HOTELS Interview: Getting deals done in the downturn

Bruce White, founder, chairman and CEO of White Lodging
Bruce White, founder, chairman and CEO of White Lodging

When Bruce White founded White Lodging Services Corp. in Merrillville, Indiana, in 1985, limited resources forced him to focus the hotel management company on small, suburban select-service projects requiring minimal cash outlays and promising high rates of return in short order. Today, White Lodging has the expertise and capital capacity to concentrate on top 20 U.S. markets — particularly urban cores — with large select-service and boutique full-service projects in addition to large convention hotels. Its managed portfolio has grown to 155 hotels in 17 states with brand partners including Hilton Worldwide, IHG and Starwood Hotels & Resorts, but its most significant project of late is the JW Marriott Indianapolis. The 1,005-key hotel has won White Lodging numerous industry accolades and helped lead to plans for the similarly grand-scale JW Marriott Austin in Austin, Texas, scheduled to open in 2015.

HOTELS recently spoke with White about his company’s development philosophy, portfolio performance and plans for future projects.

HOTELS: How is White Lodging managing to develop new properties at a time when new development is practically at a standstill?

Bruce White: First off, we have never been momentum players or investors that wanted to play the cycle. We’re very long term in our horizon. We have focused on new buildings because when we went out and tried to make acquisitions, we always found we would end up being third or fourth horse in a six- to eight-horse race. We weren’t able to consistently purchase assets at a value at which we could add enough to the redevelopment process to meet our hurdles and to build strategic portfolio value.

We’ve over the years been able to create the development expertise in our organization where we can really add significant value through the entire development process. Add to that adding value through the operations and trying to develop our assets in a way that we’re creating some strategic portfolio value so we have a viable exit strategy. We found that this works, and because of our track record, our lenders continue to support us regardless of where we’re at in the cycle.

The 33-story, 1,012-room JW Marriott Austin is scheduled to open in early 2015.
The 33-story, 1,012-room JW Marriott Austin is scheduled to open in early 2015.

HOTELS: How has White Lodging financed new developments, particularly sizeable projects such as the JW Marriott Indianapolis Downtown and the JW Marriott Austin?

White: Financing a US$300 million project is a lot different than developing a US$25 million to US$50 million project. You get into the banks because of the size of the project.

The other thing about those large projects is the development cycle time is very long. They’re really five years from start to finish, so you’re tying up your balance sheet, and you’re tying up potentially a lot of contingent liabilities and cash in a very high-risk project. Therefore, for those projects, we’ve ended up putting a lot of our own money in. In Indianapolis, as an example, my father got involved in that. As a native Hoosier, he really has a great affinity for the state, and he wanted to do something that would be a great addition to the skyline. For as much personal reasons as business reasons, we decided to go ahead with that project.

Based on our positive experience in Indianapolis, we feel strongly enough about the business model to tie up our capital for an extended period of time. You’re kind of in rare air when you’re there. The projects are not as liquid because of their size and scale. There potentially aren’t as many purchasers for them. They’re incredibly difficult to finance, and they’re very management- and marketing-intensive. It’s just a niche we found success in. We feel comfortable, but we’re going into it with our eyes wide open. I’ve been in most segments in the hotel business, and it’s far and away the most management- and marketing-intensive segment of the business.

White says the JW Marriott Indianapolis, which opened in February 2011, will hit fifth-year pro forma projections in just its second year.
White says the JW Marriott Indianapolis, which opened in February 2011, will hit fifth-year pro forma projections in just its second year.

HOTELS: What are some of the main lessons you learned from developing the JW Marriott Indianapolis?

White: Number one, you have to have both the city administration and public opinion supportive of a project like that.

You have to have a strong convention bureau and supporting amenities downtown. One of the reasons Indianapolis has seen such incredible success in such a short time is the group customer has found Indianapolis to be such a tremendous destination.

The third lesson, which we did correctly, is you have to have ample and functional meeting space (104,000 sq ft/9,662 sq m) so you can host the type of groups you want to.

Having the right brand helps too. We were fortunate working with Marriott in Indianapolis.

HOTELS: How is the JW Marriott Indianapolis performing?

White: In our stub year, we hit our third-year projections. In our second year, we’re going to hit our fifth-year pro forma projections. So we’re well ahead of plan.

But I would also caution that when you’re talking about a major convention hotel, you’re really working two to four years in advance, and if you take your eye off the ball based on some initial success, that success can be fleeting. The convention business is a very competitive business, so we’re working very diligently focusing years down the road. But we’re very happy and pleasantly surprised. No one on our project team thought we’d be where we are today, and that’s a tribute to the brand and to our sales team and to the city.

HOTELS: What can you tell me about the performance of your portfolio overall?

White: Our results to date through the middle of April we were up, I think, 11.8% comp store with our new properties. Some markets are stronger than others. We haven’t seen the growth in south Florida that we’ve seen in other places, and we haven’t seen the growth in northwest and northern Indiana and southern Michigan. But for the most part, our properties on the East Coast are seeing significant growth. Everywhere else — Texas, Indianapolis are seeing huge growth. Denver is seeing strong growth. Phoenix is actually not anywhere near where we’d want to see it, but year-over-year is up significantly.

HOTELS: Have you found strategies to optimize overall profits given the economic climate?

White: I think it’s much more about execution than strategies. We’ve been working very hard to review our market mix and basically eliminating our lowest segments and replacing them with better, more highly rated business. That means taking risks, and it means a lot of our property-level people get nervous because they’re always focused on getting heads in beds. It’s easy for someone far away to say you’ve got to believe in the market and you’ve got to make these tough decisions. It’s a little more difficult when you’re on property and you know you’re going to be the one who’s going to end up being accountable for making your plan.

In most of these cases, the decisions we’re making are putting people well above their plan, because things are better than when we put the initial asset-maximization plans together. I can’t even think of an example where taking those types of risks and really focusing on rack efficiency and mix have not paid off. The property-level people are starting to gain confidence. Success is breeding success.

HOTELS: Where else is White Lodging looking to develop right now?

White: Our philosophy is to go into a market that we think is a good long-term growth market. We want to be a multi-brand, multi-segment developer in that market. So we tend to prefer to continue to develop markets that we’re already in. All that being said, we’re continuing to develop in Austin, Chicago, Houston and Denver. In Salt Lake City we’re doing a project near the airport — not as large as the other markets.

HOTELS: What keeps you up at night?

White: Execution. When you’re developing large complex projects, if you don’t manage your risk properly, that can be a fatal mistake. Nobody wants to find out they need to put more equity in a project than what was committed or planned for. Through the discipline of our development process, we’ve successfully avoided that scenario without exception to date. But the minute you take your eye off of it, that can change quickly. So we still are very rigorous in our development process.