LOS ANGELES—Chartres Lodging Group is proof that timing is everything when it comes to buying and selling hotels.
The San Francisco-based investment and advisory firm that focuses on the acquisition, asset management, renovation and development, and property management of hotel assets, has shuffled its executive team in anticipation of adding more hotels to its portfolio of 16 properties comprising 12,600 guestrooms in the United States and Japan.
Co-founder Rob Kline, who on Monday was elevated to CEO of Chartres (pronounced “Char-ter”), said during a break at last week’s Americas Lodging Investment Summit that the company is actively looking for opportunities to invest in hotels.
“We definitely look at the low levels of new supply as the driver for success,” Kline said. “We want to get properties today and turn them around so two years from now we want to be ready for that market. … To be ready in 2014, we need to be ready to buy today.”
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Maki Nakamura Bara (left), Rob Kline (right) |
Chartres’ acquisition goals include a US$1-billion increase in major markets during the next three years.
Kline said he and co-founder Maki Nakamura Bara, who on Monday became the company’s president, are facing the same issue executives throughout the hotel industry are facing: fierce competition for the turnaround opportunities ranging from the upper midscale segment to the luxury segment.
“With every cycle it gets tougher and tougher to find properties,” he said. “It’s getting shorter as a hold period for us. Cycles are coming more frequently with greater intensity. We need to get in and out during the same upcycle.”
Bara said the company typically underwrites for a five-year hold period, but won’t rule out holding a property longer. For example, the 941-room National Conference Center in suburban Washington, D.C., has been in the Chartres fold for a dozen years.
Setting the stage for growth
To expedite the opportunities, Chartres earlier this month hired Kirk Pederson as chief investment officer and COO. He is responsible for all new acquisitions, operations and management.
Chartres began preparing for the upturn in December 2010 by acquiring the 451-room Ocean Resort Waikiki, pumping US$100,000 per key of renovations into it and rebranding it as a Hyatt Place. It followed that with the recently announced acquisition of the Novotel Times Square in New York from Accor SA for US$91 million.
Chartres was the junior financier on both deals—it partnered with Morgan Stanley Real Estate on the hotel in Hawaii and joined forces with Apollo Global Management for the New York transaction. Kline said the company is more than willing to replicate those deal structures going forward.
“All of our deals are partial ownership,” he said. “We’ll take 5% to 10% of the equity, bring in a partner like Apollo or Morgan Stanley Real Estate, do a substantial renovation and reposition it. Sometimes we’re manager, sometimes asset manager. Generally we’ll find the opportunity, the hotel we want to buy and bring in our capital partners.”
Bara said the opportunities Chartres seeks are well defined.
“It has to be well-located in a major market in a gateway city and it has to have something broken about it,” she said. “It always involves a renovation. Lately it has involved a heavier renovation and deeper repositioning than in the past.
“The things that you can’t fix, we want that to be right—the location and the market,” Bara added. “Otherwise we want to go in and put on a little elbow grease and fix it up.”
The idea of the program is to create value institutional investors want to acquire, Kline said.
“It’s been very difficult over the last couple of years to find those because there’s no financing and it has to be all cash,” he said. “We took a (struggling) hotel in Waikiki and converted it to a Hyatt Place with all equity. There are not many properties out there that you can stomach doing that.”
Kline said the Novotel acquisition will be financed, but he declined to reveal the details. Bara said the property will remain a Novotel property.
Foreclosures provide opportunity
The environment is presenting challenges, according to Kline. There typically are two types of situations that regularly appear.
“Extend-and-pretend is starting to come due,” he said. “Somebody will look to attract rescue capital. That’s not as much an opportunity for us. The big opportunity is that servicers are foreclosing and taking assets back. They’re looking at renovations and they don’t want to write the check. They’re starting to release that inventory to the market.”
Bara said the company has spent the past 10 years overseeing more than US$800 million in renovations.
“The combination between that confidence we’ve built and that we’ve had to look for deeper turnarounds than ever creates more of a challenge today,” she said. “Even though (real-estate investment trusts) have been quieter (on the acquisition front during the past six months), the opportunities that are there are ones we’ve had to dig for.”
Kline said the deeper renovations are evident simply by looking at the investments made. “In the last cycle if our investment was a hundred dollars, a third of that went into renovations,” he said. “Now it’s about half.”
The other side of the coin for Kline and Bara is their Kokua Hospitality management company they formed six years ago. Kokua, which has six hotels in its portfolio, operates separate from Chartres. Phil Tufano, a 20-year veteran of Hyatt Hotels and Resorts, is Kokua’s COO.
“We’re investors first, and we’ll figure out the best solution for the property,” he said. “If it’s not to be managed by a big brand, we want to manage it.”