Earlier this year, Atlanta-based Hotel Equities announced the formation of its Full Service & Resorts Division. At the time of its launch in October, the division covered about 10% of Hotel Equities’ 100-hotel portfolio and the company projects the division to double in size within the next 12 to 16 months.
With a new fund in place to drive further development, HOTELS’ Investment Outlook spoke with President and Chief Operating Officer Brad Rahinsky about the decision to create the new division and future development plans.
HOTELS’ Investment Oulook: Although you could have simply just taken assets and continued to grow in a full-service resort capacity, you decided to announce a new division. Why?
Brad Rahinsky: When we started add full-service assets to our portfolio, we sent out a few trial balloons to some of our peers and partners to gauge the perception of Hotel Equities. It was loud and resounding that we were perceived as experts in the select-service space and there wasn’t a lot of mention of us in the full-service space. As a result, we continued to pour capital into the infrastructure of our new full-service division, with the majority of that going into personnel. We thought it was important to get the message out to the industry that we’re always going to be select-serve experts, but that we also think there is an opportunity with who we’ve brought into the organization over the past year and a half to become a top-tier performer in the full-service space.
HIO: What’s your ideal full-service property?
BR: We had extensive background on the full-service side with Marriott, Hilton, Hyatt and Starwood. As we started to craft and create the division to identify what our target was, it became brand agnostics. From a branding standpoint, we feel real confident and comfortable across all brands. We have a significant amount of independent background, as well, on the full-service side. If the opportunity was for an independent, whether to put equity and ownership into it or just manage it, we feel real comfortable with our abilities there as well.
As we start to define what we are comfortable with, it becomes more of a numbers issue. We don’t want to get into the big, big box space. Instead, we are aiming for full-service properties somewhere between 200 to 500 keys. Once you get above that range, you are talking about convention hotels with six figures of meeting space, which is not a focus of ours right now.
HIO: How will you deploy your US$70 million fund?
BR: In addition to full-service assets, we’ll continue to deploy that capital against select-serve opportunities, both branding and in some cases soft branding, as well as independents. We have an institutional backer behind that which will allow us, in essence for that equity raise, to only be responsible for 20% of the equity requirement of any particular deal.
So in other words, that US$70 million really provides us with about a US$500 million platform in equity to go ahead and take down deals. So that could be single opportunities or it could be a portfolio.
HIO: What’s the potential for a portfolio acquisition?
BR: Very strong… Sometime in the next six to 10 months you’ll see us take down a portfolio of premium-branded hotels. We think where we’re at in the cycle right now, we are shifting our focus somewhat from new development, which we have a number of going on right now, to acquisition. The ability to close, plug in our efficiencies and start cash-flowing is very appealing.
There is a premium-branded portfolio in the mid-Atlantic states that we are about 75% through due diligence and building nicely.
HIO: How will the investment fund work with the Full Service & Resorts Division?
BR: To some degree, we feel as though the full-service opportunity over the past year and a half to two years has been neglected. We’re starting to see off-market deals for full-service assets where we think there’s a significant amount of value-add opportunities, whether that’s from a repositioning standpoint or taking management and having an improvement in the efficiencies and flow from top to bottom.
Typically, when we’re going to put our equity into it, it’s part of the fund. We’re going to go with one of the premium brands. There also has to be an opportunity for us to plug in our model, and in short term, somewhere between two to five years, be able to show a significant upturn in the net operating income.
HIO: Is it fair to assume you will take management in all cases?
BR: We would purchase, we would have skin in, and it would be our equity that we’re using. So obviously, anything that we put that much equity into we’re going to manage.
HIO: You have mentioned that you’re moving more from a development phase into an acquisition phase. Is there still potential for new build?
BR: There is. We have four new-build projects, which are all Marriott and Hilton, going on as we speak. We will look at a new-build still, but it has to be Marriott or Hilton and it’s got to be a trophy asset or a trophy location with a trophy brand opportunity. If we’re talking about putting a shovel in the ground today, best case scenario, you’re looking at a first quarter 2017 opening and that’s where we start to get a little bit fuzzy about what’s going to be going on at that time.
HIO: I assume the new builds are more in the select-service space?
BR: They are, but on steroids. One example is that we are building a seven-story, US$32 million Hampton Inn & Suites right outside of our corporate office in Atlanta. While that certainly falls in the select-service spectrum, many aspects of the asset are custom and we’ll give the guest a full-service experience. We’re also building the Residence Inn Miami Beach-Surfside, and while it certainly falls in the extended-stay, select-service spectrum, it will provide a resort experience for our guests.
HIO: It sounds like you have a lot of momentum, but there are always bumps or challenges that cause you to pause. What would those be?
BR: We want to get better and not just bigger as an organization. We’re now past the 100 mark in our portfolio and we’ve had significant growth over the past two years. As we go back and we measure the KMIs that we think are critical for our investors, partners and ourselves, we want to insure that we continue to be best-in-industry in all of those areas. Sometimes that’s difficult when you have this exponential growth. So, we’ve committed as a team to make sure that we have the right folks on the right seat on the bus.