Social Icons Superfish

MHI President Drew Sims Discusses the Challenges Facing Hotel REITs During the Great Recession

10/05/2010 | By Jason C. Flynn

In the midst of a slow economic recovery, one of the few bright spots, especially in the commercial real estate markets, has been the improvements in fundamentals in the lodging sector. MHI Hospitality Corporation (Nasdaq: MDH), one of the smallest hotel REITs on the market, has posted a 5.5 percent gain in room sales, marking its fifth-straight quarter of growth.

Andrew M. Sims, president and CEO of MHI, says that his company has faced some major challenges during the recent recession. Sims notes that one of the key elements of MHI's value proposition has been its ability to take distressed properties and reposition them in the market.

"We engage in what we call 'deep turn' renovations," Sims says. "We take deeply distressed or closed hotels and completely rework them, sometimes right down to the concrete."

MHI only became a public REIT in 2004, but the lodging company has been in business for 53 years, since the CEO's father, Edgar Sims, Jr., founded the company. A self-professed "hotel brat," Sims and his family have been a part of the hotel industry since his grandfather Edgar Sims built the first two motels to be constructed between Baltimore and Washington D.C. in the 1920s.

In Drew Sims' 33 years with MHI, he has helped the company grow and expand into 10 markets in the Mid-Atlantic and southern United States, including Philadelphia, Miami, Tampa and Raleigh, N.C. 

When the recession hit in 2008, half of MHI's portfolio was either just coming out of renovation or in the midst of one, putting the company in a difficult position. Like many other companies, MHI had to decide what changes, if any, they would make to improve their balance sheet. According to Sims, being a public REIT has made the recent period of economic uncertainty much easier to manage.

Since March of this year, MHI has seen occupancy rates for their hotel rooms at over 70 percent, as well as a 69 percent increase in net income in the second quarter of 2010. Sims says he expects that the hotel sector will continue to grow, even if the pace has slowed.

"I expect the recovery to continue," Sims says. "A new supply of hotels is almost non-existent right now, because there is still a lot of stress based on what was paid for assets from 2006 to 2008. Very few new hotels are going to be funded and built."

Despite what he sees as a limited supply of new hotels, Sims said that MHI will continue to raise capital to revitalize properties and expand its presence in the market.