Unconventional Wisdom - Investment Outlook - September 2001

Soros' Richard Georgi snubbed cautionary wisdom with a bold move into Japan's hotel market. Europe gets a more strategic touch from the former Goldman Sachs wünderkind.

By Staff -- HOTELS Magazine, 9/1/2001

Global investor/philanthropist George Soros did not hire Richard E. Georgi to run with the pack. The "man who broke the pound" wanted an innovative maverick as managing partner to raise and run his latest real estate fund, Soros Real Estate Investors (SREI) C.V., and he got one. In the two years since the establishment of Soros Real Estate Partners, the London-based management group of SREI, which was launched last October, Georgi and his team have muscled their way into Japan's complex economy with the start-up of Ishin Hospitality, a venture initiated with Westmont Hospitality Group, Houston.

At the same time, SREP has finessed the finer points of Europe's mid-cycle opportunities, creating five platforms including niche hospitality plays such as Dolce International and MedGroup; as well as property companies such as Mapeley, a property outsourcing company; French asset/property manager, Awon; and self-storage concept, Safestore. Backed by Soros' macroeconomic, financial, tax and legal expertise and blessed with an intuitive sense of market timing, SREP's team has glamorized real estate deals in general, and hotel deals in particular, into an edge of the seat play.

The 38-year-old Georgi is in the game for top-dollar returns of 25%-plus IRR, and sees macroeconomics as the means to achieving them. His message: it is markets and timing-not just location-that produce the best risk-adjusted rewards.

That philosophy worked as well in fact as in theory when he made a contrarian move into the distressed U.S. hotel market in 1993 (including the acquisition of Westin) and the Canadian, French and Italian markets in 1994, 1995 and 1997 respectively (partnering with Westmont in each case) during his nine-year tenure with Goldman Sachs.

Now, Georgi is testing the template in Japan, where 25% of SREI will be invested. "I'd look at anything in Japan right now. It is a grab bag of opportunities," says Georgi in characteristically decisive style. "One of the reasons we chose a hotel platform is that there tends to be a high correlation between a nation's economy and its hotel industry. If Japan's economy is at an inflexion point, its hotel industry is likely to be, as well. We looked at the economy inside and out, top to bottom, and made an opportunistic move with terrific partners. No question, it will be a long road ahead. It's all going to come down to the execution."

Georgi's ability to read markets and his research orientation make for a good fit with operating partners like the performance-driven Westmont. "I had the pleasure of working with Richard in a number of meaningful transactions in North America and Europe," says Majid Mangalji, president and founder of Westmont. "Richard has the ability to spot the right point in the cycle to enter the market," says Gabriel Petersen, Westmont's London-based vice president of corporate planning. "In the mid 1990s, Richard and Westmont saw things developing in Europe and did the right deals at the right times. It would be highly unlikely for opportunities like those to be repeated in Europe in the near future. Based on macroeconomic and thorough research, Richard sees the same opportunities unfolding in Japan in the next few years."

Yuji Tsutsumi, president of Ishin's local partner, Hospitality Network, says Georgi worked to understand Japan's social and cultural issues and brought new thinking to the operations side of what has been a real estate-driven sector. Adds Shamir Alibhai, managing director, Westmont, "In Japan, Richard has spent as much time building a foundation for long-term management presence as he has pursuing transactions."

For the moment, at least, SREP/Westmont's Japanese platform, Ishin Hospitality Group, will have to tap Japan's potential asset-by-asset. Georgi considered the Daiei portfolio and others, but passed.

"The Daiei deal might come back but, for now, it's dormant. There are a lot of portfolios out there. Keep your eyes open for a deal in the near term," says Georgi, revealing a little of the competitive spirit that drives his interest in adventure travel and mountaineering, and contributed to his national ranking as a junior alpine ski racer in his native United States.

Any deal in Asia would have to focus strictly on Japan. By nature and corporate culture, he drills deep into a single economy in distressed situations rather than "having one hotel in Japan, one in Sinapore and one in Thailand. That's too expensive." How fast and how far Ishin grows will be dictated by the types of deals that surface and the success of the government's efforts to rejuvenate that economy with measures aimed at increased transparency.

Europe's Veins Of Opportunity
While a broad attack may suit Japan's distressed economy, Europe requires a more strategic touch. As Charles Human, director, HVS International, London, points out, Georgi's deals for Goldman Sachs in Europe, like his current plays in Japan, were more about cyclical plays and turnarounds. Clearly, says Human, a growth strategy makes more sense for SREP's European investments. Georgi agrees. "It is not a matter of niche or not niche. It's what the market calls for. In Europe, the opportunity to create value lies in introducing innovative products. We're at the sharp end of the business with high risks and high rewards. It's our job to forge into new markets with new ideas," says Georgi, who has lived in Europe for the past seven years.

One of those ideas was buying a 33.3% stake in U.S.-based conference hotel pioneer Dolce International. Respected as an operator, Dolce is transplanting its sophisticated product to a European landscape where competition at this level is scarce indeed and demand is growing. Increased pan-European business activity, plus the lure of conference center hotels' above average returns, should fuel steady growth for Dolce's European portfolio.

"Our market is different (from other hotel platforms) in that some of the properties we look at are not all distressed," says Andrew Dolce, Dolce International's founder and CEO. "They may be performing well as standard hotels, but they could do much better repositioned as conference centers. Richard Georgi and Richard Mully (SREP's managing partner, Europe) have a good eye for looking at assets in strategic markets and seeing whether they could be the right."

Georgi sees "tremendous potential" for Ian Schrager's boutique concept on the continent. Unlike traditional 5-stars, which Georgi maintains are too capital intensive, Schrager's small, hip hotel product is flexible enough to take advantage of conversion/redevelopment options in city centers and serve pent-up demand among travelers hungry for a new experience. One of Georgi's first deals after joining the Soros organization in 1999 was to complete the final negotiations and closing of the US$75 million Quantum Realty Holdings/Soros investment in Northstar Capital, which owns a controling interest in Ian Schrager Hotels.

"Richard really understands the hotel business," says Ian Schrager. "He knows that it feels like real estate, but that it really is an operating business. He's not looking at our concept as a fashionable, trendy business. He's looking at how well it can work in an under-served market."

Georgi and Mully are also playing smaller, tighter niches, like the upside of Spain's leisure industry. Aging populations, increased disposable income and burgeoning tourism, coupled with Spain's favorable infrastructure and its healthy economy, all point to deep market opportunities in a domestic hotel sector experiencing upward pressure on rate and occupancy. Georgi's five-year business relationship with MedGroup CEO Jordi Robinat opened a door to the notoriously hard-to-enter Spanish market. Their shared belief in the profit potential of planned communities and golf and leisure development made Barcelona-based MedGroup SREP's first hotel-related platform.

"Before this platform, MedGroup had been doing deals; now we're growing a real estate company," says Robinat. "Richard is a real fundamentalist. He does a lot of research, makes decisions based on that and gets into markets on the crest of the wave. Even with Spain's growth over the last decade, he saw, as we do, that this market has an opportunity to reinvent the hotel industry."

These niche platforms efficiently broaden SREP's point of attack. Not only does each offer its own unique potential in leisure, conference and/or city-center markets, together they present possibilities for synergies that can drive better profits. Board-level participation by SREP in all three companies increases the options for capitalizing on synergistic growth. It gives the operating companies access to the bottom-line benefits of the Soros organization's resource set. Soros's tax, currency and legal expertise can be crucial to maximizing profitability in a pan-European environment, where tax structures and legal codes vary widely from country to country. Currency hedges, too, can swing the balance sheet, especially since SREI is a dollar-denominated fund.

SREP also extends the deal-making skills of its operating partners. Nick Marsh, executive vice president, Jones Lang LaSalle Hotels, London, credits Georgi's respect for research and creativity as prime drivers in getting deals done. "If he likes a deal, he finds a way to use the fundamentals to get the deal closed," says Marsh, who met Georgi while JLL was handling the sale of London's Langham Hilton, a deal Goldman Sachs lost to Great Eagle.

Application of the fundamentals and research at this level takes time. Due diligence on the Dolce deal typically spread over nearly two years. This commitment is indicative of Georgi's insistence on fully aligning interests with the right partners-both critical factors since SREP invests in operating businesses, not bricks and mortar. SREP is in the business of using the "right" operating vehicle to tap the multi-layered opportunities for corporate growth, enhanced performance and asset appreciation that recovering markets afford.

"We are not just investors in assets or the holders of a lease. We co-own these businesses with our partners, so the process is more complex, richer and more dynamic," says Georgi. "You can do a lot more with everyone pulling on the same side of the rope. Down the road, there's a big difference between being 99% aligned and 100% aligned. We want issues worked out before the deal is done so there is no discord when it really counts later on."

This redefinition of "real estate" as an investment in integrated companies assures a vertical alignment that expands return potential, says Robert B. Stiles, managing director, Sonnenblick-Goldman, San Francisco, who was involved in the negotiations for Ishin's purchase of the RIHGA Royal at Tokyo/Narita International Airport. Given that the value of hospitality assets "is largely defined by the underlying businesses" and that operating companies are positioned to leverage or create maximum value out of an expanded capital base, maximizing the operating business should be "the greatest value-enhanced play," according to Stiles.

Ultimately, any discussion of IRR centers on exit strategy. SREP chooses deals, and partners, that offer the largest menu for exiting. "The cliche is that the hotel industry is easy to get into and hard to get out of," says Georgi. "Getting in early is important, but so is getting out early. We want all options open, whether selling the assets, selling the company or taking it public." The latest application is Georgi's timely sale of Soros' interest in the hotel assests of Millennium Partners, New York, which is developing six 5-star hotels in the United States.

Means To An End
Integrated hotel companies fit well into this model of scalable businesses with diverse exit strategies, one of the reasons they will continue to make up 25% of SREI's commitments. Although Georgi invests by market, not asset class, the Boulder, Colorado, native clearly likes the hotel business. He grew up in it, the son of ski resort and yacht club developer Richard Georgi, Sr. He learned how it worked from the inside as a 13-year-old dishwasher and later as everything from a desk clerk to a night auditor-long before his days of motorcycling to work on a BMW as managing partner of a US$1 billion fund. "The characteristics of hospitality are not easy to make money from," he says. "It has high fixed costs. It is capital intensive. It is labor intensive. There is no secure income stream. The most important competitive dynamic, location, cannot change, yet the inventory rolls every night. If there is a cutback in demand or an increase in supply, you can be the best operator in the world and you will still get hurt. It is a classic boom and bust business."

But it is precisely because the hotel industry is sensitive to economic timing issues and too cyclical to appeal to some of the mainstream that makes it right for Georgi's aggressive investment strategy. "Richard is brilliant, very intuitive," says Laurence Geller, CEO of Strategic Hotel Capital, Chicago, who met Georgi when he consulted Whitehall in its acquisition of Westmont and later when Whitehall invested in his firm. "People who think of him as a cowboy only see the superficial side (Georgi was one of the few investment bankers in the City with hair well past his shoulders, for example). He works so hard compiling facts and figures that he always seems to be ahead of everyone else. He learned discipline at Goldman Sachs and has had very few missteps in his deal making. He's gutsy enough to back the deals others dismiss as too complicated. The institutional attitude is to forget those deals. He just goes ahead and does them."

Christopher Jeffries, principal of Millennium Partners, which counts Quantum Realty Fund and George Soros and Family among its investors, calls Georgi "a first-class intellect." "He does his own work and his own analysis. He reads every board package thoroughly. He has clear ideas about investing and makes logical decisions to get the best results," says Jeffries, who was hosting Georgi at his summer house the weekend after this interview in Soros' New York office. While some sources point to Georgi's hard-driving, work very hard, play very hard style, they, like Jeffries, acknowledge that Georgi's adventurous spirit is balanced by a no-nonsense read on business. "Richard is dispassionate about investments. That is very important to us as an operating partner," Jeffries says.

It will also be important to SREP's investors when the fund's eight-year term is up. While the consultants say SREP faces no special obstacles, Georgi says every market looks tough. "There's no easy money. You just have to have the courage of your convictions and be in the right market at the right time," he says. "Everything is motivated by IRR and profit. That's the way we are incented, and the way our partners are incented. An investment only becomes a good investment when you realize the capital returns."