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Distress a Boon for Asset Managers as Hotels Go Bust

Distress a Boon for Asset Managers as Hotels Go Bust

Q&A with Richard Warnick, president, Warnick + Co.

Richard Warnick knows it’s a tenuous time for most in the hotel industry, but the president and founder of Phoenix-based Warnick + Co. is sitting in an enviable position. As one of the most experienced hotel asset management firms in the country, Warnick expects to double its asset management portfolio in the next three years, largely through the addition of distressed hotels, as properties are reclaimed by lenders or taken over by new investors or servicers.

Warnick’s firm also offers consulting, investment banking, development and renovation management. Its asset management portfolio is comprised of 23 properties including the lender-owned InterContinental Montelucia Resort & Spa in Paradise Valley, Ariz. The 293-room luxury resort opened two years ago at a cost of approximately $330 million. It features four restaurants, a spa, 27,000 sq. ft. of meeting space and 34 residential villas.

German lender Eurohypo AG foreclosed on former owner and developer Crown Realty & Development Inc. last year and bought the property at a trustee’s sale auction on Jan. 20 for a bid of $122 million. InterContinental Hotels Group still manages the property, but Warnick won’t say if that will continue.

Warnick + Co. also is overseeing the sale of the 10 unsold villas and working with Eurohypo and broker Eastdil Secured on the sale of the development. We recently spoke with Warnick about Montelucia, the Phoenix market and the role of the asset manager in distressed situations.

Distressed Real Estate Strategies: What's the interest level been like so far with Montelucia?

Warnick: There's quite a bit of interest in the asset. It's a very nice hotel, in an exceptional location and in a distressed market. There are a number of companies looking for opportunities to come in and acquire [assets] in distress, especially with some specific real estate opportunities. Phoenix has been hit very hard, but will have quite an upside.

Distressed Real Estate Strategies: How rough of a year was it for Phoenix?

Warnick: I would say 2009 was just a complete disaster here, and the early part of 2010 isn’t going to be a whole lot better. The most significant issue is demand has been off, especially in the [luxury] tier of the market, which is heavily dependent on group business.

The ‘AIG effect’ and the continuing comments coming out of Washington and other places about it almost being politically incorrect to travel have really hurt this market more than most because of our dependence on [group business]. What has really debilitated Phoenix is how the market has reacted in terms of pricing. Some of the pricing decisions [to cut rates] at luxury and upscale resorts in this market have been nothing short of complete insanity.

Distressed Real Estate Strategies: How involved can an asset manager be with pricing?

Warnick: It is an asset manager's job to basically make sure those kinds of decisions, both from a strategic standpoint and tactically from an implementation standpoint, are being executed correctly. We review the marketing plans and strategies that are in place for the hotel and provide input.

We also look at the tactical side: What are they doing at the ground level? How are they spending money in the marketing? What kind of strategy is in place for revenue management and for managing the different distribution channels? We are hands-on to the extent we need to be.

Distressed Real Estate Strategies: What are your first objectives when you take over a property?

Warnick: I think there are three big picture things. The first is an asset manager needs to look at the positioning of the asset, which would include everything from customer pricing, the brand, management company and then understanding how it should be positioned against its competitive set. Then obviously the other two things are what you can do to increase revenue and how can you better manage expenses. And I say ‘better manage expenses’ because it’s not always just cutting.

Distressed Real Estate Strategies: Can you talk a bit about expense management?

Warnick: When the market is going down the tank, [cutting costs] is sort of a gut reaction. One of the first things cut is often marketing. I would say it’s very intelligent to evaluate your marketing strategy. But just going in and saying ‘Gee, we can’t afford to spend money’ is not an intelligent approach. It is a very shortsighted approach if a market is going down, the property is going down and everyone is spiraling downward, and you’re not spending any kind of money to reverse or mitigate that. We don’t just come in with a machete.

Distressed Real Estate Strategies: How does the approach change when taking over a distressed property?

Warnick: When taking over a property for servicers, lenders or other unintended owners we’re usually not in it for the long term. We take over, stabilize, maximize cash flow and the value of the asset and help [our clients] get it off their books at an optimum price.

Someone that just bought an asset with the intention to hold onto it and maybe sell on the back of the cycle, the options are a lot broader in terms strategy, brand affiliation and management contracts. If we’re taking over on a short-term basis, some of those strategies may be things we’d be better off leaving to the next owner. We would make those suggestions to the next owner or to those looking at [the property] as an acquisition.

Distressed Real Estate Strategies: When will we see more distressed transactions?

Warnick: A couple of lenders have taken a more aggressive stance, saying we’d rather have cash and we’re going to sell. But most are basically saying we’ll take [the properties] back, the existing borrower adds nothing to the equation, and we’ll sell when the timing is right. I don’t think lenders will see the timing is right for the first two quarters of this year, maybe even the third quarter. We’ll have to get better news in the economy, some demand compression so that pricing power will return, and maybe very late this year or 2011 we’ll start seeing more transactions.

Distressed Real Estate Strategies: What would be your advice to owners of properties in distress?

Warnick: You have to start with the premise an asset is never maximally productive even in an up cycle. It’s almost a given that occupancy hides a multitude of evils. I’ve yet to look under the hood of any hotel where we couldn’t find something to improve operational efficiencies, revenue or marketing efficiencies.

My best advice is don’t assume what’s been done, regardless of performance, is the best it can be. If you’re a professional owner, redouble your efforts to look under the hood. If you’re not a professional owner, get that advice, get someone to come in and look at the situation.

Distressed Real Estate Strategies: What should property owners look for when selecting an asset manager?

Warnick: When selecting an asset manager, I think there are a few really important things people should look at. One is depth of experience in hotel operations and marketing. When sitting with a GM, if you haven’t sat in those shoes, it’s hard to get respect.

Another thing is a really good knowledge of this business in general: It’s cliché, but there’s the hotel business and then there’s the business of hotels. We pride ourselves on both. Another aspect to look for is creative thinking, the ability to think outside the box and to be really good problem solvers.

You can’t be an adversary in this process. If an asset manager goes in with pistols blazing and the goal is to beat the crap out of the operating company, it probably won’t be cooperative. You have to take the hammer out sometimes. But you should [try] to influence behavior in a way that causes the people on the ground with their hands on the steering wheel to want to steer to the left for you, not because you’ve demanded it.

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