Successful joint ventures for hotel development, acquisition and financing

At JMBM’s recent hotel finance conference in Los Angeles, a panel of experts talked about how well joint ventures are working to provide financing for hotel development and acquisitions.

The panelists were:

  • Mark Burden, CEO, Rim Hospitality
  • Lamont Meek, SVP and COO, Circa Capital
  • Rick Frank, SVP Hospitality, Behringer Harvard
  • Jonathan Martin, VP, AEW Capital Management
  • Kam Babaoff, managing director, Ensemble Hotel Partners

Each of these participants has a long history of investing in and operating hotels, and they represent the spectrum of views currently prevailing in the industry. While each has been successful, each has taken a different road to achieve success. The individual strategies and approaches of each stands out, as does the talent and vision necessary to navigate some of the toughest years in the hotel industry.

Sweet spots for hotel joint ventures differ

While joint venture investors tend to have their individual sweet spots — a specific set of criteria that makes a deal attractive — they often find deals slightly outside their comfort zone. And we witnessed some indication of that on this panel.

Rick Frank sees this time as “the beginning of the next cycle” and believes the market remains out of equilibrium, with a disconnect between buyers and sellers. For example, Behringer Harvard itself wrestles with an internal conflict, as it is often unwilling to sell properties for the price it would pay for them. 

Jonathan Martin says AEW is focusing on the top 15-20 markets, returns in the upper teens and assets from US$10 million to US$20 million. Like most of the opportunity funds, AEW stays away from ground-up development. For AEW, it’s all about the real estate. Branding is secondary.

In contrast to AEW, Mark Burden of Rim Hospitality focuses on and believes heavily in branding. The right brand with the right asset can drive revenues, he says. Rim also places a heavy emphasis on cost containment, particularly keeping labor costs in check. Burden is quite optimistic, as Rim is closing out rate discounts and seeing the market react positively with an uptick in ADR.

Breaking from Rim’s focus on branding to a significant extent, Circa Capital is proving this market is a great place for independent hotels. Lamont Meek says Circa’s hotels have rebounded to 2007 levels in 2011. Half of Circa’s hotels are branded, and yet Meek believes it’s Circa’s creativity and the freedom to act on its instincts without being hampered by heavy brand requirements that has driven the positive performance of its independent hotels.

Kam Babaoff says based on the nature of capital returns, Ensemble is looking for something that has a value-add component — something that involves rebranding and deep PIP refreshment. Like most operating partners, Ensemble is staying away from ground-up development. 

How great partners make great projects

Panelists shared similar views on how great partners make great projects.

AEW’s approach has been focusing on debt transactions and REO, with operating partners around the country who have competitive advantages in their markets.

Likewise, according to Frank, Behringer Harvard also has a set of partners it knows and trusts. Both Frank and Martin say they are not taking on new partners at this time. And yet, when a member of the audience mentioned a deal that sounded particularly appealing, both indicated a willingness to look at that deal. Thus, the right deal creates an exception to the “no new partner” stance.

Meek and Babaoff likewise agree upon the importance of partnering with someone who is in the hotel business and with whom they are familiar. Circa has had very few partners over its 21-year history. Both believe it’s helpful to have a capital partner that understands the hotel business. It’s about people, not an institution. With the capital partner investing 90% or more of the required capital, that partner is entitled to control and a great deal of respect.

Burden believes the biggest challenge with capital partners is fighting the pessimism still prevailing in the underwriting. However, all panelists expect optimism to prevail over the next 12 to 24 months, and that now is the time to be active and buying in this market.