensively, its life saftey guys.

They would make any owner address: Computer systems (this alone is about a $500,000 issue) in hardware, software and licensing fees; beds - each chain has specific mattress specs to meet; casegoods and softgoods in the rooms - armoirs, chairs, etc. - again chains don't look at quality as much as they look at whether they meet specs; bathroom fixtures; carpeting; wall paper - most chains now will not allow wall paper or wall vinyl b/c of mold problems; signage (at least $150K here; meeting rooms - all banquet chairs, tables, etc. have exact standards to meet. And lastly, smoke evacuation and stair pressurization. Conforming to these standards (and Hilton and Marriott will not bend even a bit) would be the lion's share of the cost.

When the total cost is spread across guest rooms, $50K a room for conversion from boutique to flag is certainly well within reason. But, i won't beat that to death b/c i don't want to be accused of just arguing with Houston19514.
This statement makes sense. However, i would submit that the reason people don't is because they always feel like success is "just around the corner". Hotels sell based on a trailing 12 months of NOI (basically) and the statement (I believe Niche made) about the debt is exactly right. The hotel is valued off cash flow before debt service which allows a seller to show some positive cash flow and for the buyer to discount the fact that the debt service is drowning the property. Given this, the Seller thinks "if we can just put together a good 6 month run, my numbers will improve, and i can get another $2MM or so for the property." Numbers will vary, but this is the general idea. Also, no one wants to admit failure.

The same ego that caused many of these boutiques to get built stands in the way of drawing the very logical conclusion
above.

On the Inn, Fertitta can afford to ride it out. He is a long term guy. Just like some of the big apartment guys in town: they will build knowing that they may be 5 years too early to market. However, since they are in long term, they will ride out the storm until rents catch up. They do this especially in an environment where they believe land will continue to escalate. If you wait for rents to validate your land purchase, the cost of land and construction may have already priced you out of market.

That is why Finger has been so successful. But i digress....

TNJ

Thanks for the thoughtful and detailed response. I have never been trying to create any big argument here. My questions have been genuine, and I think logical.

Your explanation of costs of flagging a hotel is interesting. But the Doubletree Intercontinental just did most of that for a mere $6 million in a 300+ room hotel. Granting that a chain might required entirely new computer systems for $500,000, and of course new signage for $150,000. That would leave us with $27,580 per room (more than $5,500,000) for perhaps HVAC (not sure if the Doubletrees $6 million already covered that), and life safety matters eg "smoke evacuation and stair pressurization" (presuming those any changes are even required in those areas. Yes the chains have standards, but it is possible that these hotels, all recently rehabbed, might already meet those standards.) In short, given the Doubletree's very recent total remodel for less than $20,000 per room, I'm not convinced that the $50,000 per room estimate is likely, especially for a hotel such as these that are already of high quality. I'd love to find some examples of boutiques converting to chains to see some actual numbers. I'll see if I can find any.

EDIT: Here's the best I can find so far. But it seems like a pretty fair comparison (assuming of course that it was in a facility fairly comparable to our subject hotels). It's a conversion from a Wyndham to a Marriott: $11 million for 311 rooms: $35,370 per room. Higher than I might have expected (but still well short of $50,000 per room). http://www.procgroup...of-wyndham.html

This post has been edited by Houston19514: Wednesday, July 18, 2007 at 5:26 PM

[TheNiche]

The New Juniper, on Wednesday, July 18th, 2007 @ 4:27pm, said:

Thank you Niche for the synopsis of my post. Well said.

Makes sense. Hotels (especially failing boutique hotels in the CBD) aren't my specialty, so I greatly appreciate the elaboration and clarification.

[TheNiche]

Houston19514, on Wednesday, July 18th, 2007 @ 4:55pm, said:

(Yes the chains have standards, but it is possible that these hotels, all recently rehabbed, might already meet those standards.) In short, given the Doubletree's very recent total remodel for less than $20,000 per room, I'm not convinced that the $50,000 per room estimate is likely, especially for a hotel such as these that are already of high quality. I'd love to find some examples of boutiques converting to chains to see some actual numbers. I'll see if I can find any.

Remember that a critical part of the business model of a big chain is consistency. People traveling to other cities find themselves in unfamiliar environs, so when many are booking a hotel, it is nice to at least be assured that a certain comfort level can be attained. The chain is also largely uninterested in exceeding that standard in any significant way because it only creates unrealistically high expectations for their other hotels and makes average hotels seem subpar. So you might even see a chain that would want to replace existing high-end finishes to ensure consistency between hotels.

The very same kinds of principles apply to fast food chains. They'll demolish and rebuild a proprietary format before converting an already built-out but vacated restaurant that is sitting idle, even if it would save money up-front. ...and believe it or not, I know people who will eat at Olive Garden before they take a chance on a highly-recommended non-chain Italian restaurant.

[mbgriffith1]

TheNiche, on Wednesday, July 18th, 2007 @ 5:44pm, said:

I know people who will eat at Olive Garden before they take a chance on a highly-recommended non-chain Italian restaurant.

I'm sorry, but anyone who would prefer to eat at Olive Garden than eat their dog's food is crazy in my mind. Basic italian food is so simple and I don't know how they manage to still always screw it up. Even more amazing though is the idiots that still flock to this place for their AMAZING bread and salad - yeah everyone loves salted white bread sprayed with butter and an iceberg lettuce covered in Kraft italian dressing. Just talking about them makes me want to vomit. In fact, everytime one of their cheesy-ass ridiculous commercials full of actors pretending to stomach their horrible food comes on, I gag a little. Ok... rant over, I just f'ing hate that place.

[Trae]

One time my dad asked for rice at Olive Garden. He loves rice.

[TheNiche]

mbgriffith1, on Wednesday, July 18th, 2007 @ 7:08pm, said:

I'm sorry, but anyone who would prefer to eat at Olive Garden than eat their dog's food is crazy in my mind. Basic italian food is so simple and I don't know how they manage to still always screw it up. Even more amazing though is the idiots that still flock to this place for their AMAZING bread and salad - yeah everyone loves salted white bread sprayed with butter and an iceberg lettuce covered in Kraft italian dressing. Just talking about them makes me want to vomit. In fact, everytime one of their cheesy-ass ridiculous commercials full of actors pretending to stomach their horrible food comes on, I gag a little. Ok... rant over, I just f'ing hate that place.

I can't say that I disagree...but there are a lot of crazy people in the world, so that's that.

[mbgriffith1]

TheNiche, on Wednesday, July 18th, 2007 @ 7:28pm, said:

I can't say that I disagree...but there are a lot of crazy people in the world, so that's that.

Believe me, I know - way too many crazy people. (The same people that don't have a problem with Channel 2 News). Ok sorry to get off topic.

I'm excited about the W and Barney's. Where are you people getting your info if not from the ROD's website?

[buildingunbuildingrebuilding]

mbgriffith1, on Wednesday, July 18th, 2007 @ 7:39pm, said:

I'm excited about the W and Barney's. Where are you people getting your info if not from the ROD's website?

In the words of REO Speedwagon, I heard it from a friend who, heard it from a friend who, heard it from another..

[Deut28Thirteen]

Great news about the W and the Barney's. Kinda off topic but does anyone know how the Downtown Hilton is doing?

[houston-development]

buildingunbuildingrebuilding, on Wednesday, July 18th, 2007 @ 8:09pm, said:

In the words of REO Speedwagon, I heard it from a friend who, heard it from a friend who, heard it from another..

actually, i know the bathroom attendant at treasures. he overheard some guys talking about it last night while relieving themselves.

credible enough for me, so figured i should pass it along.

This post has been edited by houston-development: Wednesday, July 18, 2007 at 8:54 PM

[Rweil]

houston-development, on Wednesday, July 18th, 2007 @ 8:52pm, said:

actually, i know the bathroom attendant at treasures. he overheard some guys talking about it last night while relieving themselves.

credible enough for me, so figured i should pass it along.

I heard from a friend who works in Highland Village - Harold Powell is moving across the street next door to Pottery Barn. The entire building where Harold Powell is, and The Gap was, is being torn down and will be a hotel. Kind of a small plot for a hotel - but would not doubt be a boutique hotel. W? Another one?

Also, the addition above Waterworks is going to be a Wine Bar.