STRONGER TIES: Hotel developers and investors form new joint ventures as they figure out new ways of doing business in a pandemic-altered reality.
In February, a partnership of three companies joined forces for the first time to acquire a full-service hotel in Oregon. One of the investment groups, AWH Partners LLC of New York, typically seeks fellow investors when acquiring a hotel, but this deal is structured a little differently.
It’s the first the lodging asset the companies have closed on since the coronavirus pandemic struck the hospitality industry.
Russell Flicker, co-founder and managing principal of AWH Partners, said JVs are an integral part of its growth strategy, but the coronavirus pandemic has forced the investment firm to shift is strategy a bit. For the most part, the crisis has confirmed AWH’s business model is shaped for such a time as this.
“Every one of our projects we buy in a joint venture,” Flicker said. In most deals, AWH Partners is the general partner and the other investors have a limited position. AWH leads the deal and manages the hotel through Spire Hospitality, its third-party management subsidiary.
Flicker, John Rosenfeld and Chad Cooley formed AWH Partners 12 years ago during the Great Recession when many hotels found themselves in financial distress.
Each hotel acquisition is a separate deal. AWH Partners does not raise syndicated funds first and then shop around for assets to buy.
“We don’t have any pressure to put out capital, so we’re not on a timeline of a fund,” Flicker said. “We can also do larger deals or smaller deals. We don’t have a construct or the limitations that sometimes are accompanied with having an investment fund.”
It was the first hotel acquisition for all three companies since the coronavirus pandemic began in early 2020.
As with many hotel deals, investors often are well acquainted with one another. Flicker said he and his colleagues at AWH Partners have known West Point Partners co-founders Sri Sambamurthy and Robert Ashmun for a number of years. The pair started their business in 2009.
Marc Perrin founded The Roxborough Group eight years ago. His real estate career has been steeped in private equity and investment banking.
In February, AWH Partners LLC of New York City formed a joint venture with West Point Partners and The Roxborough Group to acquire the Hilton Garden Inn Portland-Oswego Lake in Oregon. AWH Partners typically seeks fellow investors when acquiring a hotel, but this deal is structured a little differently as the firm and its co-investors hope to do more business during and post-pandemic.
Though JVs are part of AWH’s business model, this deal is different in that West Point Partners is a co-GP.
Flicker said AWH did not particularly need West Point to carry an equal financial load, but the partners figured the more lift the better as they manage the asset through the trough of the pandemic recession. And it positions all investors for other deals on the horizon.
“It’s more one plus one is three,” Flicker said. “If we partner up with smart people who are potentially accessing other deals that we don’t see and bring more to the table. We think we can grow the pie.
“In this downturn, we spend more time talking to all of our partners and potential partners very regularly, and so we found this opportunity. We said, ‘Sri, why don’t we do this one together? Tick it off together in this new cycle, if you will.”
The Roxborough Group is a new partnership for AWH. “The big factor there is simply our ability, we hope, to do a lot of deals together,” Flicker said. As a passive investor, The Roxborough Group, AWH and West Point can get to know one another with a like-mindedness of co-investing in the future deals.
“We never take lightly investing millions of dollars in a deal,” Flicker said. “If we prove ourselves and we see that the dynamic works and the culture works and the partnership works it’s much easier to get deal two, three, five, and 10 done.”
As AWH Partners typically seeks co-investors in hotels its subsidiary will manage, another hotel company has restructured its model to bring in a third-party operator for its portfolio.
WATCH: DUAL-BRAND OPENS: In September, the same month The Witness Group and Hotel Equities Group announced their new alliance, The Witness Group opened a dual-branded Residence Inn and SpringHill Suites in Indianapolis.
Sagar Patel is chief investment officer at The Witness Group, an Ohio-based company that formed five years ago through the merger of two family-owned businesses.
Patel is part of The Witness Group’s next generation of hoteliers who took the reins of the new venture and steered its expansion through hotel development.
Patel said the company’s five-year pipeline will be completed when it opens the last two of its 36 hotels later this year. The strategy from there is to asset-manage the properties and focus on acquisitions and development.
To be able to shift to a new growth phase, The Witness Group in 2020 teamed up with Hotel Equities Group in metro Atlanta to manage the hotels.
On Sept. 1, Hotel Equities announced the agreement that also involves Virtua Partners, Hotel Equities’ private equity arm.
In a news release, Hotel Equities said it and its “affiliate Virtua Partners will focus on future transactions, conversions and new development generating a significant value-add for investors, associates and all parties involved.”
Patel said the partnerships enable The Witness Group to explore other growth strategies.
“Where we stand today, we are primarily focused on the asset management of our current properties in combination with acquisition and divestiture activities for our current portfolio and new additions that may happen, and then still actively looking at development deals,” Patel said.
The Witness Group has developed some retail space in conjunction with its hotels, but Patel said the hotel-management shift allows his company to explore commercial real estate development beyond hotels.
“I think that was our way to test the waters and understand that side of the business,” he said. “Having that experience of the retail centers that we’ve developed, we think that we can use that experience and move forward with doing that development on its own, whether it’s with hotel or not.”
Patel and his company cohorts are no strangers to joint ventures. The Witness Group was borne in a merger of Alliance Hospitality, a company founded by Sagar Patel’s father and uncle, and KB Hotel Group, a company founded by the father of Aakash Patel, who is chief development officer at The Witness Group.
TEAMWORK: Many hotel companies, including investment firms, developers and managers, have formed partnerships or joint ventures to strengthen business during the coronavirus pandemic and beyond. Episode 319 of Lodging Leaders podcast features three enterprises that have made JVs a key business strategy.
The decision to partner with Hotel Equities in managing The Witness Group’s hotels was based on several factors, including company culture. Patel and his colleagues at The Witness Group knew through experience that when joining forces with another company it’s important that both the tangibles and intangibles align.
‘It’s probably a cliche answer but culture and developing a common culture is key,” he said, recalling the merger of KB Hotel Group and Alliance Hospitality. “In terms of their history, their foundations, their principles, their regions and in terms of the operating procedures that were set up for both companies, they were guided by owners that had a lot of conversations with each other. And we used a lot of the same consultants and documents.
“But [merging the companies] still wasn’t very easy,” he said. “Bringing together two different companies with a different set of smaller-but-nuanced cultural elements. It is important to make sure you match it and gel.”
Patel said the newly formed Witness Group made some early missteps when merging the workforce cultures which resulted in employees leaving the hotels as well as the corporate office. “Once we got our feet wet with what the culture was going to be – a focus on obviously the guests and our associates – that was key in terms of making sure we have a successful business model, especially at our scale. We had almost 900 associates at our peak in the last five years.”
Patel said The Witness Group quickly learned the importance of “maintaining a culture that retains talent and attracts talent because that’s what makes these hotels live and breathe.
“That’s kind of where we shifted our focus after the first six months or so when we got everything aligned transactionally. But I think a little bit more emphasis on that upfront would have been more useful. We took for granted how similar the companies were as a way to ease people into it as opposed to really putting that forefront.
“That’s a learning we got from that experience, which we certainly were mindful of when we partnered with Hotel Equities on the operational side.”
Scaling Career Opportunities
The Witness Group’s joint venture with Hotel Equities is a marriage of workplace cultures and it enables both companies to deliberately scale their growth by combining the best of what each has to offer.
“When we looked at our operating model and our ability to develop talent, we felt that there was going to be a cap at some point. One, because of where we were living and, two, because of our inability to go from 35 to 70 very quickly. That would take not only a lot of investment in terms of dollars, but a lot of time to scale well to get to the next stage of an operating company.”
The Witness Group saw that at the property and corporate levels, employees were asking what was next for their career growth. Merging with Hotel Equities allows its employees to gain more experience and, therefore, more mobility by expanding their options within Hotel Equities’ management portfolio.
The Witness Group’s hotels are primarily in Ohio and Indiana and Hotel Equities’ footprint is largely in the southern U.S., Texas and Canada.
Recently, a manager at one of The Witness Group’s Midwest hotels moved on to become general manager of a South Carolina property managed by Hotel Equities.
Hotel Equities’ employee training program is top drawer and will give employees of The Witness Group access to knowledge and practices that the family-owned business could not provide on its own.
“We’re a little bit more of a smaller shop and didn’t have some of the formal [employment] policies in place. Whereas, they have a little bit more of a structured program on certain things, especially when it comes to training development, which is light years ahead of ours.”
Small to Large
Shannon Shackerley-Bennett doesn’t build or manage hotels but she leads a company that gets building sites ready for such projects.
She founded North Star Hotel Development several years ago to focus on the pre-construction phase of lodging projects. The company does business primarily in California’s Silicon Valley, a high-barrier-to-entry market for commercial real estate development.
Shackerley-Bennett said she spends a lot of time searching out prospective sites for hotel development. The coronavirus pandemic dramatically curbed her ability to scout locations and talk directly with landowners.
“There are a lot of people in the Silicon Valley who’ve owned their properties for a long time,” Shackerley-Bennett said, noting she’s become well acquainted with owners who are now considering selling their site or who know of a prospective deal.
Apropos for this report about joint ventures is that North Star Hotel Development is in a partnership with a company called Sun Rise Development, founded by Elsa Nguyen, that focuses on the multi-family and mixed-use sectors. The pair comprise a third enterprise named North Star Development of which Shackerley-Bennett and Nguyen each own 50 percent.
“We came to find that sometimes there was opportunities that really needed a full service team. It needed more than each of us could do individually. And so we come together and formed this new company,” Shackerley-Bennett said.
By building a bigger team, “North Star Development allows us to be able to work with any type of property mixed-use, urban village,” she said.
However, North Star Development is not officially structured as a joint venture. In fact, Shackerley-Bennett had not considered including joint ventures in her company’s strategy until the coronavirus crisis forced her to take a fresh look at the possibility not only of creating joint ventures for hotel development projects but keeping North Star Hotel Development in the deal all the way through the construction process.
“Our business model was really to get in acquire, approve, sell, and do that independently as a syndicated group,” she said. “It had been a syndication in terms of multiple small investors. Passive investors would contribute to this fund and then our management team would carry it out.
“What led us to think about JVs was COVID. It needs to be a growth strategy because we are a small woman-owned and -operated business.”
UPSCALE OPPORTUNITY: Shannon Shackerley-Bennett, founder and CEO of North Star Hotel Development in Silicon Valley, has formed a joint venture to develop an upscale hotel in San Jose’s Santana Row, a retail and dining complex. The hotel drawing is what North Star Hotel Development is using to share the lodging concept with prospective investors.
Timeline of Events
Shackerley-Bennett said the beginning and end of a hotel development deal is structured like the House that Jack Built and the coronavirus crisis has thrown a wrench in her pre-pandemic strategy.
“The only way that we exit is to have a buyer. And the only way that a buyer could buy a hotel project is if they can get financing because these things cost $25 million to $40 million to build out. And the only way they could get financing is if the lenders had faith in the future of the industry. And right now, over the past year, they’ve really struggled to figure out how to value these hotels because the occupancy rates have changed. The daily rates have changed because some of these hotels have closed. So they’re looking at existing assets to forecast the future, and those assets have been so negatively impacted financially that lenders got nervous and they stopped lending or they would only lend to very, very good candidates.”
North Star Hotel Development identified prospective buyers for their prepared sites, but the buyers cannot get financing on their own. As such, Shackerley-Bennett put out the call for joint venture partners.
North Start Hotel Development would provide the land and a JV partner with a successful track record would provide their operational expertise. Together, they can qualify for financing as lenders have more faith in the JV than in any one company.
“That’s really what the growth strategy has to be until we can see consumer confidence come back and the industry come back to some kind of pre COVID numbers,” Shackerley-Bennett said.
In the new development structure, North Star Hotel Development will take the project through the construction-permit portion. Then it will hand the project over to a general contractor. Meantime, the joint venture partner “who has assets under management already,” will oversee development and operate property, she explained. “We become almost the passive investor once we get it through the permitting phase.”
Shackerley-Bennett says the JV concept for her business is here to stay.
“We started it before the pandemic and we persevered through the pandemic and that has been challenging. We’ve overcome so many barriers, I see us continuing and just really refining it.”
Currently, North Star Hotel Development is exploring a joint-venture opportunity in Santana Row, a mixed-use project in San Jose.
“Santana Rose thrived through the last few months. They’ve done a great job of keeping the environment safe and inspiring consumer confidence in the restaurant and the retail experience, and the [hotel] brands are super excited about that location,” Shackerley-Bennett said.
“Some of the brands have even offered some money to go toward those projects. It makes it a very attractive project for somebody come in, and that’s a joint venture where we’re saying we’ll stay in this through the site development permit.
“It’s really establishing a stick in the ground for a price because we know there are groups who also want to joint venture to take it all the way through.”
One of the ownership groups involved is a women-led organization, making it even more meaningful for Shackerley-Bennett. “That’s what’s developed over time and it’s exciting to be on that leading edge and be that difference in the room.”