Owners who are active on the transactions market highlighted what they’re looking for in deals during the recent Hunter Hotel Conference.
ATLANTA—Strong markets, locations, age of existing buildings, the number of years left on franchise agreements, and opportunities to make changes and improve cash flow are all deciding factors for owners when they’re looking to buy and sell properties, sources said.
Speaking during the “Buying and selling hotels in an active market” session at the recent Hunter Hotel Conference, panelists said all of those factors weigh on their decisions to move forward with deals.
“There’s not one magic bullet,” said Ben Pierson, VP of investments for Rockbridge. “It’s all driving to: can you get your return? There are a variety of indicators.”
Importance of markets
Panelists said it’s vitally important as owners to invest in markets they believe in.
Craig Nussbaum, SVP for Waramaug Hospitality, said his company had been “focused on secondary and tertiary markets” roughly five years ago but “shifted to primary and secondary markets.”
“New supply in tertiary markets made it tougher,” he said.
Jatin Desai, managing principal and chief investment officer for Peachtree Hotel Group, said his company is also interested in secondary markets, and many people don’t understand how broadly that term is applied.
“There’s a deviation from what people consider primary versus secondary,” he said. “Atlanta is a secondary market. Some people say the primary markets are New York, Miami, Houston and Los Angeles, and everything outside that is secondary. So we’re into secondary markets and even tertiary markets like Gainesville (Florida).”
Pierson said it’s important to understand the balance of barriers to entry versus demand drivers in markets.
“We’re conscious of supply, but if you really believe in a market, it’s going to get new supply,” Pierson said. “We’re not the only ones who can figure out it’s a good market. So you have to look at how it will absorb supply over time. That’s why we’re a long-term believer in Nashville. We also own assets in Eugene, Oregon, because we believe in university markets.”
The state of a property
Desai said one of the most important factors when looking at a deal is “the age of the box.”
“There are some deals we come off of pretty quickly because (the hotel) is functionally obsolete,” he said. It doesn’t make sense to invest “if it’s a long-term play and the property doesn’t stand the test of time.”
Nussbaum said the hotel’s flag, and the future of that flag, is another key when looking at potential deals.
“We’re always concerned about how many years are left on the flag,” he said. “You don’t want to be the last ones holding that flag.”
Both Pierson and Guy Crawford, VP of acquisitions and development for Lightstone Group, noted it’s important to identify properties where operational or other improvements can be made.
“We think demand growth is slowing,” Crawford said. “So you look for definitive value creation—some anomaly in (a hotel’s) expenses or where you can create value—so we’re not reliant on markets to make the investment work.”
Pierson said his company focuses on deals that are “generally value add” and they have the flexibility to opportunistically sell or hold depending on what makes the most sense in each situation. He said there’s a simple question they ask themselves while looking at potential deals.
“Do we have a reason this deal fits our profile?” he said. “Can we add something specific to it or are there operational levers we can pull?”
Some metrics are overemphasized
People spend a lot of time talking about cap rates, but panelists said it’s not necessarily the most meaningful metric, especially if you’re looking at a property that isn’t running at full capacity.
“For us, cap rates are meaningless,” Desai said.
He pointed to a deal his company did in Miami as a specific example of why cap rates are sometimes uninformative because it measures current performance and not a property’s potential.
“It made zero sense when you look at the cap rate, but it was $102,000 per key in Miami,” he said. “It was being mismanaged and all the things that go along with that. So in that sense, the cap rate meant nothing.”
Pierson said getting a property up to peak operational condition will mean you’ll have a buyer for it at the exit.
“We focus on cash flow,” he said. “People want to buy cash flow. There’s a market for that.”