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About Us: News
HEI Takes Advantage Of "Opportunity" To Expand Hotel LineupIssued: January 25, 2005
NORWALK, CT. With some $400- million in capital earmarked for investments in each of the next three to five years, HEI Hospitality, taking its original Hospitality Equity Investors moniker quite literally, is determined to become a pre-eminent firm for investors.
Right now, HEI is in a growth mode, with the clearly defined objective of owning and operating 200- to 600-room, nationally branded hotels in the top 50 markets in the U.S., according to Chairman and CEO Gary Mendell. Much of the company's liquidity comes as the result of the formation of HEI Hospitality Fund earlier this year. The $275 million, fully discretionary fund already has directly led to the acquisition of several hotels and changed the dynamics of the company.
"Prior to that we were an operator, it's a big transition for us. We have full discretion on investments," said Mendell, who estimated the fund gives HEI some $800 million in buying power. He also noted that in 2004, the company was the leading active private buyer of hotels, a role it plans to accelerate in 2005.
Second Chance
The company was originally created in 1985, but the firm's management opted to dispose of its assets in 1996. While market conditions played a role in its exiting the business, according to Mendell, he believes the conditions are ideal now for further growth.
In fact, the company, which retrenched in 2002, already has built a portfolio of 25 hotels.
If Mendell and the three other founding members' his brother Steve Mendell, executive vp, acquisitions and development; Dave McCaslin, president of management subsidiary Merritt Hospitality; and HVS International president Steve Rushmore, have proven one thing, it's that their timing is pretty good.
"In 2002, we reformed the company. I saw the recession in 2001 and began tracking the industry, and decided it was a good time to reinvent the company. "We were one of the first to recognize the beginning of an investment cycle," said Mendell, who further explained his foresight into selling its previous portfolio of more than 20 properties, 10 of which were sold to Starwood Hotels & Resorts, while the others were one-offs.
"In 1996 it was clear. I certainly didn't have a crystal ball to say the industry was going to have the severe drop it did, but prices were in excess of where I thought they should be. It made sense to be a seller, not a buyer."
The company got restarted by buying two hotels. The Hilton Orlando/Altamonte Springs was acquired in a joint venture with Prudential for $24 million in August of 2002. The Holiday Inn in Boca was purchased for $11 million in October by principals of HEI, in addition to other private individual investors.
In 2003, the company also acquired the 205-room Sheraton Crystal City in Arlington, VA, in a joint venture with Prudential Real Estate Investors. In July 2003, HEI partnered with Olympus Real Estate Partners, and Rockwood Capital Real Estate Partners to acquire 11 upscale properties from Starwood, followed shortly by the additional purchase of the Hilton Novi in Detroit, MI, by HEI and Prudential Real Estate Investors.
The $300 million, multi-property portfolio consisted of the Sheraton Buckhead, Atlanta; Sheraton Chicago Northwest, Arlington Heights, IL; Sheraton College Park, Beltsville, MD; Sheraton Danbury, Danbury, CT; Sheraton Ferncroft, Danvers, MA; Sheraton Norfolk, Norfolk, VA; Westin Southfield, Southfield, MI; Westin Stamford, Stamford, CT; Hilton Sonoma County, Santa Rosa, CA; Residence Inn Tyson's Corner, Vienna, VA; and Wayfarer Inn, Bedford, NH.
HEI sold the Residence Inn Tyson's Corner and the Wayfarer Inn immediately following the transaction.
Mendell offered this analogy on the suddenly large lineup of hotel properties in its coffers. "In 2002 we put our toe in the water; in 2003 we jumped in," he said.
Adding More
In early 2004, the company acquired five more hotels. In a joint investment fund managed by Greenfield Partners, LLC, a privately owned real estate investment management firm, and GIC Real Estate, HEI obtained five Marriott hotels from Host Marriott Corp. for $70 million. The five hotels will undergo renovations in 2005 totaling more than $21 million. The properties are the Atlanta Marriott Northwest, Atlanta, GA; Detroit Marriott Southfield, Detroit, MI; Detroit Airport Marriott, Romulus, MI; Atlanta Marriott Norcross, Norcross, GA; and Fullerton Marriott at California State University, Fullerton, CA.
Gary Mendell stated the company's clearly defined objective is "creating the highest and best value for investors" and emphasized HEI's current strategy is by no means short term, partially due to the fact its opportunity funds are longer in length.
"We will hold the asset for five to 10 years. Many opportunity funds are shorter term, you buy now and sell in two to four years. Our investors have a longer-term horizon. If we see a depreciation of assets in the future, we won't be afraid to sell. We'll be in it as long as there continues to be an appreciation of assets," said Gary Mendell.
The company has since acquired six hotels as part of the new HEI Hospitality Fund, including the 410-room Sheraton Music City in Nashville, TN. There also is an additional property currently under agreement in southern California, according to Steve Mendell.
Mendell also offered some insights on the appeal of returning to the hospitality business, aside from the potential for profit. "I love the combination of real estate and an operating business, working with and building an organization. I get a thrill out of delivering great returns for investors."
The CEO detailed a number of objectives he had when restarting the company to help deliver those returns, which involved appealing to four main constituencies: sellers, investors, employees and national brands.
"For the sellers; there are four criteria; price, certainty of close, speed and professionalism. We're focused on having a competitive advantage in all four.
"For investors, we need to provide above-market risk-adjusted returns. They want an investment firm that can balance high growth and they want a professional organization as that can act as a fiduciary on behalf of their capital."
He also underscored the importance of attracting qualified personnel as one of the company's primary strengths. "We need the best people working for our company. What we need to do to attract the best employees is invest in institutional-quality assets, and the owner/operator business model shows that we are investing alongside the investors."
The company went from some 20 employees to almost 50 within the past year.
And Mendell certainly understands the importance of a good relationship with the brands. "We realize to be successful we have to be a good partner for the brands. They want growth, quality of product and service," he said.
Mendell touted the talent and expertise of Merritt Hospitality, which is under the direction of McCaslin, as being vital to the company's success. [See sidebar on Page 28.]
"It's amazing what the team has accomplished growing from 2 hotels to 25 in 18 months. They are driving superior results for our hotels," said Gary Mendell.
An experienced acquisition team, headed by Steve Mendell, also is deemed to be a key factor in the company's development and subsequent expansion. Weekly meetings bring together some of the top acquisition minds, including hotel investment veteran Clark Hanrattie, who was added as senior vp, chief investment officer earlier this year from Olympus Real Estate Partners. Steve Mendell noted many of the top operations personnel are part of the meetings, as the company seeks input from them as well.
"We have a really superior acquisition team with Steve, Clark, Roger [Clark, senior vp, acquisitions and development], and Jin [Lee sr, vp, feasibility and investment analysis}. Those four people are just phenomenal, they are aggressive, smart and experienced. Each one has the experience to lead an acquisition team on their own," said Gary Mendell.
"We talk about the pipeline, and then it is my responsibility to figure out which deals to go after. But pro forma needs to sign off before we can make an offer," said Steve Mendell, adding the company is expecting to add from "six to 10 hotels" during 2005.
"When we sit down we have people that have 10, 15 and 20 years of investment experience. That is by far the most experienced investment team that I've been around. There are different backgrounds and experiences; it's a collegial environment, and expressing views is encouraged. It's the type of environment where you can challenge certain decisions to come up with the best answer. We exercise all the talent that we have," Hanrattie said.
Hanrattie described some of what he brings to the table, and noted that includes more than just the acquisition of high-profile assets, such as the Ritz-Carlton Rancho Mirage, The Algonquin Hotel in Manhattan, and the Fairmont Copley Plaza in Boston, which he helped acquire while he was with Olympus.
"I have a depth of transaction experience that transcends beyond first-class hotels' My skill sets enable us to [pursue] other investment strategies," he said.
In terms of adding those high-profile or trophy-type properties, Steve Mendell did not see it as a priority.
"It's not in our game plan to try and get a trophy. We're focused on our core product, which are our bread and butter assets," he said.
Steve Mendell added that the company takes an extensive look at the markets it's planning to get into and tries to get out its crystal ball.
"We're looking for "forever locations" that will be as good or better 20 years from now. We take a lot of time to assess how the real estate market is developing," he said.
"You have to assess the risks associated with any single investment. What's the risk of new supply coming in. Is there some element of the demand base eroding," he added.
He also provided some specifics on the geographic regions on HEI's radar screen right now, saying the firm is looking at "penetrating the West quite significantly," and already has three properties in California. "We're very focused on identifying markets with high barriers to entry and strong demand growth."
In terms of future acquisitions, Steve Mendell said the company is equipped for either portfolio grabs or one-offs.
"I'm focused on either. I'm very happy to look at single acquisitions, but we are the pre-eminent portfolio buyers in the country. [The deals] are more complicated, and it's more difficult to get the due diligence done. There's not too many groups that can close on portfolio transactions; it takes a lot of creativity, and we're particularly adept at figuring out issues," he said.
Among the areas the company would consider entering is hotels with a residential component, as well as health-club-oriented hotels in markets with a strong demand for athletic components, according to Steve Mendell.
Despite HEI's aggressive growth plan, Gary Mendell noted the company also would consider selling certain underperforming assets. He added the company would venture outside its core competency "to either develop a new hotel or have one operated by someone else," depending on the situation.
Hanrattie, for his part, thinks things will continue to look up for both the company, as well as the hotel industry, at least for a while.
"The fundamentals are very strong and should be for the foreseeable future. Values continue to rise relative to capital flows. There's a lot of capital competition on the acquisition side and a lot of interested capital in our sector," he said.
When asked about any lessons learned from the company's first go-round, both Steve and Gary appeared to be on the same page.
"Buy as much as you can while the market is down; the hotel investment market is definitely cyclical. Values are a little higher, theres less risk in the market than there was, and a better chance of a risk-adjusted return," said Steve Mendell.
"When the timing is right, I learned you can be more successful by not being afraid to grow quickly. You have to capitalize on the current environment, we are clearly growing faster this time," said Gary Mendell.
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