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Hotel deals for all types of investors
March 29 2013

Four panelists at a Hunter Hotel Conference session represented separate styles of hotel investment.

Highlights
  • RockBridge is opportunistic and looks for “what’s broken in a hotel.”
  • Watermark Capital’s portfolio balances cash-flowing hotels and those with broken capital structures.
  • SREE Hotels is an owner-operator that wants a stake in the hotels it operates.

ATLANTA—Hotel deals are available for just about every style of investor, said panelists during a session at last week’s 25th annual Hunter Hotel Conference. The four participants represented the broad spectrum of hotel investors, each looking for specific types of deals with varying risk and return profiles.

Columbus, Ohio-based RockBridge* is opportunistic and looks for “what’s broken in a hotel and that has degrees of brokenness that will drive our return based on the risk involved,” said James T. Merkel, president and CEO. The firm has a broad market appetite with interest in the top 100 metropolitan statistical areas, plus what he called “specialty markets, places where there is a beach, a college, some type of government demand or other generators.”

RockBridge, which invests and lends throughout the capital stack and has investments in 110 hotels, prefers projects in need of renovation. Last year, for example, the firm bought a former W Hotel in the Perimeter submarket of Atlanta. It then invested $20.5 million to renovate the 275-room hotel and rebrand it as a Le Meridien.

“Owners love not to reinvest in their hotels,” Merkel said. “But there’s no way to change the trajectory of a hotel without putting capital into to make it competitive. That’s what we look for.”

In making investment decisions, Merkel said RockBridge focuses more on how it can improve a property's value through upgrades and repositioning rather than the capitalization rate on the transaction.

“If there is no story (to the hotel) and no possible growth in cap rate, then it’s hard for us to be competitive,” he said. The targets, when possible, are “fatigued owners” of distressed properties for which lenders are no longer willing to extend money.

“Our challenge is that we must be there when that debt capitulation happens,” he said.

The other three panelists said their firms also focus on opportunistic deals with varying levels of interest.

Michael G. Medzigian is chairman and managing partner of Lake Forest, Illinois-based Watermark Capital Partners, which he described as a non-traded real estate investment trust that raises capital through a network of broker/dealers. The firm’s two-pronged investment strategy focuses on stable urban select-service hotels that provide ongoing cash flow and assets—mostly full-service hotels—with broken capital structures that need fixed.

An example of the former is a Courtyard by Marriott in San Diego that Watermark bought recently for $100 million at an 8% cap rate leveraged with 4% debt. It’s the kind of asset Medzigian said enables the company to “anchor its portfolio with cash flow.”

The other side of the strategy is exemplified by the purchase last October, in partnership with The Arden Group and Marcus Hotels & Resorts, of the 372-room Westin Atlanta Perimeter North. The group paid approximately $43 million for the hotel and is spending $14 million on a renovation.

“There are still a lot of (assets) out there to be worked out,” Medzigian said. “Cap rates are very aggressive in major markets, but there’s still some buys to be had in smaller markets.”

Samuel Plimpton, senior advisor and partner emeritus of The Baupost Group, said his Boston-based investment advisory firm that has more than $27 billion under management invests primarily in people.

“We’re agnostic when it comes to geography, type of asset and brand. We believe there’s a price for everything,” he said. Baupost has equity investments in hotels with more than 12,000 rooms in Asia, the U.S. and western Europe. “The first and foremost thing for us is a good long-term operating partner with the skills to execute our strategies.”

He outlined a laundry list of projects in which his firm would consider investing, ranging from what he calls a “gift, a fabulous buying opportunity,” to hotels that need fixes to their capital or expense structures to those with issues related to furnishings and design. Lowest on his wish list are reflaggings, expansions, conversions from other types of real estate, new builds and, finally, large mixed-use development.

The panel also included Vinay Patel, president and CEO of SREE Hotels, a Charlotte-based owner-operator. The firm has equity in 28 hotels and is operator of 19 of those properties. For Patel, it’s important to “have skin the game in any projects we’re involved in.”

The firm also looks for turnaround opportunities, although Patel admitted “those kinds of assets are hard to come by. It takes a little digging.”

Last year, SREE bought a 175-room foreclosed hotel in the Charlotte market for $6 million and spent another $6 million to renovate and reflag it as a Courtyard by Marriott, he said. “So for $12 million, we got a brand-new Courtyard with 3,000 square feet of banquet space in a good market.”

“This shows the how the select-service side of the business is fantastic because the chances of making a higher return are a lot better,” he said.

What’s ahead?
While all four panelists have some concerns about the future, they agreed this year should be even better than 2012 for hotel transactions. Medzigian said he believes cap rates will continue to come down modestly as will the cost of debt.

Merkel expects to see “plenty of good deals to happen” this year, and even though lenders are back in the market, “they’re a lot more conservative.”

And while Plimpton is concerned about interest rates rising, he believes the market will continue to be ripe for transactions.

“We expect to see a continuing flow of opportunities in assets that have needs in capital expenses, repositioning or capital structure both here and in western Europe,” he said.

Patel said SREE plans to stay aggressive. The company has three projects with five hotels underway and hopes to do three or four deals a year for the foreseeable future.

“We’re at historic levels of hotel demand, and if that continues opportunities will be out there for us,” he said.

* Correction: 2 April 2013: RockBridge was originally referred to as RockBridge Capital

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