A Suite Deal

It was a good idea at the time. Acquiring the Sheraton World Orlando Resort for $87 million may seem pricey at first glance, but the hotel sits on 28 prime acres on International Drive–less than a mile from the convention hub. Besides, this was 2006, the economy was strong, financing was readily available, and with Florida’s voracious appetite for condominiums, the plan to convert the Sheraton into a hotel-condo property couldn’t miss.

Richmond S. McCoy, president and CEO of UrbanAmerica Principals III (No. 3 on the BE Private Equity firms list with $1.1 billion in capital under management), felt good about the deal. His firm invests primarily in commercial real estate in urban areas and currently has a portfolio of nearly 30 properties collectively valued at $1.1 billion. “There were a number of hotel-condo projects planned that were new developments that we didn’t think would get off the ground,” McCoy recalls. “So we thought we had an asset that we could get to the market very quickly and be able to take advantage of the appetite in the market.”

Sure, it was a fixer-upper. The bar, an important revenue stream for most hotels, hadn’t been renovated in years. Only 180 of the 1,094 rooms had been modernized, and rates were discounted to less than $60 a night to attract bargain hunters. Since the hotel had fallen into disrepair, its reputation suffered. With the abundance of social media and review sites, the bad news spread like wildfire.

On the plus side, however, the property was literally next door to SeaWorld and Aquatica, two popular tourist attractions. McCoy’s rationale was that with enough investment it could be upgraded, converted into condos or “flagged” under a prominent hotel brand, and sold at a profit. But what he could not have anticipated was a housing bubble that would burst and lead to some of the sharpest declines in prices ever recorded, the steepest increases in foreclosure rates, and an economic downturn that’s lasted three years and counting.

In the face of a devastated housing market, the UrbanAmerica team adjusted its business model for the hotel and embarked on a three-year overhaul at a cost of $35 million. As a result, the team breathed

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new life into the property that now features Balinese-inspired architecture, art, and furnishings, which have helped lead to increased occupancy rates and revenues. Now operating as the Doubletree Resort Orlando – International Drive, it’s not only the nation’s largest black-controlled hotel but also the largest of any type in the Doubletree chain worldwide. And it’s operating at a profit.

HOUSING MARKET MELTDOWN
When the housing bubble burst, no one knew its magnitude or what lingering ripple effects it would have. But now it was obvious that the Florida condo market was no longer an option. “Before we even got plans drawn, we had Plan A and Plan B,” recalls Thomas P. Kennedy, UrbanAmerica’s chief financial officer and chief operating officer. “The financing market for those buyers [who wanted to develop the condo] dropped out and so Plan B was to renovate the hotel, fix it up, and run it as a hotel.”

There was work to be done. “We were selling rooms at wholesale rates,” says Greg Gooding, who was brought in to serve as general manager. “So I said ‘Stop selling them.’ I don’t care if you paid $50 or $100 for it, you’re going to have a bad experience–and with today’s social media, they’re going to badmouth you on TripAdvisor and Facebook saying it’s a dump.”

The renovation was extensive. First, crews planted more than 50 new palm trees of various sizes and species. Bamboo is planted around the entire property, creating the look and feel of a tropical oasis. The lagoon ponds were enhanced with jasmine, rocks, and palm trees. Next came new brick pavers on the walkways. All the guest rooms were fully refurbished with hardwood desks, flat-screen TVs, clock radios with iPod docks, luxury linen, and new vanity areas that boast granite countertops and vessel sinks. All flooring, wall treatments, and heating/cooling systems were upgraded. The restaurant, lounge, and delicatessen were all redesigned as was the fitness center, which was outfitted with new equipment. The lobby, which was saved for last, now features an Internet café and a ticket center where guests can conveniently purchase tickets to area amusements. The business center was reconstructed with granite work areas, artwork, a fax, scanner, copier, and four computers. And new granite countertops grace the front desk.

To offset the critical online reviews, the team fought fire with fire. “Any comment that comes through social media is copied to Greg [Gooding] and me, and we respond to any comment, specifically on TripAdvisor, Facebook, or our Twitter account,” says Larry Goldman, director of sales and marketing for the property. The website was also redesigned (doubletreeorlandoidrive.com) to showcase the hotel’s new look. “We started this process in August 2008, when we were ranked 230 or 240 out of 300-plus. Our current ranking is around 53, so we’ve made a tremendous jump in rankings based on customer reviews through TripAdvisor.”

A NEW MILESTONE
Construction was completed in the fall of 2009 and resulted in 28 acres of tropical landscape, dark woods, three swimming pools, relaxing earth tones, a full-service restaurant, children’s game lounge, miniature golf, and 60,000 square feet of

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meeting/event space. Occupancy has risen from 35% to 40% to its current rate of 65%. Total hotel revenues increased 38% in 2010 and are expected to increase approximately another 30% in 2011.  UrbanAmerica partnered with Doubletree in September 2009, and in exchange for an undisclosed fee and by meeting certain requirements, gained access to Hilton’s worldwide sales team and reservation system. (Hilton owns Doubletree.) UrbanAmerica also brought in Pyramid Hotel Group, a Boston-based full-service hotel management and advisory company, to manage the property, oversee the renovation, and reposition the resort.

Andy Ingraham, president, CEO, and founder of the National Association of Black Hotel Owners, Operators & Developers, or NABHOOD, hailed the acquisition and turnaround as a milestone in black business. “It’s significant in the scope of the investment and development, one that’s large enough to take advantage of the more than $40 billion that’s spent [annually on travel] by African American groups in the country,” he says. “It shows the departure and commitment of the brand standpoint that African Americans can play at all levels of the hotel business.”

In light of this dramatic turnaround, Hilton Worldwide named UrbanAmerica Developer of the Year in August 2010. “To win, an owner should deliver a hotel on time, meet all the brand requirements, and operate in a way that provides guests a great stay and employees a great place to work,” says Rob Palleschi, global head for Doubletree Hotels. “This hotel was an exceptional development deal because of its size and complexity to become the largest Doubletree in the world, and its fast track to meet brand standards to convert and open with our brand.”

Despite the more than $120 million investment, McCoy believes UrbanAmerica will see a significant return within the next three to five years, depending on market conditions. “We’re looking to ultimately sell this at around $200 million,” he says. Until then, UrbanAmerica will continue to keep the hotel in its portfolio while seeking out the next big real estate deal.