Hotel owner/operators on a panel at the Americas Lodging Investment Summit Summer Update conference in Boston said they still plan to add to their portfolios with deals that make the most sense for their companies.
BOSTON—Despite signs that hotel industry growth is decelerating, owners and operators said they continue to see transaction opportunities.
Panelists on the “State of the transactions market” session during the Boston ALIS Summer Update conference each said they intend to acquire hotels throughout the end of the year.
Russ Shattan, SVP of acquisitions and development at MCR Development, said his company will be a net buyer this year. As an owner/operator, his company looks at opportunities to add value, which allows it to not have to play a market timing game, he said.
“Through an operating-driven investment thesis, we can design our organization to buy hotels through strong periods and weak periods,” he said.
His company is one of the largest owner/operators in the country, and it’s achieved that not by trying to build a national platform but rather by simply looking for good real estate opportunities, he said.
On occasion, MCR will sell, he said. It held a property in Baltimore that was on a terrific upward streak until 2015, he said. The market has been challenging since then, and the company decided to cut its losses, he said.
McNeill Hotel Company also likely will be a net buyer this year, CFO Chris Ropko said. Though it has only sold hotels this year, it expects to acquire some in the second half of the year and will be net buyers over the long-term regardless of the economy, he said.
Peachtree Hotel Group will fall in the middle, Director of Investments Michael Ritz said. The company closed on 15 transactions in 2018, an increase from the seven to eight the year before, he said.
Exploring new markets
Because none of the panelists owned or operated properties in New England, they were asked what would attract them to buy a property in the region.
A couple of things can hold back a company from moving to a new area, Ritz said. Peachtree doesn’t have an operational presence in New England, so it doesn’t have economies of scale there. Buying one 90-key asset doesn’t do it much good if it doesn’t have a couple of successful assets in its pocket to achieve those efficiencies it’s looking for, he said.
From a comparative perspective, his company can get a better deal on a newer Residence Inn next to a medical center at a higher cap rate elsewhere than it can for a second-generation Residence Inn in southern Boston, he said.
Ropko said McNeill would want to achieve critical mass in the region. If the company starts there with one property, it has no synergies to use to its advantage, he said.
“You might as well have a third-party operator that’s got better synergies in the region who understands the dynamics very specifically,” he said.
Those first- and second-generation properties present companies with an opportunity to buy at high cap rates, renovate, yield and then trade out, he said.
“We don’t pursue those opportunities because we’re purposefully trying to build a more intuitional, younger quality portfolio with the potential of taking them public someday,” he said.
Where to invest
Each panelist was asked how they would invest $75 million of their own money in the hotel industry.
Shattan recalled his job interview with Tyler Morse, CEO and managing partner of MCR, 10 years ago for his answer. Morse had asked Shattan, who was then working for Starwood Hotels & Resorts Worldwide, why he was interested in MCR, which owned Value Place at the time. He said he explained to Morse that if he had won the lottery, he would have bought Hampton Inns and Courtyards by Marriott. Morse replied that he got the job.
Customers have migrated to this type of product over the years, he said. These hotels offer free Wi-Fi, free breakfast, sometimes free dinner and free parking, he said. The value proposition for guests is out of this world, he said.
Ritz said he would stick with Peachtree’s general investment thesis, to go after the proven Marriott International and Hilton select-service brands, he said. Extended-stay hotels near medical centers would also be a target, as well as suite products near large corporate headquarters, he added.
Mixed-use developments bring demand generators to hotels’ front doors, he said. They also have apartments, which bring life into the property, he said.
Select-service brands make a lot of sense, Ropko said. If run correctly, they could experience a 30% to 50% drop in their net operating income before running into any problems, he said. However, he said he would pursue a “super, ultra-luxury” hotel with a low key count, high barriers to entry and an emphasis on an experiential stay.
Under the right construct, there are people who want that personally delivered curated service and experiential aspect, he said. In those cases, some would pay up to five times the normal average daily rate of a good room to stay in a tent, he said.