Rockbridge is expecting to see opportunity knock in the hotel sector due to positive supply and demand fundamentals and a rising number of private equity funds that are coming to the end of their life cycle and need to sell assets.
“We’ve had significant low supply growth over the past five years and there is a good fundamental supply and demand picture,” said Jim Merkel, president and ceo. “The opportunity set is also very good in that hotels have been underinvested in. People who have held their hotels through the last cycle are either coming to the end of the life of their fund or they need to reinvest in the asset and don’t have the capital or the appetite. Those assets are getting sold and there are also opportunities to recapitalized those hotels.”
The company can invest in the sector in a number of ways, including as a lender or investor. “We’re trying to decide whether to be a lender, investor or owner but the underlying deal is the same,” Merkel told REFI’s Samantha Rowan in an interview earlier this month.
REFI: Let's start out with a brief overview of Rockbridge.
JM: We are active hotel investors, known for our turnaround success and expertise in the hospitality sector consistent with that of an owner or developer. We've done more than 325 hotel deals [since inception] and we're really focused on fixing broken hotels. We acquire them, we reposition them and we bring them back to the market based on what the consumer is looking for. We typically work with three and four-star hotels and we've been doing it for two decades.
Today, the hotel market is really one of the stronger markets in a lot of respects. We have strong fundamental strength in the underlying businesses and performance of the hotels. We're also coming out of a long period where the market was disrupted and hotels weren't invested in. This means we're now seeing a lot of turnover in properties and a lot of real opportunities to take a property from a two-star condition to a four-star condition.
REFI: How do you source your deals?
JM: We've been doing a lot of what we've always been doing. We're very well networked and our deals come from a lot of different places. We do a lot of direct and off-market transactions.
At the bottom of the market, there were very few transactions because no one wanted to sell at that point. Most of the transactions completed were bulk debt sales of underperforming assets. Now, with fundamentals and performance back, some of these properties are being sold because they need a major capital infusion. Without this, these hotels will never be competitive.
REFI: Where are you focused geographically?
JM: We are a national player and we like to tell our investors we are not market timers. We are deal timers and we look for the right deal, find it and execute on it. We look for deals that offer the opportunity to create value and ensure all components, from design and overall experience to brand flag and management partner choices, deliver satisfaction to the consumer.
This tends to be in primary and secondary markets with lots of infill and high barriers to entry. That said, we can be in a lot of different places—we have done deals in 45 states.
REFI: The hospitality sector has been rising. What factors are driving this?
JM: If you think back—and it's almost a distant memory today—five years ago the banking system was on its heels. People were afraid the financial system would collapse.
The business world cut discretionary spending and cash became an extremely prized possession. The fundamentals of the hotel business were affected. But as businesses began to get more comfortable that the world wasn't going to fall apart and they began spending again, the banking world wasn't ready to finance new projects.
We've had an extended period with strong growth that was partly due to the normalization of business travel and a lack of new supply. We're in a position today where we've had five years of significantly low supply growth. There is just pent-up demand.
REFI: What are your plans for the coming year?
JM: We plan to keep expanding on what we've been doing; through dedication and diligence Rockbridge thrives in hospitality investment, as both buyers and sellers. We're in the fund business, which means that we have different vintage funds. As a result, we're both buyers and sellers, depending on the stabilization of a particular asset. We focus on the business plan of each investment and when we've executed the plan, we're a seller and we return the capital to investors.
The hotel industry represents a core competency for us, however, looking forward, our ability to create value certainly translates beyond hotels and real estate, and into other investment arenas.