Deflaggings reflect belief that Trump brand is hurting hotels

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Owners of the Trump International Hotel & Tower Panama are trying to oust Trump.
Owners of the Trump International Hotel & Tower Panama are trying to oust Trump.

The Trump Organization has announced its second hotel deflagging within the past five months, and it appears to be on the verge of a third, signaling that President Trump and the controversies surrounding his politics could be hurting his family's luxury hotel business.

The Trump Organization and CIM Group, the majority owner of New York's Trump SoHo, reached an agreement to remove both the Trump brand and management from the 391-room hotel by year's end. The hotel, which was announced in 2006 on "The Apprentice," opened in 2010.

In late June, JCF Capital, then owner of the 261-room Trump International Hotel & Tower Toronto, agreed to buy out the Trump Organization's management contract just as the 5-year-old property was being sold to InnVest Hotels LP. The property has since been rebranded under Marriott International's St. Regis badge.

And as of last week, the Associated Press reported that the owners of the 369-room Trump International Hotel & Tower Panama were trying to remove both Trump's name and management. The 70-story, sail-shaped tower opened in 2011, but since then, owners, who collectively paid at least $32 million for the Trump association, have had trouble selling its condominium units.

Neither CIM, JCF Capital nor the Trump Organization cited lagging demand for the deflaggings, while Miami-based Ithaca Capital Partners, which acquired a majority stake in the Panama hotel, did not respond to a request for comment last week. JCF Capital called the Trump group "exceptional partners," while CIM cited "a strong working relationship" with the family.

"Not only do we have a valid, binding and enforceable long-term management agreement, but any suggestion that the hotel is not performing up to expectations is belied by the actual facts," the Trump Organization said of the Panama hotel in a statement last week. "Despite the fact that Panama City has experienced a 21% increase in hotel rooms since 2014, over the last three years, the hotel has outperformed the market by a wide margin -- as much as 20% -- by virtually every measure."

Still, the three properties account for more than 25% of the Trump Organization's global total, and the willingness of hotel owners to pay the company millions of dollars to terminate its contracts before they expire suggests that the president's polarizing effect on prospective travelers is hurting demand.

JCF Capital agreed to pay the Trump Organization at least $6 million to walk away from the project, Bloomberg News reported, citing a person familiar with the process, while the New York Times reported that the company had years remaining on its Trump SoHo contract when it was terminated.

With annual management and branding fees approximating 5% of revenue, a breakup fee could be two to four times that amount, according to Jan deRoos, HVS professor of hotel finance and real estate at the Cornell School of Hotel Administration. That means that for a property like Trump SoHo, early termination could net the Trump Organization from $4 million to $8 million. The Trump family's privately held hotel company does not disclose financial figures.

"His presidency is probably hurting his hotel business," deRoos said. "Even if you like the guy and stay at his hotel, the conversation is going to be about Trump and not about the business at hand. So we're starting to see evidence that people are voting with their feet."

The deflaggings also mark a reversal from a year ago. At the time Trump was elected president, the Trump International Hotel Washington D.C. had just opened at the Old Post Office property, giving the Trump Organization an opportunity to benefit from increased business from foreign dignitaries and Republican Party power brokers, both in Washington and at Trump's Mar-a-Lago Resort in Florida.

The company was also putting the finishing touches on Trump International Hotel & Tower Vancouver, which opened in February. It was an era of optimism for the company, which had recently announced an upper-upscale lifestyle brand called Scion. This June, it added a midscale brand called American Idea.

The optimism appears to have been warranted in the case of the Washington property, which had $1.97 million in net income through April on $18.1 million in revenue. Those figures, about 50% over budget projections, were reported by the Washington Post in August, citing General Services Administration (GSA) documents that were later removed from public viewing. The Trump Organization operates the hotel on a long-term lease with the GSA.

The Vancouver opening, however, was marred by protests, and in August, Foursquare, an app that lets users check in to various locations, said foot traffic to Trump's U.S. hotels fell 16% year over year March through July, while the search engine Hipmunk said first-half bookings at Trump's hotels in North America were down 58% from a year earlier.

Trump Organization representatives disputed the Foursquare and Hipmunk reports, though they did not provide financial metrics.

As for Trump SoHo, the hotel last week was quoting mid-December weekend rates starting at $404 a night, which is comparable to the James New York SoHo ($370) but substantially less than starting rates at nearby competitors such as the Mercer ($625) or the Four Seasons New York Downtown ($660).

As for the company's future, deRoos said it might find opportunities for American Idea because of minimal competition within the sector in Southern, Trump-supporting states. But he said the limited development of the Scion brand -- there's only one property under construction, in Mississippi -- suggests that prospective developers have lots of other lifestyle brands to choose from without political headaches.

As for the flagship brand, its small and shrinking footprint will likely prevent it from operating at the economies of scale necessary to compete with larger luxury brands, limiting growth opportunities to either one-off locations or to the golf resort sector.

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