How to Deal: Leveraging Assets for Optimal Returns

The hotel business is attracting a lot of investment money and there’s a good reason for that. “The market fundamentals are as good as we’ve seen since we’ve been in this business,” says Jim Merkel, president and CEO of Columbus, Ohio-based hotel investment firm Rockbridge. “And we expect the high level of activity to continue for the next 18 months.” With demand continuing to outpace supply and RevPAR growth breaking records in several areas of the country, it’s a good time to own and operate a hotel. These conditions are driving a flurry of acquisitions, new development, and renovations of every scope throughout the United States. However, in such a robust transaction environment, it can be difficult to get good deals done, especially with so many interested parties circling every new opportunity.

“Nobody rings a bell to tell you when an up cycle starts and when it ends, so you have to focus on executing the particular projects that make sense to your business,” says Beau Benton, president of LBA Hospitality, a property development and third-party management company based in Dothan, Ala.

You have to move fast but still do your due diligence, he says, since the amount of money moving into the lodging space increases the chance that some deals will move forward simply because the capital is available to do them. “You have to understand the 30,000-foot view of each market you’re going into and be able to zero in on all the factors impacting hotel demand,” says Benton. The process of identifying the right submarket, quantifying the demand generators, seeing what the flag need is, and figuring out the appropriate product segment is all happening at a faster pace than ever before, making it that much more difficult to find out when something doesn’t add up.

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“We’re at the top of the cycle where everything is moving as fast as it can,” says Benton. “Now more than ever­—sometimes the best deal is the one you don’t do.” Merkel agrees that there’s something to be said for being selective. “Experienced firms know when to walk away from a deal,” says Merkel, adding that there are plenty of opportunities out there with so many owners and developers looking to take advantage a lending environment that’s been freed up.

According to Merkel, Rockbridge tends to be specific about the deals it does and is able to execute quickly when the right opportunity comes along. “We reposition, recreate, and reinvent properties to create an experience that’s intensely focused on what guests are actually looking for in a particular area,” he says. “This is an approach that’s more difficult to execute but one that never seems to go out of style.”

To that end, Merkel spent the past four years building up the development and construction arm of the company. “As we customize each project, it’s become critical for us to make sure the dollars are going where they need to go during the design and development phase of the project in order to have the most impact on guest experience.”

A good example of this approach in action is the 173-room, boutique hotel Rockbridge is building in Savannah, Ga. Located on the site of the oldest bottleworks factory in America, the new property will incorporate historic elements from the old plant in its design. “The hotel is right on River Street, an area that’s difficult to develop because of historic preservation restrictions,” says Merkel. These restrictions have put the project on the slow track for the past few years, but now development is really picking up. “We plan to leverage what Savannah has to offer in this hotel and really localize the experience through the property’s look and feel by providing distinctive food and drink experiences.” Slated to open in late 2016, the new hotel will be part of Starwood Hotel’s Tribute Portfolio soft brand.

This is the latest move in what’s been a busy year for Rockbridge. At the end of 2014, the private equity firm closed its largest-ever fund at $438 million. They immediately invested in deals across the country that include the Aqua Waikiki Wave Hotel in Honolulu, the Cliff House Resort & Spa in Maine, and a new-build AC Hotel in San Jose, Calif.

“We are well capitalized and in a very good position to execute on our investment strategy,” says Merkel. “We can focus on doing the right thing for our assets and position them correctly for what the end user wants.”

Considering how much guest preferences have changed in recent years, this idea of creating an ideal experience for them is a moving target. It used to be that most guests—and business travelers especially—wanted the same thing everywhere, they didn’t necessarily care where they were. “They just wanted to go to their room, be by themselves, and order room service,” says Merkel. “Today’s guests want to experience what an area has to offer. And that’s where we can bring value to the deals we make going forward.”

None of this matters if you can’t line up the money behind your project, and that’s where maintaining long-term partnerships comes into play. “While the capital markets are healthy and there’s more interest in hotels today, you still need to have a good track record and good sponsorship to get your projects financed,” says Merkel. “If you’re a known entity, you stand a better chance of getting your deal done.”

CONNECT THE DOTS
Successful dealmaking often involves placing long-term bets with limited information. Rockbridge’s Jim Merkel offers a few rules for successful dealings.

Don’t underspend on the asset. Make sure you invest the right amount of money into assets so you don’t have any deferred maintenance in a hotel. “You can’t survive long term if you buy an asset and don’t fix it, especially when it comes to the infrastructure, as these are the things that can negatively impact the guest,” he says. “And when the market gets soft or demand goes down, the hotels that don’t address these issues get harmed the most.”

Stay disciplined in your approach. “We’ve carved out a niche in doing deals that repositions assets to create value,” Merkel explains. This means taking hotels that are well located, that have been under invested in and therefore are under performing, and investing the correct amount of money and positioning the hotel correctly to create value. “This means creating an experience that compels guests to pay a premium over the alternatives in the market.”

Try to create a better box. Matching the right location with the right property will drive a lot of revenue. “If you have a good physical asset that meets consumer needs, then you’re going to have success,” Merkel describes.