No herd mentality for Certares’ $284M fund

Nolan Hecht said he’s done two hotel deals in his career where no one congratulated him. The senior managing director and head of real estate for New York-based travel-focused investment firm Certares said it was because others didn’t see the value.

One of those deals was part of a $284 million real estate fund that Certares recently announced had completed its final closing.

The fund, which launched in March 2021, has so far invested $228 million in 10 U.S. hotels with over 2,100 keys, which include:

• AC Hotel Santa Rosa Sonoma Wine Country (California)
• ARC Hotel in Washington, D.C.
• Ashore Resort & Beach Club in Ocean City (Maryland)
• Courtyard San Diego Downtown (California)
• Doubletree Suites Doheny Beach in Dana Point (California)
• EAST Miami in downtown Miami (Florida)
• Embassy Suites Midtown Atlanta (Georgia)
• Hilton San Antonio Hill Country (Texas)
• Le Meridien Tampa (Florida)
• Sea Crest Beach Hotel in Cape Cod (Massachusetts)

The EAST Miami property was the one that didn’t yield any high-fives for Hecht (the other was a Ritz-Carlton in Kapalua that sold earlier in his career in 2018). But he is happy to accept all of the congratulations now.

Hecht said the property (in Miami’s Brickle area) is a great example of how Certares uses its other travel-related investments to inform its hotel real estate investments.

EAST Miami in the Brickle neighborhood

It’s also an example of anticipating the market, or as Hecht quotes hockey legend Wayne Gretzky “skating to where the puck is going.”

“If you don’t focus on (the Miami) market, people don’t really understand. They understand Miami Beach,” Hecht said. “And we saw the pricing on the beach and said, ‘It’s too expensive. It’s not compelling. Let’s look at Brickell. This is a pocket that is really showing growth.’ It wasn’t so much that research led us to Brickell. It was more that the research backed up our thought process of ‘let’s move off to the beach in Miami.’”

Certares has many travel-related investments in companies like Hertz, American Express Global Business Travel, Liberty Tripadvisor Holdings, airlines and travel companies. 

Hecht said the appeal of using that market knowledge drew him to the job at Certares. He joined the company in 2020 after serving as Senior Managing Director at Square Mile Capital Management. 

Currently, the company has invested $228 million of the fund, and Hecht said, depending on the deal size, that leaves room for one or two more. So far, the company says the fund has generated a net IRR of 35% and 1.4x multiple on invested capital through the first quarter of this year.

The value of the assets acquired is roughly $850 million of buying power in the fund, assuming 65% leverage.

Hecht said he couldn’t comment on whether Certares will open another real estate fund.

When we set out to establish our strategy, we said we wanted to go into the markets that are growing… where we saw tailwinds pre-COVID. And (properties) we thought would accelerate coming out of COVID and outperform. These are not older, traditional U.S. cities like Boston, New York, DC or San Francisco, but instead are what we would call the younger, growing U.S. hotel markets.

Nolan Hecht

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He talked to Hotel Investment Today about the properties in the fund, what has surprised him and where future deals might make sense.

Hotel Investment Today (HIT): Is there a common characteristic with the 10 hotels in this fund?

Nolan Hecht: When we set out to establish our strategy, we said we wanted to go into the markets that are growing… where we saw tailwinds pre-COVID. And (properties) we thought would accelerate coming out of COVID and outperform. These are not older, traditional U.S. cities like Boston, New York, DC or San Francisco, but instead are what we would call the younger, growing U.S. hotel markets.

HIT: What were the surprises along the way in getting these deals?

Hecht: We were surprised at how strong the leisure recovery was in the U.S. We had a thesis that leisure would come back first, but (it) ended up coming back at 120% of where it was in 2019. So assets that we bought in Miami and Tampa, in particular, showed tremendous, robust growth in year one of ownership. The leisure recovery was fiercer and faster than we anticipated.

What is amazing about that [growth] is that it came with very little international travel, with very little of what you would consider traditional corporate travel... But what you replaced it with is a stronger leisure market. And I think the fallout of the flexible work environment… has created this ‘bleisure’ business, which is a mix of business and leisure travel, and we’re seeing that across all our hotels.

HIT: What markets would make sense for the remaining potential deals in the fund?

Hecht: We are looking for the kind of pockets in the U.S. that we think will produce outsized growth. But I will tell you, we are starting to look back into the traditional urban cores in the U.S. We are bullish on New York City and the recovery there... Those markets have recovered enough now that I can see us starting to look back into (New York, Boston and DC.) While those markets are only, call it, 85% to 90% recovered, we think they’re going to get back to 100% recovery, pre-pandemic, over the next 24 months. So we’re close enough to a full recovery in those markets that the valuations excite us.

Le Meridien Tampa

HIT: How much were you impacted in these deals by rising interest rates?

Hecht: We have fresh debt on our assets with real runway. Nine of our 10 hotels are floating rates, and we have one fixed-rate hotel in Tampa… Most of that has been offset by strong RevPAR growth... If you look at our last two transactions in Cape Cod and San Diego, we found regional banks that like the assets, like the story, and have given us loans priced through the market. That’s largely through our lending relationships that we’ve cultivated over the past three decades.

HIT: What’s the strategy for holding these investments?

Hecht: We underwrite every investment to a five-year hold period. But there’s no magic to that. We are opportunistic. So, we have assets that we think we will sell in the next 12 months. Some have a larger value-add play, meaning we’re doing a heavier lift with renovation or repositioning, and maybe, we have five- or six-year holds.

HIT: How do the travel-related investments inform your real estate investments?

Hecht: It’s really two-fold. When we make investments, we have an unbelievable amount of travel data right behind us. And that really can help inform where we go. We can see the travel patterns to a market like Tampa. And whether that’s through our investments in airlines and car rentals, and certainly through the travel agencies we own, we think we have an advantage, just from a know-how standpoint. And then, certainly, once we buy an asset, we try and leverage all the companies that may be appropriate for that asset.

HIT: What were your biggest takeaways from this acquisition process?

Hecht: The one thing I’ve learned in my three decades in this business is: don’t follow the herd… My best investments have always been in finding new pockets… I certainly think what the U.S. is going through right now, domestically, is the redistribution of the haves and have-nots markets.