A recently formed joint venture between two Miami-area businesses — AMS Hospitality and commercial real estate firm Black Salmon — was years in the making, but it was launched now because the timing was right, according to executives from both companies.
“We’re trying to find good hospitality deals due to the current distress situation due to [COVID-19]. That’s a very easy investment strategy to sell to investors,” said Jorge Escobar, Black Salmon's CEO.
AMS is itself a relatively new entity, created in early 2020 as a partnership of real estate firm The Allen Morris Company and Stormont Hospitality Group.
Spencer Morris, an executive with Allen Morris, said he’s been looking to Black Salmon for some time. But this joint venture, which aims to spend $300 million on hotel properties over 18 months, was the first project “that fit the box for both groups.”
The joint venture made its first purchase in December by picking up the historic Pelham Hotel in New Orleans. Morris noted, however, the 65-room boutique property might not be the exact blueprint for the types of assets the joint venture will chase, at least in terms of size. He said it is looking to target assets in a 100- to 200-key range while being agnostic about whether they are branded or independent.
“We like lifestyle assets with character — a good story with good bones,” he said.
The joint venture plans to focus primarily on the Southeast, with executives identifying “10 key markets” where they’d like to pick up assets. Those include Miami and Tampa in Florida; Savannah, Georgia; Asheville, North Carolina; and Birmingham, Alabama.
Escobar described the joint venture's target asset type as those in markets with a solid combination of business and leisure demand drivers as well as something akin to “boutique select service” that requires some capital expenditures and modernization.
While Escobar noted the possibility that distress on the market spurred the partnership, Morris said they aren’t limited to distressed properties.
“There are better prices in this environment, but we’re looking for quality assets in quality submarkets,” he said. “We’re looking for discounts, but that’s not our core thesis.”
Escobar said deals would ideally see discounts of anywhere from 15% to 40% compared to 2019 valuations.
“That’s our target, and it’s not just wishful thinking,” he said. “We are seeing some already, and as soon as we announced [the joint venture], our deal flow increased a lot. People are eager to find new partners with this strategy and liquidity.”
Escobar said there is ample reason for optimism for the hotel industry in the long term, and their underwriting assumes a return to 2019 performance levels at some point around 2023 or 2024.
Both Escobar and Morris noted that if the partnership goes as well as hoped, there will be plenty of opportunity to expand its scope beyond the $300 million initial funding. Both also are hopeful that their capital will be deployed well before the end of the 18-month time frame they provided.
“If we could deploy it in six months, that’d probably be a better outcome for us than 18 months,” Morris said. “We’re starting to see opportunities for acquisitions become more available, but we don’t know what the extent we’ll see is yet.”
He said that if the joint venture can deploy its funds in six months, both sides will “definitely be looking into round two” for investment.
Escobar similarly expected “the next three to six months to be very active” for deals.
Morris said there has been a significant amount of competition for deals up to this point, with other private equity players similarly eager to find discounted assets, but he added the asset type they’re targeting is a bit smaller than what the larger private funds are looking for.
“There are large groups raising funds for distressed acquisition strategies, but the reason we like the space we’re looking [at] is it’s too boutique and small of an average check size for those bigger funds,” he said.