When he was 25, Jim Merkel co-founded Rockbridge alongside his first boss, Ron Callentine. Since 1994, the Columbus, Ohio-based private equity firm has strategically converted or repositioned 325 assets, turning them into top-performing properties by capitalizing on the specific needs of each local market. Last year, Rockbridge did 12 deals. According to Merkel, that number could go to 15 this year.
How did you get your start?
I got a job as an analyst for the company that would become Rockbridge straight out of college. I really got lucky, since [Rockbridge Chairman] Ron Callentine has been a great mentor. He started the company after he had developed and sold the Pickett Suites hotel chain with Jim Pickett. The goal was to provide capital to the industry, and we’ve carved out a niche in doing deals that reposition assets to create value.
Can you provide a framework for how Rockbridge approaches its deals?
There are several factors, but the primary one is making sure that you capitalize the deal correctly and invest the right amount of money into an asset so you’re not leaving deferred maintenance in a hotel. You can’t survive long term if you buy an asset and don’t fix it, especially the infrastructure—the elevators, the HVAC systems, the mechanicals—because these things can negatively impact the guest. And when the market gets soft or demand goes down, the hotels that don’t address these issues get harmed the most. So we’re focused on making sure we can position a hotel correctly and create an experience that compels guests to pay a premium over the alternatives in the market.
Is there a sweet spot in the chain scale or markets where you like to operate?
Where we see the most value add for us is the upscale and upper upscale segments. For example, we took a historic hotel in Portland, Maine, and converted it to a Westin. It was a two-star hotel, and it’s now a four-star hotel. We created value by better positioning the hotel for what customers want and are willing to pay for today.
We still think well-positioned full-service hotels are viable in the right markets and the right locations. Some people think suburban full-service hotels aren’t the best place to invest, and we disagree with that. No matter the scale or the location, what we’re trying to do is look at a hotel and ask why it isn’t working. If we can fix it in a way that has low downside risk, then we execute on that.
Is it getting harder to find the right distressed assets to work with?
There’s always opportunity in the hotel business, and we’ve been able to find good deals at the top and bottom of the cycles. Having just been through a downturn, the fundamentals are good, and the hotels out there need renovation and repositioning because they haven’t been getting this during the downturn. We aren’t market timers—our goal isn’t to try to predict when the next downturn is going to happen. We did some of the best deals in our firm’s history in 2006 and 2007 at what most people would consider the top of the market. The deals are there; you just have to be selective and disciplined.
Are you still finding it hard at all to get the right financing in place for certain deals?
We’re blessed with great financial partners, and we’ve been able to capitalize in all the deals we’ve pursued. The capital markets are healthy, and there’s plenty of interest in hotels today. But you have to have a good track record and good sponsorship to get your projects financed.