Yesterday, HOTELS published the first part of an interview with CGI Merchant Group’s (CGI) CEO and Founder Raoul Thomas, focusing on funds raised, its development to date, and the launch of its Conscious Certified Hotels (CCH) to create positive social impact in its destinations.
Today, Thomas goes deeper on how he sees CGI advancing its cause after having recently raised a US$650 million fund, and shares his thoughts on the ESG movement, among other things.
Acquired hotels will be in prime locations in gateway cities around North America and the Caribbean, according to Thomas. Built on ESG principles, CCH is committed to addressing the hyperlocal needs of its destinations, with a heavy emphasis on social causes.
H: Will there be more funds coming beyond the recently raised US$650 million fund?
RT: Hospitality is a core theme to what we do. We’ve invested in hospitality for the last 10 years – more on a selective basis. But this is certainly going to be a programmatic venture for us, with fund one being the first.
H: What is the exit strategy?
RT: The good news is that this particular fund and future funds, given the cycles within hospitality, are set up with long durations. So, this fund has 10 plus two years, so you’re looking at 12 years in before we have to start thinking about exit strategies. But there will be numerous opportunities at that point for us regarding going into a more perpetual public structure like a REIT or moving into a different structure. Some of the assets that we are acquiring are legacy assets. So, we would want to see how we can optimize those in the best way at the exits.
H: What’s your take on your ability to acquire at a greater discount than has been the case as of late?
RT: We have done very well off-market as a firm and that puts us in a unique position to access that type of pipeline. But it also demonstrates that we’re very good in working with sellers. So, in some cases, there may be and we’ve seen it here, a joint venture opportunity where a seller takes a hit at a lower basis, but rides with us as part of a fund long term, and able to recoup some of that investment.
So, we are very creative in looking at structures that do not preclude us from striking an opportunity to deal with a seller that’s reluctant to dispose of assets at a significant discount, but can recapture value in partnering with us. So, I think that’s opening a door that’s just very opportunistic and very beneficial.
The second piece is that I do believe that there is still a lot of pain to come. Some of these ultra-luxury hotels were built at the height of a very strong hospitality market and in that you saw a capitalization that I don’t believe will sustain over the next three to four years. We probably won’t stabilize until more like 2023-2024. So, we see the first two quarters of next year being exciting times for us to deploy more capital. That’s why we’ve been very disciplined.
We’re looking at upscale, upper upscale and luxury because we think that they have the most opportunity for us to find things within our parameters.
H: There seems to be more focus on the limited-service space right now, and fear about acquiring the bigger boxes or higher-end assets, especially city center business hotels. How do you see it?
RT: We come back to the premise of investing correctly, which raises the value and prospect of value creation. Going into these investments and looking at things like location, location, location is key for us. Also, having a longer horizon versus narrow shifts the perspective on how we go into these investments. We are big believers that there will be continued growth within the urban markets, and there will still be revamping at some point of business travel and business needs. But we will keep key count focus topped off at about 300 keys. So even though we are looking at a value proposition that is geared towards luxury, the key count is not going to be more than 300. We are not going to be a big proponent of buying a massive big box that has extensive convention or banquet or event space.
H: How real is the ESG movement, especially among hospitality firms?
RT: From our perspective, ESG, or social-minded investing, has been a principal of the firm from day one. So, this is not new to us. But I do believe that the core movement towards embracing ESG is quite substantive and real because it’s a requirement by the constituencies, many private allocators of capital. They’re all held by these mandates… We’ll be focusing on something within ESG that is groundbreaking, which is a social component. We believe that we are a pioneer in this regard. Everybody has seen an establishment of parameters around everything from health and environmental issues, but when it comes to substantive change, we think it’s going to be around the social impact, and that’s why we want it to be meaningful and measurable… In the fourth quarter we will announce a global partnership with the highest credibility and reputation value that will help us create a proprietary model. And they will take ownership with us to publish this data independently.
H: What else are you going to do to differentiate your products with guests?
RT: We chose soft brands for that creativity and flexibility, and to be able to create a unique way for guests to experience our hotels. We want to bring the experience of the communities to the guests. That’s going to be an exciting part of navigating the story of our social impact. We want the guest to get out and see the differences that we’re making in those communities and touch and be part of it so they see that their stay is making this difference, and they can relate to it visually… And this disclosure of impact will be done at a consumer level, as well, all the way up to stakeholders.
We are pioneering within this market space. We think there’s a legitimate demand and we are responding to this demand from a very unique position where we believe that this is accretive to returns. You can do good while looking out for your investors and ensuring returns, and we want to embrace that type of approach as we think it is sustainable over the long term.