Editor: Please tell us your background and experience in the hospitality industry.
Robins: I've been practicing law for over 30 years, and during the past two decades, my practice has focused primarily on the hospitality industry. Our global team represents developers, operators and capital providers in this sector. We have a particular focus and expertise in the development and operation of mixed-use resorts - these may be the "sun and sand" or ski oriented resorts or, just as likely, an urban tower that mixes many uses to create a vertical resort. Our South Florida location facilitates our active involvement in projects throughout the U.S., the Caribbean and Latin America, but our local team provides development support to our larger Lodging and Gaming team throughout the U.S. and around the world.
Our group is also involved in some niche leisure products such as amenities clubs - think golf or equestrian clubs, timeshare and fractional ownership and their up-market cousins, private residence clubs and destination clubs, as well as the seniors living market, particularly continuing care retirement communities. These seniors living communities present many of the same issues as a resort and allow us to work closely with Proskauer's highly regarded health care practice group. Another commonality of each of these areas is that they are all extremely dynamic from both a business and legal perspective. Each must be responsive to changing customer demographics, economic circumstances and technology.
On the seniors housing side, even a casual look at U.S. demographics tells you that bringing innovation to the available offerings for quality life care that is focused on a rich and stimulating environment for people with physical and other restrictions will present an exciting growth opportunity in addition to just being a "good" thing to do.
We also have a steady diet of financial and operational restructuring activities. This entails not only hotels and resorts, but also stand-alone clubs and recently, timeshare and other shared ownership projects. We are seeing a substantial increase in activity related to properties confronting loan maturities that do not support valuations necessary to allow for a smooth refinance. A huge volume of loans made in 2005 and 2006 at peak hotel values, are maturing at something not too distant from the bottom of the valuation cycle. That's a problem for owners and lenders and an opportunity for opportunistic investors. Our fund formation group has been extremely active, almost throughout the downturn, in assisting these program sponsors in creating funds and raising capital for what many anticipate to be an historic buying opportunity. These large capital formations in both funds and REIT's have already had some impact on pricing, but the swell of additional properties coming to market as a result of refinancing pressure is expected to drive prices back down for some time. We expect to be doing note purchases and asset sales quite aggressively through 2011 and 2012. We hope to see continuing improvement in the debt markets to support these transactions but that continues to be the largest challenge for most investors.
Editor: Can you please discuss some of what is going on in the area of development?
Robins: Of late, very little. Most industry participants anticipate that significant growth in the development pipeline will be a couple years down the road. Having said that, the design-development firms are getting calls again because they tend to be the leading edge of the development process. Much of their business over the last few years has been in developing markets like Costa Rica, Panama, Honduras, Thailand, Vietnam and, of course, China. Slowly, however, we'll also see projects we were working on in 2007 have the land plans and term sheets dusted off and new feasibility studies commissioned. These projects may be in different hands when they move back into development but many will come back.
Editor: How will the new projects differ from the past? What are the lessons learned?
Robins: The last ten years produced a sea change in resort development in which the capital structure for a typical development project required something other than the traditional debt-equity structure. A combination of high land and construction costs created a need for something that was then readily available, a class of households with significant appreciation in their homes - liquidity - and a belief that housing values would continue to rise. These households were at the ready to invest not only in pure residential condominiums, as they had been doing at a feverish pace, but also in a condo that would be "packaged with a dream." The dream, of course, was ownership of one's little bit of paradise - a beachfront condo at which the family would gather on a regular basis and be pampered in the branded luxury of their choice. Developers armed with locations that were the stuff of dreams approached the branded resort operators with a new business model. Now the brand could create a new branded experience by taking its transient model of luxury to a variety of lifestyle products that covered a spectrum from timeshare ownership to whole ownership. This model has become entrenched in the resort development model. While there has been fallout from the exuberance of the last decade and from the most extreme version of this formula, typically referred to as the "condohotel," the concept of mixing various types of leisure products to create a unified resort experience seems to be here to stay. We're quite pleased with this because the combination of various forms of real estate products with a branded lodging experience replete with golf clubs, marinas, spas and signature restaurants, is the world our group comes from.
Editor: Looking to the future and considering the demographic shifts, how do you see the hotel and resort development picture playing out?
Robins: The world is only getting smaller so our focus is quite global and I anticipate that regional differences will continue to break down. To be sure there will continue to be regional differences involving service, operations and even the layout of lodging units, but the basic formula of mixing hotel rooms with a menu of for-sale real estate and amenities seems to be here to stay. Similarly, the notions of sharing the ownership and/or use of luxury products, be they villas, private jets, or yachts, and of branding in each of these areas appears to have solid acceptance around the world. All of this results in a very broad menu of leisure choices for all of us.
Geographically, Asia, including not only India and China, but Vietnam and Thailand, Indonesia and Malaysia and many other places with enormous populations and great natural beauty, will see continuing development of everything from business hotels to upscale resorts. The Americas will also experience a ramp up in new development over the next several years. Central and South America will continue to see expansion of hotels in secondary and tertiary markets where the brands are under-represented presently, and will see more resort development. While many countries have already experienced substantial growth in resort inventory, many, perhaps most, markets are not overbuilt. Again, don't expect to see shovels in the ground for a couple years and even after that - the ramp up will be over time. If the world economy, or even the U.S. economy experiences more protracted systemic problems, development will clearly be affected because it will continue to be dependent, to at least some degree, on people feeling sufficiently secure, financially, to make a significant investment in a vacation residence of some sort. Assuming, however, that the new normal isn't too different from the old normal, these expectations seem reasonable.
Editor: Can you speak about the "New Normal" that you mentioned? What will it be?
Robins: There are many smart people in the leisure and resort real estate business attempting to discern and describe the "new normal." What I can share is that in some respects, but certainly not all, the 80 million Baby Boomers, are yesterday's news. Although we are still relevant, we no longer overshadow the 50 million "Gen X-ers" and the 80 million "Gen Y-ers" or "Millenials," who are moving into and beginning to reshape definitions of market demand. Large hotel brands are very focused on these age cohorts and their own definitions of a nice place to stay or live. They travel more than Boomers and may require less luxurious finishes in the hotels and resorts they frequent. They are clearly demanding on the technology front and want some "buzz." Accordingly, we see several "W"-like brands coming to market at lower price points.
On the vacation home and resort side of the equation, there has been some thinking that even in a severe downturn, the more affluent consumers, who did experience at least a short term change in consumer psychology, continue to demand high levels of finishes in their hotel rooms and vacation ownership products. While there had been some belief that these consumers would sacrifice space in order to bring these products into a price range they can feel more comfortable with, some recent data places that conclusion in question. Other issues that people talk about is a change in the notion of primary and secondary residences and an expectation that families will increasingly raise their children in what would previously have been thought of as the second home and dad or mom will commute to the office where what would have been the primary residence may be something different. This is changing the infrastructure requirements of what had been second home communities and will drive some changes on the margins in urban housing.
On the programmatic side, there is a growing recognition that golf takes more time than many younger families are prepared to commit and resorts are looking at the substantial cost of golf courses with some additional scrutiny. Conversely, greater emphasis is being placed on health and wellness programming and activities oriented toward family activity. In fact, the emotional draw of a vacation residence as a place to bring an otherwise geographically spread out family together is universally accepted as one of the most powerful draws for affluent baby boomers that have or will soon become empty-nesters.
Editor: What is the selection process for professional management companies?
Robins: The right management companies bring substantial expertise not only to hotel and resort operations but also to the design - development processes. Additionally, the brand standards for the physical facilities are an integral part of the management company selection process, so the management company selection process should begin as early as possible. Initially, a developer tends to have some thoughts on the positioning of his or her project, which should be driven by a market study that provides some insight into the markets that will support the hotel or resort. With this information, an analysis is performed as to which of the possible brands are prevented from participating based on area restrictions imposed by other owners and a high level discussion is had of the strengths and weakness of the developer's skill set and that of several potential operators. This results in a focus on some of the particular areas in which the operator's expertise will be seen as being all the more critical. At this point, a formal request for proposals may be sent to several operators or there may be a less formal discussion process with some or all of the potential candidates. At some point in the process, typically early on, we draft a detailed term sheet. It is important to capture detail in an agreed upon term sheet because by the time formal contracts are presented for negotiation it is much more difficult and expensive to change operators.
During initial discussions, we assess the manager's overall interest, expertise, regional experience, the brand synergies as well as compromises presented by a particular brand or operator. We learn more about the project's potential by discussing each operator's thinking concerning positioning, facility programming, operator investment of capital, proforma revenues and competition. Differences in brands drive differences in development cost as well as revenues so we continue to work closely with other consultants who prepare proforma financial statements under a variety of scenarios.
During contract negotiations, we address many issues that cumulatively determine the level of flexibility available to an owner in order to manage costs more effectively, as well the level of owner scrutiny that can be effectively brought to bear in the annual planning process. Representing an owner in a management contract negotiation is all about building in the flexibility that finely tuned operator forms of contract tend to strip away. These negotiations can be long and tedious but can make all the difference in how a property performs in a notoriously cyclical business over a long period of time. In fact, we find that many of the hotel workouts we see entail management contracts that were not negotiated as aggressively as they should have been.
Published April 3, 2011.
