ATLANTA—Like many companies looking to buy hotels, Noble Investment Group focuses on value-add opportunities and achieving enough improved yield so it can flip the asset down the road. The Atlanta-based company is using current economic conditions to remain knee deep in that process.
Mit Shah, Noble’s CEO, said during an interview with Hotel News Now at last month’s Hunter Hotel Investment Conference that the company has invested a little more than $200 million in hotels during the past 12 months, and he projects that pace to continue as it takes advantage of the robust industry fundamentals. Noble owns 52 hotels.
“The markets that exist today have a lot of investors looking for yield, and a lot of investors are looking to buy in scale,” Shah said. “It sets us up very well for what we do. What we’ve historically been most successful at is finding assets in locations that are really driven by mostly consistent demand generators—big universities, big medical research centers, being in state capitals.”
The average Noble acquisition involves a $20- to $25-million asset and includes $8 million to $12 million of equity, according to Shah. The rest of the deal is funded through traditional lending sources.
“You can do a number of hotels, but every hotel matters,” he said. “So we have taken a very, very focused approach, one deal at a time, and I believe that’s the right way in which to think about investing in the business for us.”
Noble’s acquisitions during the past year have included:
- the Q Hotel in Kansas City, which will be converted into an AC Hotel by Marriott;
- four Residence Inn by Marriott properties in the Cleveland area; and
- two Windmill Suites Hotels in Arizona that will be renovated and converted to Homewood Suites by Hilton properties.
The four hotels in Cleveland fit right into Noble’s wheelhouse, Shah said.
“Those are well-performing assets,” he said. “We bought those at double-digit unlevered yield on a trailing basis, but they needed renovation dollars. So we’ll renovate those assets, and we believe that we’ll be able to move market share on average from 110% to 120%, and that will really allow us to earn half of our return through cash flow.”
The company recently completed a $22-million repositioning of a former independent hotel into the 194-room Hyatt Atlanta Midtown and is building two new Hyatt Place properties.
A new brand on the block
Shah said the company is looking at a couple of other AC Hotel deals—mainly because it provides opportunities down the road. Marriott International last year introduced the Spain-based brand to the United States through a joint venture.
“One of our really big priorities as an organization is to think about branding companies not as they exist today, but how visionary they are going forward,” Shah said. “How we think about brands today is not only what do they distribute in terms of loyalty and revenue opportunities through the channels, but what will they over the next three, five, 10 years, and as we think about those brands and as Marriott thought about their stake in the ground for this millennial traveler that will come to bear in a significant way, we found very interesting what they were doing in Europe with AC hotels.”
Noble’s general philosophy is to monetize an asset five years after acquiring and repositioning it.
“From an overall investment, we want somewhere around 40% of our overall return to come from cash flow, and the balance being the appreciation of the asset,” Shah said.
Predicting the exit
Looking ahead to the expected exit from assets acquired this year is a tough thing to predict, the executive said.
“Prognosticating something is something we always do and rarely we’re never wrong, right?” he said with a laugh. “While we talk about five-year holds, sometimes they’re shorter holds. Sometimes they’re longer holds. It depends on the optimal time in the marketplace.”
Shah said upcoming tax changes, entitlement spending, uncertainty over interest rates and the opportunity to raise average daily rates also pose interesting scenarios for what the next few years hold.
“There are lots of external threats into our business relative to the cost of revenue and disruption to our space in the revenue model,” Shah said. “The growing cost of how we take care of our people in our hotels relative to insurance and the like.”
Regardless of the threats, investors are flocking to the hotel industry. Shah said he expects that trend to continue for the foreseeable future.
“We believe that just given the efficiency of the model, the growing institutional appeal in select-service and extended-stay hotels, every year it becomes more and more interesting,” Shah said.
Noble’s history
Noble’s first fund, launched in 1993, was a friends and family fund, Shah said. It served as the foundation for a company that has grown in magnitude during the ensuing 21 years. A second fund launched in 1999 set the stage for institutional investors who wanted a piece of the Noble action after the company’s stellar performance during the 2001-2003 recession.
“When we got out of those times we really found our ability to find and source opportunities, and institutional investors came to approach us because of what we were able to achieve through the downturn and say, ‘Gosh, you guys have assembled a fantastic team. We really thought the story could’ve gone in a number of different ways. The brands think extremely highly of you. We’d like to invest with you,’” Shah said.
Learning the ropes with institutional investors in the mid-2000s provided Noble’s team with the opportunity to understand the landscape for investors such as state pension plans and universities, according to Shah.
“The greatest leadership lesson I ever learned, which is never be the smartest person in the room,” Shah said. “Institutions came to us at the time, to say we would like to dedicate capital to you, Noble, as our platform to invest in the lodging space. And that really changed our organization.”
Noble raised its third fund—$310 million to invest over three years—in 90 days during 2006. The six limited partners in the fund watched as the Great Recession ravaged the hotel industry but stood strong and gave Noble an extra two years—until 2012—to invest the money, Shah said.
Noble then raised its existing $220-million fund in 2013. Shah said he’s never completely sure how investors will react to the launch of an investment fund.
“It’s just like a general manager; you’re only as good as your last (profit-and-loss statement),” Shah said.
The current environment leaves many investors, owners and GMs in good positions, the CEO said.
“You can sense a little euphoria right now,” Shah said. “There’s a (commercial mortgage-backed securities) market in the hotel business that has emerged. Construction lending is coming back. Financing for assets that have yield is available.”
Shah said preparing for the worst-case scenario is the one lesson that investors and owners have to learn from the last two industry downturns.
“Our focus remains on how do we find opportunities to fix and create yield and then take that opportunity to market and then sell it to those that covet that in-place, existing yield,” Shah said.
“We call that core-like yield. Whenever you mention core and lodging, people look at you a little funny. But if you can prove consistency in a yield, that’s what a core yield really looks like, and that’s where we’ve been successful over the time horizon of our organization to go and monetize assets,” he said.