During any hotel acquisition, I am sure the question always comes up: “Is it the right time to involve the asset manager?“
There is no clear answer.
Several deals never get to the finish line. Acquisition teams are reviewing multiple deals and asset managers are tight on time as they have current portfolios to operate. However, the ideal time for any asset manager (AM) to get involved in a deal may be even before the letter of intent is signed and acquisition teams have a strong feeling about the deal.
From my experience of working in investment banking, we often employed the concept of the "fire wall,” a barrier between departments within an investment bank such as trading and mergers-and-acquisitions, so they don’t know what the other is doing. This is specifically created for ethical purposes and to avoid any conflict of interest. But in hotel acquisitions, we neither have this wall nor do we want one.
As much as strong underwriting is very important and sets the base, the most successful hotel acquisitions are the ones where the acquisition team and AM have worked as partners from the start of the deal. This not only helps to reconfirm the assumptions, but it also gives a complete picture and mitigates risk associated with all the moving parts (which we know are many!) since both sides look at the same opportunity through different lenses.
The reality check or second opinion
Acquisition teams are brilliant at identifying, negotiating and structuring deals. They have a good relationship with brokers and strong handle on the capital markets. The question then is: Why do we see some acquisitions fail? The answer lies in the gap between potential and operational reality.
This is where the AM can play a valuable role in the acquisition process. An AM looks at the underwriting from a different vantage point. It’s not about being a critic; it’s about successful execution strategy.
Say, for example, underwriting assumption builds significant labor cuts or assumes increases in market share. The AM evaluates these assumptions through considerations such as the effect on service scores in case of such labor cuts and changes in strategy/marketing budget in case of increased market share versus the competitive set.
These and several other questions should not be looked at as challenges to the deal, but rather questions to make the deal stronger by mitigating risks.
Building trust before closing: Lenders and partners
In today’s world, capital partners and lenders are very sophisticated. All have seen several great pitches and at least some properties struggle post-acquisition because the business plan looked great on paper but didn’t materialize in practice.
AM’s involvement from the front end in site visits, due diligence calls and even contributing to the investment committee presentation sends a positive and powerful signal. It helps build credibility and trust, which can help ride any waves post-closing.
The capital partners are assured that they are not just buying a building but rather an executable plan. From the lender perspective, this also brings a level of comfort as they are engaging with the person they will be dealing with post-closing while building confidence on business plan execution.
Strategic value of asset manager
The involvement of the AM at the acquisition phase itself will help create efficiencies in several areas of the deal. Consider, for example, the capital plan. Most underwriting will identify the items to be fixed, including new HVAC, roof repairs and all the necessary evils. These are very important and need to be handled. An AM will be able phase things in a manner to maximize projects that drive rate and revenue while maintaining the integrity of the asset.
AM can play a vital role in several areas such as negotiating the property improvement plan, optimizing the franchise agreement, identifying value-add opportunities that are not captured in underwriting and can create incremental values, landlord relationships (in case of leasehold assets), etc.
These inputs from AM often uncover hidden value that justifies the purchase price or creates negotiating leverage.
Asset management and acquisition: A partnership
We are all working toward the same goal — a successful transaction for all stakeholders. To achieve this, we need to see an effort where financial acumen and operational expertise are integrated from the start of the deal.
While philosophically acquisitions and asset management are considered sequential steps, a successful acquisition process should be considered more like riding a tandem bicycle with both pedaling together, contributing their strengths and heading in the same direction toward the finish line.
So, when is the right time to involve your asset manager in an acquisition? In my opinion, the earlier the better.
Prath Mehta is Director of Asset Management at Westmont Hospitality Group in Houston, where he oversees a portfolio of luxury, upscale and limited-service hotels. He has previously been involved in various roles in acquisitions and advisory in the U.S., Canada, and India.
The opinions expressed in this column are his personal opinions and do not necessarily reflect the opinions of Westmont Hospitality Group and its affiliated companies.
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