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HOTELS Interview: How Thayer plans to invest

Last month Thayer Lodging Group announced that Brookfield Asset Management had purchased it for an undisclosed sum.

Thayer Lodging Group, Annapolis, Maryland, co-owns Interstate Hotels & Resorts, Arlington, Virginia, with Shanghai Jin Jiang International Hotel Group Co., Shanghai, and moving forward will continue to operate Thayer’s investment management, asset management and property management businesses as a subsidiary of Brookfield Asset Management, Toronto.

To find out more about the Thayer’s future plans under its new ownership, HOTELS spoke with Lee Pillsbury and Fred Malek, co-founders and chairmen of Thayer Lodging Group.

HOTELS: How is the structure of the organization changing?

Lee Pillsbury: We built this skilled team who are really good at executing the strategy and the Brookfield merger is a terrific marriage because we take this really qualified team of people and marry it to an outstanding capital aggregator with global resources. 

HOTELS: So you’re only going to have to tap Brookfield?

Fred Malek: We will have other co-investors from time to time, but we don’t necessarily need to go that route.

HOTELS: What opportunities are you currently seeking out? Single assets or portfolios?

Malek: Large single asset purchases are our preference. We would consider portfolios, but we’re looking now for acquisitions that have a valuation range of US$100 million or more, although that doesn’t mean we won’t consider smaller ones.

HOTELS: Is this predominantly in North America?

Pillsbury: We will not be taking our investment fund outside of North America.

Malek: One thing we have learned over life is that you do much better if you stay with what you really know and you go deep, go deep and narrow. North America isn’t exactly narrow, but we do go deep into the markets we go in.

If you look at the markets that we have invested most heavily in, the Washington, D.C. metro market, South Florida and Northern California, we understand these markets and go deep into them.

HOTELS: Does this accelerate the pace?

Pillsbury: The ideal deal for us would be US$200 million to US$300 million dollars in one of the top 25 markets in the U.S., probably coastal. We hope that over the next 12 to 18 months that we would acquire somewhere in the order of a billion dollars’ worth of real estate, maybe a little more.

Lee Pillsbury (left) and Fred Malek.
Lee Pillsbury (left) and Fred Malek.

HOTELS: How does this affect your disposition strategy?

Pillsbury: We sold 85% of our portfolio in 2006 and 2007. And it was not because we saw the problems that emerged in 2008. We certainly didn’t. We had just come off of three years of more than 7% RevPAR growth, and the forecast continued to be very optimistic. Instead, we sold in 2006 and 2007 because we were able to realize our targeted returns. And so, we try to be very disciplined in our disposition strategy.

HOTELS: So that strategy remains intact?

Pillsbury: That’s going to remain the same. We believe very strongly that we are in a cyclical business.

HOTELS: Are there any development plans on your part?

Pillsbury: There isn’t right now. If there was an opportunity that was unique that had a unique competitive position and a compelling case, we would do it. But as a general matter of course, to go out and build run of the mill limited-service hotels, that’s not something we’re going to do.

Malek: Part of the problem with development for a firm like ours is our investors like to see the money turned over. And if you get into a strictly development deal, it’s going to be three years before you open your doors, let alone get the profit level and are able to reap the rewards. So, it’s a little bit too long a horizon for most of our investors.

HOTELS: Certainly, but you do hear everybody talking about midscale and limited service as a really great opportunity right now.

Pillsbury: We like more complex business models, where there’s opportunities for us to change business models, to change the margins, to change the way the business is run. There’s very limited, very few opportunities to do that in the limited- or select-service hotel. 

Malek: We have plans to double the NOI in anything we acquire in the first two to four years. With limited service, there are no levers to pull. You ride the tide. With full service, there are many, many levers you can pull to improve market share and to, in some cases, reduce costs, and to get that income up.

When we look at the market today, we are at historically low cap rates on hotels. We can’t imagine that’s going to stay that way forever, so we have to assume that there’s going to be some increase in cap rates. Therefore, we think the only kind of investment strategy that makes sense today is value-add.

HOTELS: Where are we in the cycle?

Pillsbury: When you look at the broader economy, unemployment rate has come down, but it’s come down only because the people who have left the workforce. But they’re still here. One in three 18- to 34-year-olds are living at home with their parents, and you’ll never convince me that a 30-year-old wants to be living with his or her mother. So, there’s tremendous capacity in the labor market that is going to keep wage rates reasonable and prevent inflation for a long time.

I think that’s going to lead to a very long period of low interest rates. I think the broad economy is in the midst of a very slow but what will be a very prolonged recovery. So, in my view, in the hotel segment, we’re seeing demand growth since Q2 of 2010 and a steady increase, particularly in the major markets and I don’t see anything that’s going to derail that for the next five years.

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