Private equity hotel investment firm Rockbridge, Columbus, Ohio, is on the prowl for hotel investment opportunities, particularly among distressed assets in the U.S.
Rockbridge recently announced the purchase of the 166-room The Cliff House Resort & Spa, located in Ogunquit, Maine, and plans for a comprehensive renovation of the historic property.
To find out more about the strategy behind this investment and the company’s outlook on the U.S. hotel market as a whole, HOTELS spoke with Jim Merkel, Rockbridge president and CEO.
HOTELS: How do Rockbridge’s latest transactions reflect its current hotel investment strategy?
Jim Merkel: We take an opportunistic investment approach — we are not market timers, we look for a type of deal and when we find it we execute on it. We have done over 300 hotel transactions in our firm’s history and the Cliff House purchase represents exactly what we do.
What we have invested in in the past have been probably two-thirds full-service and one-third select-service. The projects are more capital intensive, as previous owners did not invest capital in their asset and as such lost their position in their market. We invest in hotels where we can reimagine and reposition the asset.
We are in a market today where there is a significant amount of reinvestment required in the hotel supply in the market that we can execute on and the fundamentals of the hotel business are very good so we continue to see opportunities.
HOTELS: Where are we in the business cycle?
Merkel: I believe that if you look at the long-term of the hotel business, it is a growth business. At the end of the day, RevPAR goes from the bottom left of the chart to the top right and in between you have market cycles. What we try to do is execute on our strategy that works on any end of the market, and we have been able to create value for our investors throughout cycles.
Currently you have fundamentals where demand is at an all-time high and supply growth is well below the historical average, so the fundamentals are very good. This is a very unique market where you can sell stabilized assets for a good price but you can also buy unstable assets for a fair price and that is what we do. Our goal is to take an unstable asset and take it to stabilization and sell that investment.
HOTELS: Are you seeing volume of hotel transactions in the U.S. pick up?
Merkel: You’re going to continue to see turnover in assets and sales that were pent up from 2009, 2010 and 2011 when the transaction market was very low and there was a lot of disruption as capital markets were in turmoil and lenders extended their loans to avoid losses.
Now those deals are coming to market and that is healthy. The assets tend to need capital and reinvestment in them and the owners that held it through the downturn are not the ones to make the investment, instead they are selling.
Of course, you have to be disciplined but there is great opportunity out there now as transactions increase. I predict that there is going to be a healthy transaction market in the foreseeable future.
HOTELS: How difficult is it to get financing for deals?
Merkel: For stabilized assets, the capital markets are healthy and there is increasing interest in the hotel space. For unstable assets, those deals are harder to get done and require a good relationship and good sponsor to close.
HOTELS: What trends are you seeing for hotel property capitalization rates?
Merkel: If you have a stabilized cash flow and well-located assets that don’t have deferred maintenance, you can sell them for low cap rates.
HOTELS: How do you determine which brand is the best fit for one of your hotels?
Merkel: We are selecting the brands that most closely align with the end user consumer of hotels in our particular market, and what is in the market dictates which brand should be chosen.
I think the biggest thing that brands are to us is a risk mitigation tool. If a property needs a brand to lower the risk of the investment, we do that. For some independent properties, where the location is the brand or if the property can do very well without a brand, in fact the brand is sometimes a detriment to the hotel as it can hold back rate expectations. So we are trying to be thoughtful for each investment and to follow a strategy for using brands that produces consistent returns for our investors.