The Dallas-based company intends to add $1 billion in hotel assets to its portfolio, having recently acquired six properties. President Perch Nelson said it’s just the beginning.
DALLAS—From the day he was born, the president of Dallas-based Phoenix American Hospitality was destined to be angling for hotels. The latest efforts by W.L. “Perch” Nelson are netting some early results.
“We’re busy, we’re building, we’re excited about the future,” Nelson said during a phone interview. “For the first time in my professional career I can see the clear path in front of me. Our direction is clear now that we partnered with a major institution to buy hotels.”
Nelson declined to provide details of the investor, but said Phoenix American’s $87-million January acquisition of a 754-key portfolio of six Hyatt Place properties located in Georgia, North Carolina, Texas, South Carolina, Virginia and Kansas is proof that both investor and fund manager mean business.
Perch Nelson, Phoenix
The deal tripled Phoenix American’s portfolio size, and Nelson said the company is looking for more.
“There is no question this is a substantial deal for us,” Nelson said. “It’s the first of many.”
Phoenix American’s mission is clear, according to Nelson: To identify and acquire $1 billion of hotel assets that provide cash flow and value-added opportunities during the next two years. The subsequent plan is to launch an initial public offering.
“The IPO is the end goal,” Nelson said. “In order to get there successfully you have to build the portfolio with the exit in mind. A lot of investment criteria (are) built so it would be attractive to the public venue when the time comes.”
The recent performance of the U.S. stock market buoys the company’s chances of reaching its goal because the perception in the market is more positive than it was for most of 2016, Nelson said. Since the election of President Donald Trump, the R.W. Baird/STR Hotel Stock Index has increased by 30%.
“Some people believe (the stock market) is the barometer of the domestic health of the U.S. economy,” he said. “That leads to more investor confidence.”
Phoenix American’s nine-hotel portfolio is valued at $150 million, according to Nelson, so there’s plenty of room for it to grow. Phoenix American typically prefers select-service hotel assets.
“We’re actively considering hotels that are a little bit closer to full service by definition with limited food-and-beverage and limited meeting space,” Nelson said.
The company also wants to own and manage its properties, with the possibility of being third-party managers in the mix, he said.
“What (we) really do is we endeavor as being an active manager of the properties,” Nelson said. “We create value in the operations because we treat hotels as operating business rather than just appreciable real estate.”
Phoenix American is searching for hotels that are not managed as efficiently as they should be, he said.
“It’s a little more difficult to do because for the most part owners and hotel managers have become more proactive in the process,” Nelson said. “They’re just a bit more difficult to find.”
The company is building the infrastructure to manage its own properties so it can take an active role in improving the assets’ net operating incomes, Nelson added.
There could be more opportunities on the horizon as funding has become scarcer and 10-year loans from 2007 are coming due this year.
“That was a pretty robust year from a hotel lending perspective,” Nelson said. “Our belief is that the (commercial mortgage-backed securities) market doesn’t have the appetite to absorb all of that paper coming due.”
Nelson said the deal for the six Hyatt Place properties demonstrates the company’s willingness to have a broad geographic footprint.
“We want to stay true to discipline of operational efficiencies rather than focusing on the market it’s in,” he said. “We certainly want to be in markets with a positive outlook, but those are located throughout the country. The Southwest and Southeast are particularly popular now.
“We’re very excited (about) the cycle we’re in now,” he added. “We don’t really see a dramatic slowdown in growth coming for either the limited-service or select-service markets."
Hotels on Phoenix American’s target list must have one or more of the following characteristics:
- Cash-flowing investment, not distressed;
- an urban market, business travel focus;
- strong hotel flag with a national and/or international reservations system;
- competitive barriers to entry;
- the ability to acquire at below replacement cost; and
- competitive positioning in the submarket.
“Given the choice, we have found we’re typically more successful in off-market transactions—principal to principal rather than negotiated,” Nelson said. “People we’re successful with have a high certainty of a transaction.”
Nelson’s career has taken him to Wyndham Hotels & Resorts, Wyndham International (which was formed when WHR and Patriot American Hospitality merged) and Eaton Development.
As Phoenix American continues to cast its net to acquire more properties, Nelson explained why he has been called “Perch” for his entire life.
“It’s not a glamorous story,” Nelson said. “I was born and raised in Dallas, but my grandparents lived in deep East Texas. On the day I was born, my grandpa was supposed to go fishing but instead had to come see his first grandson, so the name was given and it has stuck.”