Hotel owners- turning a flag into a boutique. Input needed.
I just purchased a couple hotels with beach block locations in a city with heavy seasonal tourism and some off season traffic. I’m going back and forth between changing the flag or rebranding and going the boutique direction. 

These are 50-75 room properties under economy flags/choice. I’ve been looking into renovating and rebranding it. Does anyone have experience in this or any advice one way or the other?
[{"id": "gyzdad4", "text": "Sounds like you should hire a hospitality consultant. They should be able to determine RevPAR, occupancy, and capital requirements for all options.\n\nNot speaking from personal experience, but second hand. Pros and cons to each option you're considering.\n\nMaintaining a flag be quite costly. I'd want to do some serious DD on each option and understand what the capital commitments are for the next 10 years. I've heard stories where recent renos needed to be redone and relatively new furniture needed to be replaced - all in the name of revamping the brand.\n\nBoutique gives you more freedom, but has other issues such as lack of brand presence.", "replies": [], "depth": 1}, {"id": "gz02sdt", "text": "There are pros and cons to each. I think you have to weigh the cost of keeping the flag and the additional exposure they give you versus being able to keep the occupancy percentage where it is (or improve it) as an unbranded motel. Do you have a system in place that will help with advertising, social media presence, etc. without the tools the flag gives you? The other concern with keeping the flag are the PIP costs. Are there PIP costs to keep the brand more expensive/less expensive or the same with the improvements you plan to make anyway? \n\nThe main benefit of unbranding the property is you have more control over the property and if you plan on holding long term, that could be of value.", "replies": [{"id": "gz05fdv", "text": "Appreciate this response. My justification on Unbranding is I don\u2019t think the name days inn or quality inn is worth 3500/key per year in an A- location. I\u2019m not great with marketing but I plan on bringing in someone to help. I am going to be fully renovating the hotels. I have a good staff in place from other smaller hotels that I\u2019m bringing over. \nI think you did expose my weakness which is marketing", "replies": [{"id": "gz064mk", "text": "I would agree on your assessment, especially being by the coast. Bring in someone who is strong in the marketing area (social media and other online exposure) and you can probably save in that cost while keeping or improving your occupancy.\n\nIf you create a good vibe in the community, you may also be able to bring in more local traffic for getaways as well...for example, someone would be more likely to stay a night or two away from home in a hip boutique close to home than saying...hey honey, lets go stay at the Days Inn for a little get away. Just a thought...", "replies": [{"id": "gz09boa", "text": "Yup that\u2019s exactly what I\u2019m going for in the off season.  I\u2019m very close with this community. Im friends with various business owners and local politicians. I think a modern marketing approach would work here.", "replies": [{"id": "gz0tg2i", "text": "If you go with rebranding, I can recommend a really great marketing firm who does work for a large independent hotelier and has a strength in hospitality. The properties are high end, in touristic destinations, over 100 properties. I really liked the firm\u2019s work and will be hiring them for my jewelry store\u2019s branding and marketing. Let me know if you want their contact info.", "replies": [], "depth": 5}, {"id": "gzhhrtm", "text": "You haven't mentioned any convention hall. The event catering could be a big driver off season.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gz05rlf", "text": "1) How in the world did you buy two 50-75 key assets and not have a view on this? wild. But good for you.\n\n2) There are so many variables to consider but it all boils down to a pro forma for each... have you built one? Do you have STR reports for the market? Before hiring a consultant, just buy one for your economy flags and for higher end/boutique.. \n\nEconomy hotels can crank out cash flow... but if you overpaid for them than your only option might be to find a new business plan. \n\nTough to say not knowing what the reno budget is ect. \n\nI ran a hotel investment company for a few years. DM me if you want to discuss.", "replies": [{"id": "gz06uxp", "text": "Lol great questions. They\u2019re both being poorly managed, no money being put into them and under performing the comp set. \n1- grabbed them both for roughly 2.5x 2019 revenue and currently at a 18% cap \n2- I have all my numbers down in the market. I\u2019m very very familiar with this area. \n3- There\u2019s no boutiques here, it\u2019s all low level economy, a few choice, a few Wyndham, and 4 star chains and larger mixed used properties/casinos. \n\nI have enough to fully renovate each property within reason, hire a designer, and rebrand.\n\nGreatly appreciate the DM invite. I\u2019ll message you tomorrow if you don\u2019t mind.", "replies": [{"id": "gz1xnsa", "text": "don't mind at all", "replies": [], "depth": 3}, {"id": "gz45eps", "text": "18% cap?!", "replies": [{"id": "gz79h6h", "text": "Sounds about right on T12.... hotels trade on pro forma generally and past year wasn\u2019t exactly good for the hotel business", "replies": [{"id": "gzfbu2d", "text": "Seriously, an 18% cap rate?  In what world is a dollar of NOI trading at only $5.55?", "replies": [{"id": "gzfie2o", "text": "In the world of super distressed investing you pay a 0 or something high... you don\u2019t expect that 18 to last very long", "replies": [{"id": "gzhlrw2", "text": "The 18% does not exist.  It is a made up calculation.  The 0 doesn't exist either.  Fantasy!", "replies": [{"id": "gzhse66", "text": "You don\u2019t exist. I\u2019m not engaging in this nonsense I\u2019m more than happy to help educate you about cre valuation but you clearly have no interest and are hung up on going in cap rates which are totally irrelevant. Good luck.", "replies": [{"id": "gzj2g67", "text": "Can't keep up, huh?  \"Going in \" cap rates?  That's scammer babble.  Why do you bring it up?  Are you a scammer.  Seriously, the problem seems to be your complete lack of experience and knowledge of valuations.  With my experience and training it would be me teaching you.", "replies": [{"id": "gzjfl5j", "text": "tell you what, get back to me when you've spent 20 years working for brand name wall street CRE IB and PE shops and we'll have a rational conversation. later dude.", "replies": [{"id": "gzjov5r", "text": "You get back to me when you have valued more than $40,000,000,000 in commercial properties and have the qualifications to testify as an expert witness on valuations.  LOL.\n\nBut even better you stated, **\" I\u2019m more than happy to help educate you about cre valuation\".**  Put up or shut up!  Ha ha  Waiting anxiously for your thorough edification.\n\nYou also stated, **\"In the world of super distressed investing you pay a 0 or something high... you don\u2019t expect that 18 to last very long\"** \n\nu/stoweker  you got some 'splaining to do!", "replies": [{"id": "gzjq6hx", "text": "as an appraiser (which is what i assume you are based on your comment) you of all people should know that DCF is the appropriate way to arrive at valuation by applying an unlevered discount rate to cash flows where cap rate is only relevant in the context of a stabilized exit.\n\nand i've worked on transactions over the course of my career with aggregate valuations around if not in excess of your number dude.", "replies": [{"id": "gzjqwkn", "text": "Let's talk about that 0% and 18% cap rate you are trying to sell.  Now it just seems that you are trying to deflect.  Stay on topic if you can.", "replies": [], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}, {"id": "gzhh69x", "text": "The PIP for the flag is not factored into the cap rate, plus having to do a bridge and perm loan while implementing the PIP with lowered occupancy quickly brings down that ROI.", "replies": [{"id": "gzhlwus", "text": "Your financing has nothing to do with the cap rate.  Cap rates are a valuation metric.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "gzes856", "text": "There is no 18% cap rate.  That is a made up number.", "replies": [], "depth": 4}], "depth": 3}, {"id": "gzcg407", "text": "FWIW, I bought my first office (roughly 50k SF) that way. No experience with office at that time but bank wrote down note roughly 25% and the appraisers came back roughly 2x purchase price. Figured I could figure out the strategy once I got control of it.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gz0bymh", "text": "Tough without knowing the market and seeing STR reports of your competitive set. First thing choose a competitive set, order the monthly STR reports and then use them for occupancy and average rate to get a revenue per available room.  Do that for the flag version and a boutique version.  What is the budget to get these up to snuff for choice or whatever flag? What\u2019s your net cash flow for each? Take third year cash flow projection and use a market cap rate for the flag property and maybe 50-100 basis points higher cap rate for the non flagged property.  Based on those results I would make my decision along with cash on cash returns or IRR on a 5 year hold or whatever metric you like.", "replies": [], "depth": 1}, {"id": "gz0muxn", "text": "I do these kind of studies for a living. Lots of factors obviously and you have some good responses here already. If you want an in depth study I'd get a feasibility study done for the different options you're looking at. PM me if you want and let me know what market and I'll tell you who to go to. I've worked for three of the big companies that do hotel work, so would only recommend my current company if it's in a market I know we have the best people in. Better to hire the right expert, the company doesn't really matter.", "replies": [], "depth": 1}, {"id": "gz0ocn5", "text": "As a hotel development guy it\u2019s really impossible to answer without more info. Market. Location. Physical Asset are you at $100/night or $400/night ADR.  Do they need additional capital. Renovations, etc. I always say a hotel has more in common with a McDonalds than an office building.  If your on a 2-3 star flag then where is the value?  Can you upgrade to a higher product or can you fix the ops and bring in more revenue?\n\nSo many questions.", "replies": [{"id": "gz1snba", "text": "So currently the ADR is around 75 running at 68% occupancy. I have 10k a room set aside as a budget. That\u2019s for the interior, lobby, new rooms and touching up the exterior. Luckily the roofs and HVAC systems are in good shape. From my research I should be able to up the ADR to around 90-95. It\u2019s the occupancy that scares me going with a boutique. I also can\u2019t see how the name days inn super 8 or quality inn are worth over 100k/year when we\u2019re steps from the beach. Greatly appreciate the response.", "replies": [{"id": "gz439li", "text": "I\u2019m not super familiar with the 2-star space but it\u2019d describe what you are planning more as independent than boutique.  What you can do value wise between franchise and independent is nothing that can be answered without a deep dive into the market and overall strategy for the asset.  If you are beach front then maybe the question is whether you can push from 2-star to a true 3-star. That would be more capital investment but maybe much larger value add.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gz0tlv2", "text": "Regardless of the current flag (as long as it's not bottom of the barrel) I think renovations and making sure that the level of service is up to par can go a long way. I've never owned a hotel, but as a frequent consumer I can tell you I'm not too picky about the name/branding. The cost vs ratings/reviews ratio, if you will, plays the biggest factor in my decision when choosing where to stay.", "replies": [], "depth": 1}, {"id": "gz1j97u", "text": "I don't understand how it would be possible to reposition an economy/budget hotel property (given the existing flags) into a more luxury boutique hotel that will be able to command better rates or higher revenue per room.  \n\nAlthough familiar with South Florida RE, my employer was lucky to not have a hotel loan in its books this time around, but from my prior life working at another financial institution that financed some excellent properties in Miami Beach, these properties all had something that was marketable and distinctive. It could have been location, architecture, service, great marketing, or usually a combination of the above. For example, one of our customers had assembled several properties that he could fill from his marketing in Europe and they were all very small (20 rooms +/-), but minted money.  \nMy guess it will take a lot of money and marketing to get these properties there given that we are still looking at double digit percentage decreases in occupancy from before Pandemic.  \n\nThe safer bet is to keep them as budget hotels, do sorely needed Capex, improve the service so that new reviews crowd out the bad ones, and see if you can get the occupancy to a level that increases the cash flow. Then a couple of years down the road flip them.", "replies": [{"id": "gz1rx3x", "text": "So they\u2019re both around a 5.5/10 on every booking site. Poor service, dated rooms and an ugly exterior. I have the capital to completely renovate the property. Another thing is I don\u2019t see how I can justify paying 100k+/year to use the name Days inn lol. \n\n\nMy thinking is consult with a designer, renovate the properties, give it a cool name and as I picked up here, market the hell out of it.", "replies": [], "depth": 2}, {"id": "gz441f2", "text": "Upgrading hotels is done all the time.  It\u2019s harder than just a simple Reno but it\u2019s a massive way to bump revpar with the same physical box. 99% of the time you also do that conversion while staying in operations. You may have some displaced revenue but it\u2019s never zero. I\u2019ve done tons of brand conversions and it\u2019s always the same strategy. Value of same flag vs value of new flag and the incremental capital add. Especially if you are already have a heavy PIP coming due the extra costs for a PIP of an upgraded brand sometimes isn\u2019t that much more. At the end of the day it\u2019s a pure ROI decision.", "replies": [{"id": "gz4spgu", "text": "I get it, but have you seen what a typical Days Inn looks like, where they are usually located, and their usual state?", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gz1vwbo", "text": "I work for a developer in miami, we do just this. \n\n&amp;#x200B;\n\nIn your DD process, you should have read the flag agreement for such propertieis. Is there a fee on revenue, and clauses that prevent you from selling. Typically, the sale triggers the flag agreement void. \n\n&amp;#x200B;\n\nSecond, i would see if this \"flag\" brand sources any of the reservations, do they have a rewards program?  You wouldnt want to unflag and loose REVPAR (OCCUPANCY AND RATE) due to the source of the customers. \n\n&amp;#x200B;\n\nTraditioanlly, unflagged are more profitable and less restrictions. As for renovation, thats a whole other animal. DM me if you want to chat as well. Thx", "replies": [{"id": "gz1w0kp", "text": "Appreciate the insight. I\u2019ll be sending a PM.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gz8b42u", "text": "I know someone that has done this their entire career, and they said the best way to get familiar with a property and the market for it was to install a makeshift office in each property and observe the market for yourself.  Without that knowledge, one pays dearly.  Best of luck to you.", "replies": [], "depth": 1}, {"id": "h1hgqdz", "text": "Comments for this post have been locked due to  commenters going off topic.", "replies": [], "depth": 1}]