Noble Endeavors - Investment Outlook - June 2007

Backed by an expert team, Mitesh Shah has yield managed a capital pool that began with family money into a specialist investment group with capacity for US$1 billion worth of acquisition and development.

By Staff -- HOTELS Magazine, 6/1/2007

Noble's managing principals (l. to r.): Robert Morse, COO; Mark Rafuse, chief development officer; Rodney Williams, chief investment officer; Dave Weymer, capital markets, general counsel, asset management; Mitesh Shah, CEO; James Conley, Jr., CFO.

Mitesh Shah has spent the last 14 years building an organization that could play in the hotel industry's big leagues. He paid the necessary dues, from early morning stints as a teenager behind the front desk of his family's first hotels and sleepless nights as a young CEO "sweating making payroll" post 9/11, to more than a decade working with a hand-picked veteran staff to navigate good cycles and bad. Now, armed with the proceeds from the oversubscribed Noble Fund, the 36-year-old CEO and his team of 13 principals have the capacity to go after more than US$1 billion in hotel assets. If Noble delivers at this level, it will be among the few to break out from being an overachieving regional player to becoming a dominant investor across the North American lodging space.

VERTICAL REACH

Shah's patient approach to infrastructure gives Noble a unique platform from which to compete for complex, challenging deals on a big scale. "Noble set out to become a vertically integrated company that can develop and operate hotels as well as raise capital," Stephen Joyce, executive vice president, owner, franchise services and development, Marriott International, says. "Typically, companies that can get capital don't have the infrastructure. Mit invested in infrastructure in the right way."

From the outset, Shah wanted a fund that was not limited to "finance guys." "Some people say, 'Give me the deal and I'll get the people.' I wanted the people first," Shah says. He bucked the lean and mean fund staffing trend by creating a 35-member development team, including specialists in public-private deals and heavy hitters with strong regional connections. He brought in Robert Morse as managing principal and chief operating officer, tapping a skill set that crossed geographies and asset classes in executive roles with Interstate Hotels & Resorts, Millennium & Copthorne Hotels and ITT Sheraton. Paul Burke, another Interstate alum who now serves as principal and executive vice president of operations, complements Shah's own hands-on knowledge of how to read performance potential.

Shah's goal has been to create not just an equity fund that invested in hotels as an asset class, but a purpose-built, "full service" hotel real estate investment fund that could develop or acquire, provide operational oversight and raise capital. This multifaceted approach to hotel investment "allows us to do forensics on a proposal within 24 hours. We have a better read on the value-add component," Shah says. In 2007, Noble considered 100 opportunities, looked seriously at 34 and closed on eight. "We're not in a hurry. But, with Noble Fund, we have the coverage to execute on anything good that our team finds. Hire the right people and they create the opportunities," Shah says.

Getting deals is one of the things Noble Investment does best. "The platform and the in-house expertise which Noble has developed allows it to look at complex deals and determine very quickly if it will work for them," says Gregory Rumpel, executive vice president, Jones Lang LaSalle Hotels, Coral Gables, Florida. "They have the ability to look at many deals and thin-slice those to which the company can bring value. Therefore, the deals they do move on are very accretive to the company."

The Man Behind The Smile Profiled in Newsweek as one of the most influential South Asians in the United States, Mitesh Shah has all the hallmarks of one more Gen-X wunderkind. Five minutes' worth of conversation confirms that Shah decidedly has prodigal business acumen (not just for someone in his mid 30s, but for any investor), but it also drives home the message that he is not just another number cruncher. "If you're not passionate about what you do, why go to work?" Shah asks. Family commitments are one of the few commitments that can keep him home-whether to spend time with his own young family or brainstorm with his parents and brother Raj-a former Noble employee who now heads his own fund, suggesting some interesting opportunities going forward. Will this nice guy finish first? Here is what industry colleagues say: The business side: "Some companies are operators. Some are developers. Some are investors. Mit has built something unique, a fully integrated hotel real estate investment company that is best in class in all three areas." The personal side: "There are a lot of people who are smart and a lot who work hard. Mit combines those qualities. He is also a very good human being. When my wife had emergency surgery, I walked into her room, and there was a basket of flowers from Mit. People like doing business with people they like, and they like Mit. Yes, Noble is capable of playing in the big leagues." - Mark Elliott, Hodges Ward Elliott The business side: "Mit showed from an early age that he could raise large amounts of capital. Unlike a lot of people who can do that, he also recognized that he needed to build an infrastructure that could handle it. He is good at deploying capital in an efficient and effective way. He has a broader array of products and expertise than most companies out there." The personal side: "Mit is a family man. His focus is on relationships, on connections that are built to last. He has hired great people who believe in his vision and incented them to stay and grow with the company. He's very energetic and competitive-he wants to win. The first time we met, he asked me who Marriott's top five co-investors were and why that was so. Anyone who does business with him once would want to do business with him again." - Stephen Joyce, Marriott International's executive vice president, owner, franchises services and development, the Americas The business side: "Mit will let Noble's growth take its natural course. He won't force it. Noble's goals are not about having 100 hotels in x-number of years. That's not the corporate personality. It was a smart strategy to bring in the right team. Noble is expert at getting good development deals." The personal side: "Mit hasn't changed as a person during the 10 years I've known him. When I walked into Noble's office for the first time, I wasn't sure if I would be doing business with Mit or his father (Baht). Baht made it clear that Mit runs the show. The Shahs want to be good to people. They put on suits, bring in fresh flowers and make sure every visitor has a lunch he or she enjoys. That's how deals get done." - Kirby Payne, president, HVS American Hospitality Management Co., Tiverton, Rhode Island

Westin Atlanta North at Perimeter is in the Noble portfolio.

GROWTH MECHANISM

Whether in the office, where a rolled-up sleeve style takes precedence over polished pinstripes, or in the field, Shah is committed to a relationship approach to doing business. His concentration on deals with a handful of major brands- Marriott International, Starwood Hotels & Resorts, Hilton Hotels Corp, Hyatt and IHG-has opened the door to high visibility with positions on owners' boards and, in many cases, longstanding friendships. It is these connections that are helping to fill Noble's pipeline with prime off-market deals not subject to the price-inflating frenzy of the auction marketplace.

"Brands see us as an enabler for building equity and distribution," Shah says. "They bring us deals because they want to work with companies like ours that will grow their brands rather than just buy and flip the hotel in a year. Strategic relationships with the brands help us unlock value in the real estate they own or can bring to us."

Noble has carefully positioned itself to be able to take advantage of a full spectrum of opportunities as more and more brands sell off real estate to become asset-lite or asset-right. "We knew we couldn't be confined to the South East or even the East Coast if we wanted to grow alongside the major brands. Nor could we just look at select-service," Shah says. "An owner can only have so many select-service hotels in a region before he risks saturation. But, if you can do full-service, select-service or resort, you can take advantage of any opportunity that is presented."

The Lodge and Spa at Callaway Gardens, Pine Mountain, Georgia.

Like its competitors, Noble is keeping a watch on the 100 top metropolitan/ suburban markets in the United States. But, it is also looking to the future with hopes of leveraging relationships with brands and friendly developers to get "a toehold" in Mexico and Canada.

Along with new markets, Shah is looking for new brands with "good DNA." Starwood's aloft and ELEMENTS and Hyatt's Hyatt Place definitely have his attention. Noble is spending a half billion dollars with Starwood and closed an off-market deal for six AmeriSuites scheduled for conversion to the Hyatt Place flag.

Why be a pioneer? "Baby boomers, Gen-X and Gen-Y will be part of the travel business. You have to have products to fill all of these demand buckets," Shah says. "I'm a big fan of the established brands, but there are not a lot of opportunities to find the real estate for those kinds of projects. Some of these new concepts can fit with retail, restaurants and other new types of developments."

New brands backed by established players address a main concern for Shah and others on the fast-growth track: saturation. "When you're considering an established flag, you have to ask yourself, 'Can this market take another x-branded hotel, or is there one down the street?' There is also the problem of brand differentiation. If everyone has plasma televisions, how does that create an identity? How will consumers differentiate?" Shah asks. "If you look at pioneers who developed new brands-as Bruce White did with Courtyard by Marriott at White Lodging Services-they didn't do too badly. In the absence of risk, there is no reward. This is a risk-reward business."

Noble's controlled appetite for risk and willingness to partner with the brands could catalyze its next growth spurt. As owners, third-party managers and developers for their own account, Noble is positioned to take on more portfolio acquisitions as well as multiple new brand deals. Shah says losing out on the MeriStar acquisition to Blackstone was one of the few deals that got away. It is unlikely to happen again if the right portfolio comes along at the right price.

HITTING BEYOND THE CYCLE

If Noble has a goal beyond achieving 20% internal rate of return and 2x multiples, it is sustainability. Its principals' assessment of deals is not about whether to buy at 5x or 8x; nor is it about timing. "At the end of the day, the cycle doesn't matter. If your focus is on the hotel industry, you have to manage across cycles," says Shah, a former investment banker. "It doesn't matter whether the industry is in the first inning or the ninth. As long as you have access to capital, you have access to opportunities. But, if you want to be accretive, you have to understand what the opportunities are."

For the near term, Shah sees a significant upside in "C" physical assets in "A" markets with "A" locations. He sees "100%" of RevPAR growth coming from gains in rate rather than occupancy. That will come from market repositioning, improved revenue generation, cost controls and innovative management. "Do you do your own food and beverage or do you lease it out? If the latter, do you want a steakhouse or a Starbucks? In the guestrooms, do you have to have the latest technology and, if so, how much should you spend? You have to do this kind of analysis and build your redevelopment plan around it. If finding the value-add were easy, everyone would be doing it," Shah says.

As for the downturn, like most industry veterans Shah knows it has to come; the only question is when. In his view, the brands and owners who survived 2001 are better equipped to deal with a slowing cycle. They have become more expert at cost controls and better at yield management. "I'm not concerned about the next downturn. It will serve to flush out which are the real companies and which aren't,' he says.

Noble is likely not only to survive but thrive. Many of the team members that burned the midnight oil with Shah during the abyss of 2001 are still in place. He made sure of that by diluting his own 100% ownership stake to give the principals a piece of the action.

The Mediterranean-style Hyatt Vineyard Creek, Sonoma County, California.

"Our team is very focused on sustainability, not on quarterlies," Shah says. "We have weathered a lot together and worked our way out of the crucible. We all know that as we build wealth for this company, we are building long-term wealth for ourselves and our families."

Rumpel sees a measurable benefit for Shah's fraternal business model. "Some of the benefits of the team that Noble has put together will not be appreciated fully until we get into the next down cycle, when the hot money is gone and deals are more than just a flip on improving numbers. Noble will be able to manage its assets as owners," he says.