MEMPHIS HOTEL PROJECT
Aparium Hotel Group has obtained the exclusive rights to purchase the 110-room historic Madison Hotel in the heart of Downtown Memphis and the adjacent 1 S. Main retail building in an “off market” transaction. Memphis is a top 25 U.S. market in population, benefits from strong and steady demand drivers, has experienced strong hotel performance growth over the last three years, is experiencing a re-urbanization, and most importantly, is void of a great hotel and restaurant experience.
Aparium, in partnership with SMB Bradley and a family office based in New Jersey, intends to acquire the Madison Hotel and complete a property renovation and reposition in order to realize its full performance potential while improving its notoriety both on a local and national landscape for its exceptional service, luxury accommodations, and food and beverage venues. There exists an opportunity to realize its full potential through a meaningful renovation and the implementation of a strategic operational strategy. A timeless, yet fresh interior design and branding rooted in Memphis are very important in the repositioning efforts, assuring that the hotel will be positioned as a showcase of the great city of Memphis and a preferred destination for visitors and locals alike.
On a trailing twelve-month basis (February 2015-January 2016), the Madison Hotel achieved approximately $1.59 million of Net Operating Income on approximately $7.89 million of total revenue, with a Gross Operating Profit (GOP) margin of just 29.8%. By comparison, a typical Aparium hotel benchmarks at 35%-40% in GOP. There is a multitude of operational efficiencies that can be further realized through experienced and professional management. This includes reducing the Cost Per Occupied Room (CPOR) of the Rooms Department from its current $60.37 CPOR to $53-$55 CPOR upon stabilization. This will be accomplished through Aparium’s housekeeping efficiency protocols and its unique front office “Ambassador” program which streamlines unnecessary front office employment layers, cross-training employees to carry through multiple job functions.
There is tremendous opportunity to drive top-line hotel revenue and food and beverage revenue, particularly relating to both leisure and business travel and small group meetings and events. The hotel currently penetrates its competitive set in occupancy at just 87.6%, a penetration number that has continued to drop over the last three years. This indicates that the hotel is not receiving it’s “fair share” even despite being at a lesser room count than its competitors. Food and beverage sales represented 27.7% of total revenue in 2015. Similar Aparium hotels with comparable food and beverage outlets and number of rooms accomplish over 40% of revenues through food and beverage. The food and beverage revenues were $1.7 million for both the ground floor restaurant and rooftop venues. For like venues, Aparium would expect up to twice the total revenue. Eighty3, the hotel’s signature restaurant, is not well positioned, lacks any relevancy to downtown Memphis, and fails to draw locals to support the restaurant independently. The restaurant, like a branded hotel, has fallen victim to being merely an amenity to the hotel guest and not a recognized Memphis restaurant.
The rooftop benefits from perhaps the best view in all of Memphis, yet they only offer beer and small snacks in the evenings. The branding and positioning is dated despite its relatively recent opening in the market. It has become more a place to enjoy the view for a drink rather than an exciting venue that encourages patrons, both locals and guests, to stay and entertain all evening. Because the rooftop is not enclosed in any portion, it is closed mostly in the winter months.
The hotel is significantly underperforming in banquets and catering given its location and amount of meeting and event space. Banquet and catering revenue is approximately half of what the hotel should achieve. The current owners were planning for a significant banquet space renovation prior to the sale. The hotel’s inability to sell the existing event space has affected small group sales that would contribute meaningful room sales per night and create compression. Furthermore, the ballroom occupies the best frontage on Main Street, perhaps a more lucrative restaurant location than banquet space.
As part of the redevelopment in 1999, the owner subsidized property taxes for a period of 25 years through the Downtown PILOT Program. Fixed costs have recently increased due to the escalating payment schedule of the PILOT lease through its 2024 expiration. Current ownership has not yet approached the City to renegotiate the PILOT schedule or payments although the City has shown recent precedent of amending such leases.
The goal of the rebranding of the Madison Hotel will be to highlight what makes Memphis special and unique to locals and visitors alike. Memphis has so many incredible historical sites and continues to play a very important role in music, and the Madison Hotel will become a must-see destination for anyone visiting the city when it is completed. The renovation will refresh the rooms, corridors, meeting and banquet space, food and beverage venues, arrival experience and landscaping and will modernize equipment and infrastructure creating sustainable operating efficiencies. The inspired design will remain true to the authentic nature and history of the Tennessee Trust building and the renovation will revive the property. Post renovation, the rooms and public spaces will be more elegant and distinguished and the food and beverage and banquet outlets will be market leaders in Memphis. Aparium has completed preliminary pricing exercises for the renovation and will continue to complete the necessary due diligence in determining the merits of each capital expenditure item. The property is in good condition both in the front of house and back of house. The hotel has a very strong Chief Engineer in place, which has yielded strong employee morale.
The 1 S Main building has minimal tenant improvements and currently leases on a month-to-month basis to a low-end diner and check cashing business. Aparium intends to elegantly renovate the facility and either add to the hotel or bring in a noted retail tenant in this prime corner of downtown Memphis. This revenue upside is not reflected in the underwriting.