NEW YORK CITY—Independent and boutique hotel investors said that while it might be a bit more difficult to get deals done now, there are plenty of opportunities for companies that know their markets and products inside out.
Speakers at the recent Boutique Hotel Investment Conference who participated in investment and equity panels agreed that as a whole, the independent boutique segment of the hotel industry has gained a lot of ground when it comes to credibility in the broader investment community.
“It’s changed substantially,” said Mike Depatie, managing general partner at KHP Capital Partners. “It’s not only a legit segment, but CEOs are talking more about differentiation, experience, connection, design—all the things we (in the boutique space) have been talking about for years.”
Matt Livian, SVP and chief investment officer of Sydell Group, agreed but said, “It’s still more challenging proving the story, and this space is very much about execution and track record, but I think every major fund out there that owns hotels has exposure to the segment now.”
Capital sources
Where are independent hotel developers going for money in the current environment? It varies based on each company’s structure.
“On the debt side, there’s definitely a big change in the availability of capital now,” said Adam Maisel, VP of acquisitions and development for GB Lodging. “We’re looking at hotel opportunities that have a deep repositioning or ground-up construction, and it’s forcing us to focus on things from a lender’s perspective.”
Maisel said that on the equity side of the equation, there’s still financing to be had, “but everyone is selective,” he said. “You need a deal with strong sponsorship, the right operator on board and the right expertise on the team to put it all together.”
Many companies in this space know that putting their own equity into the deal is the way to achieve the best end result. That’s the case for The Trump Organization, according to company SVP of development and acquisitions David Orowitz.
“We look at deals to put equity in,” he said. “There’s got to be a reason to put above-market inflation on the average daily rate. We’re not going to assume that there will be great growth unless that market or property has a good reason for it.”
KHP Capital Partners has five hotels under development now, according to Depatie, and recently raised another fund that it’s looking to invest into boutique flags and pure independents. Given the sourcing of the fund, which is 95% institutional investors, he said, the company has strict guidelines for its return goals.
And while KHP does have some new-development projects in the works, Depatie said that overall “our view is not to do new development right now.”
Marty Newburger, partner at KSL, agreed. KSL’s fund is comprised largely of state pension plans, endowments and some government agencies, and he said today’s development environment favors renovation of existing buildings compared to ground-up construction.
“When we do ground-up, it’s usually because we wound up with a parcel of land,” Newburger said.
Why operations matter
On the boutique and independent side, all speakers agreed that now more than ever, hotel operations factor significantly into the financing of a deal. The unique characteristics of independents often work in their favor on that front, they said.
Depatie said his company likes the supply-and-demand characteristics of boutique and independent hotels, as well as the fact that “execution matters a lot.”
“How you program the hotel, how you design the hotel, how you operate and asset-manage the hotel—if you’re entrepreneurial, you can make a difference by creating a really specialized asset,” he said. “These are value-adds that really pay off.”
Having a good third-party manager can help ensure operations are paying off.
“Having that experienced operator involved in the underwriting process really allows us to present a better package to capital partners or lenders,” Maisel said.
As a manager and developer of independent hotels, Michael Tall, president and COO of Charlestowne Hotels, said his team gets very involved in the penciling of deals these days.
“The things coming across our desks are getting a lot more scrutiny,” Tall said. “We spend a lot of time with asset management on the underwriting, and we get involved where we can in figuring out operations costs and labor costs.”
Still, bigger performance and issues of supply and demand are areas of concern. Newburger said being selective is key.
“We’re seeing a lot of tick-up in labor, and the booking window is not as long as it used to be,” he said. “It feels as though things will trickle along on the top line, but the issue is the bottom line. There’s a lot of cost creep, so there are concerns about profit. But there are great pockets (to develop in) and interesting opportunities.”
Depatie and Livian both said supply is something they’re both keeping an eye on.
“New supply is obviously a concern, disruptors are a concern, as is volatility in the capital markets,” Livian said. “For us in this lifestyle space, when the money spigot turns off, it turns off, so we’ve made sure all our capital structures can withstand a three- to four-year period so we’re focused more on leverage points, making sure the term on our debt can withstand short-term volatility, and we’re not taking on any mezzanine.”
Depatie echoed the statement that supply upticks along with moderating demand can be a concern, along with operating costs.
“We’re getting concerned about increasing transparency in pricing,” he said. “We’re seeing it erode pretty quickly, and I don’t know what happens if we have a major demand interruption.”