North Palm Beach, Florida-based third-party hotel operator Driftwood Hospitality Management is riding the momentum of a successful first quarter.
During the first few months of the year, DHM took over the management of three existing hotels and signed up for three hotel development projects that are expected to exceed $100 million in construction costs, said Vice President of Acquisitions and Development Andrew Stevens.
The development deals are inked for the first-ever Tribute and Residences in Fort Myers, Florida; a Compass by Margaritaville in Melbourne, Florida; and a hotel in Bend, Oregon.
"New construction projects are getting challenged by the financial markets a little bit, but we're still seeing some movement, some traction and it depends on the quality of the sponsor," he said. "Those three projects, because of the franchising component as well as the sponsorship groups, are moving forward."
The company has additional smaller-scale lifestyle hotel developments in early planning stages, he added.
For the remainder of the year, Stevens said, management transitions are lined up for hotels in Georgia, Florida, South Carolina, New Jersey and North Carolina. Hotels will also be repositioned in Puerto Rico; Scottsdale, Arizona; and Florida.
"We've had a lot going on," he said. "From a performance standpoint, the portfolio has grown really well through first quarter. We saw house profit grow by over 12% year over year, which was great even in the face of inflation and labor costs. We saw [revenue per available room] growth go up by 40% year over year. Year to date, we're [up by] 25%; although now we're reforcasting the year to maybe be a little flatter than we expected."
Stevens said hotel performance in markets such as Florida grew significantly in the past few years, but it's now starting to decline as demand is shifting to more urban destinations or ones that were slower to pick up after the worst of the pandemic.
One standout market that Stevens said he's been impressed by recently is Washington, D.C. He said it's been among the fastest growing markets year to date within the portfolio.
DHM's portfolio currently consists of 80 hotels and a diverse ownership profile. In the early days of the 24-year-old company, its portfolio had about five or six owners total. Now, within its 80 hotels, there are about 30 different owners, he said.
Organic growth has historically been at the core of DHM's growth. In the past 24 months, the company has been pursuing opportunities in mergers and acquisitions as consolidation between companies has been on the rise.
"We've had a few looks at some of the deals that have happened. We're continuing to evaluate a number of deals — we're looking at anything from five to 10 hotels under management to 50-plus," Stevens said. "We are looking at M&A opportunities, not just for the properties themselves but also for the team, the talent, the network, the brands. There's a lot of goodwill that comes along with some of these, and then you're able to create the synergies with consolidating some of those back office [systems]."
The company is also looking into strategic alliances.
In terms of international growth, Stevens said most of it is taking place in the Caribbean and Costa Rica, where the company has operated in for more than 20 years. DHM has a new Hilton Garden Inn opening this September in Costa Rica.
"We're starting to see a lot more opportunities from the local community [in Puerto Rico]. [They're] seeing our management [and] want to start talking to us about us taking over management," he said.
Receiverships
Receiverships are a large part of DHM's business, as it has completed more than 50, Stevens said. The company also has a specialized team that's dedicated to distressed assets.
The volume of receivership opportunities has ramped up, he added, and DHM has taken over a total of four hotels in receivership since the onset of the pandemic, including a Sheraton Suites Houston and the Marriott Detroit Livonia. DHM has also looked at opportunities in New York, though those never made it to receivership.
Once DHM took over management of the Sheraton Suites Houston, it completed a full renovation and converted it to The Chifley Houston, Tapestry Collection by Hilton.
Stevens said he anticipates a wave of delinquencies on the lodging side to occur in the next 24 months.
"The franchises have allowed a lot of hotels go without renovations for a long time. A lot of these hotels, if they were in tougher markets ... for the most part they were able to renegotiate the loan agreement. Now, if those hotels don't pick back up in some of those markets, then I think we'll start to see a lot more [receivership opportunities]."
Labor Environment
Stevens said 2022 was all about finding people. Now, it's about finding the right people to staff hotels and then providing the necessary tools to help them grow within the company.
Stevens said housekeeping and line cooks are still a challenge to obtain. The roles that have been filling up quicker are servers and bartenders who want interaction with people.
"Retainment is the new recruitment," he said. "It's gotten better. [After the onset of] COVID, we were at 25% contract labor; now we're down to 7%. The goal this year is 5%."
As it shifts away from contract labor, DHM has had the ability to rebuild its teams. The reduction in contract labor has also resulted in increased guest services scores at its hotels, he added.
"The costs are way down, employee satisfaction is way higher. Turnover is still the biggest issue, I think, so that's why retainment is the new recruitment," he said.
Corporate culture and wages are among the key drivers for keeping people on staff, he said.
"There was a wage realignment that I quite frankly am happy about. Housekeeping, for example, [are] the hardest working people at a hotel. Now, their wages have gone up so much that they're in line with front office and other comparable people at the properties. That's great to see," he added.
DHM has enhanced the carts that housekeepers use, which are typically cumbersome, he said. DHM's founder and President David Buddemeyer designed new ones that are smaller, which has resulted in improvements on the operating costs side and in satisfaction among housekeeping staff.
Employee resources it has in place include its white-label "Driftwood Learning" platform, which is curated with educational modules. Some of the material is specific to each property.
It also has partnerships with the University of Houston, University of Central Florida, San Diego State, Florida International University and Florida Atlantic University. Additionally, the company is sponsoring a tuition scholarship at Johnson & Wales University.
"We've seen a lot of new leads through partnering with these universities. We bring them in to do internship, we do a manager-in-training program where they can do a rotation and figure out what they like to do," he said.
One student who was a senior in college began with a summer internship, completed the manager-in-training program and within two years became a general manager of a hotel in Atlanta.
"There is the ability to keep people and move them up, we've seen a lot of success in that part of training, development and talent recruitment," he said.