REPORT FROM THE U.S.—The three-year joint-venture partnership between Waramaug Hospitality and Interstate Hotels & Resorts has proved fruitful, particularly as 2013 came to a close and the two were able to identify and acquire several “deep turnaround” assets.
All together, Interstate and Waramaug have partnered to acquire 10 hotels, some of which included investment from third-party owners* who wished not to be identified. Most recently, the JV bought the 329-room Hilton Concord in Concord, California, in early January. In December, the two announced the acquisition of the 257-room Hilton Phoenix Airport Hotel in Arizona.
Now, in 2014 the two have aspirations to increase that activity and double the number of assets in their shared portfolio, said Jay Litt, executive VP of Waramaug Hospitality Asset Management.
A number of the full-service assets purchased by the JV were managed prior by Interstate, which counts 386 hotels in its management portfolio across the globe.
“Interstate has been integral in driving the identification of these assets,” said Leslie Ng, chief investment officer at Interstate.
Interstate’s portfolio size and management experience is what interested Waramaug and sparked the partnership in the first place, Litt said.
“We wanted to have a management company and a partnership with a group that has the wherewithal and bandwidth to be able to expand properly. Interstate has that kind of infrastructure,” Litt said.
Waramaug, a privately held investment group, counts 18 hotels in its total portfolio—eight select-service hotels it owned prior to the venture and 10 full-service hotels it has acquired in partnership with Interstate. All are flagged under one of the major franchisors.
Turnaround assets
Waramaug has traditionally focused on hotels with unique turnaround stories, and this partnership is no different. All of the properties acquired as part of the JV will be either rebranded, repositioned, renovated or a combination of all three. Interstate will manage all of them.
“We invest in value opportunities,” Litt said. “Hotels that have good bones and were well-built, but in many cases they need a fix. Some need extensive (property-improvement plans). We buy them at good value and feel we can earn a very good return on these hotels.
“We see a lot of that opportunity in 2014.”
Interstate, which now has equity in a total of 36 hotels, has aligning interests, Ng said.
“Most of them I would describe as deep turnarounds,” he said of the assets they look to invest in. “Either flag repositionings, large-scale renovations or implementing professional management whereas they were typically managed by individuals.”
A number of the assets purchased thus far have been from banks or special services and were lacking the capital expenditures they deserved. Ng said the JV came together at the right time, near the “tail end of the distressed market.”
“Most of them were in secondary or tertiary markets,” he said. “They’re all properties where we thought we could add significant value through either renovation or professional management.”
Getting it done
Along with Interstate’s expertise, Waramaug has its own project development team, Calusa Project Management, that helps scout acquisition opportunities. Calusa works with potential brands to create a PIP based on change of ownership and then hires designers, contractors and third-party professionals to price out the PIPs.
“We then negotiate with the brand. We typically achieve the brand and the PIP within one year,” Litt said. “It’s not something you want to do if you don’t have experience. We’re not new to this. The people we work with have a large amount of experience.”
Cue Interstate.
“We find Interstate to be a very effective, well-balanced and very professional group of managers,” Litt said. “They’ve been in the business quite a while. They have the bandwidth to do what needs to be done whether we need to take over two properties or five properties.”
For example, Waramaug closed on two hotels in the last two days of 2013 and Interstate “was able to send over 12 to 14 people immediately.”
*Correction: An earlier version of this article misidentified investment structure details.