Why 50 is magic number for Scarlett, Everwood merger

CHICAGO and ORLANDO — When the leaders of Scarlett Hotel Group and Everwood Hospitality Partners started talking about merging, they said it was clear that their visions and goals were in alignment. One of the biggest goals was to grow — with the key phrase “50 by 50.”

That goal started with the three founders of Chicago-based Scarlett Hotel Group — principals Zio Pekovic, Rob Sadoff and Andrew Scarlett, who wanted to get to 50 hotels owned or managed by the time they were 50 years old (roughly 6-8 years from now.) That concept also worked for the trio of Everwood principals — CEO Amit Govin, COO Amit Patel and President Sanjay Rama, whose ages roughly match the three from Scarlett by a year or two.

So, the growth path is set for the merged entity, which now counts 17 hotels owned and managed, with nine in the pipeline over the coming year (about 30% of them are ground-up while the rest are existing assets).

Hotel Investment Today talked to Pekovic, Sadoff and Patel about the merger and what it means for the future.

It allows us to underwrite a deal and have some confidence that our operations will be able to prove the underlying underwriting at the end of the day. That allows us to make faster decisions on acquisitions and development.

Amit Patel

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The partnership plays to both companies’ strengths. Scarlett is now managing the hotels (Everwood had nine of them, and Scarlett onboarded them by the end of 2023), while Everwood is rebranding to Everwood Capital Partners and will focus on investment, development, and capital deployment.

“When we started talking with Scarlett, it looked like a lot of our vision and goals were aligned as their shop was focused on management but also very active on deals and development. So, a lot of the synergies between the three of them and the three of us aligned,” Patel said. “The partnership really worked out in the sense that they would continue to do the operations arm, and that allows Everwood to go back and focus on the real estate in the private equity side of the business and be able to continue to acquire complex, structured deals… This opens the field up for us collectively to do hospitality and a few other asset classes.”

Pekovic said the merger allows Scarlett to continue to add on operationally. “An important part of the merger was also bringing on two executives from Everwood, specifically to support revenue management and sales and marketing for all the assets,” he said.

The combined hotel portfolio

Pekovic said the hotel portfolio is valued at just over $500 in asset value (with the InterContinental San Antonio making up $156 million) and is a mix of limited-service, full-service, and lifestyle hotels. The companies said they own all their assets but aren’t opposed to joint ventures, especially for new construction.

“Operationally, our team (Scarlett) has tremendous experience with limited-service assets,” Sadoff said. “So, it works well because of the blended portfolio company’s full-service and lifestyle assets.”

The first one coming down the pipeline is a renovation of the 176-key Best Western Premier Waterfront Hotel & Convention Center in Oshkosh, Wisconsin, is being converted to a full-service Marriott property and will launch this summer. Scarlett purchased the property last April.

A meeting between the two companies.

Patel said the partnership allows the companies to return to their pre-COVID path. “The merger allows and helps everyone’s perspective because our prime focus pre-COVID was this trajectory of continuing building assets via development and acquisitions,” he said.

Patel said the merger allows Everwood “to breathe a little bit better” because it isn’t focusing on operations. He said there were times when Everwood couldn’t pursue all the deals it wanted to because of bandwidth. “It allows us to underwrite a deal and have some confidence that our operations will be able to prove the underlying underwriting at the end of the day,” he said. “That allows us to make faster decisions on acquisitions and development.”

The companies are funded through wholly owned capital sources or through “friends and family” investors and pre-existing relationships with retail investment funds that would follow them depending on the asset class or size of the deal. 

Growing the portfolio

Patel said the merger also allows Everwood to expand the deals it pursues from individual assets to possibly a portfolio.

“We have a trusted management arm and trusted partners who have a track record and the ability to be able to take on the management, whether it’s an asset by asset, or if we’re looking at portfolio opportunities for purchasing. We have the combined infrastructure now to plug in five or 10 or 15 hotels if we were to go out and seek a portfolio,” he said.

Pekovic said the merger also allows the companies to focus on a larger deal size, above what a regional player could do but below what a pure institutional investor might seek.

“If we’re able to focus on acquisitions that range anywhere from $20 to $75 million, that drives our growth,” he said. “We’re now able to focus on higher price deals and be a lot more competitive in that sweet space, just below the larger institutions that want to do north of $75 million and just above some of the more regional players who are focusing in that $10 to $20 million range.”

Sadoff said those sizes of assets can also deliver better top-line revenue in terms of performance expectations.

“From a top-line gross revenue standpoint, those specific assets are probably 2.5x to 3x what a traditional limited-service would do,” he said. “So, that accelerates our revenue growth because those hotels are now within our reach and obtainable... It’s hard to say an aggregate number for tackling growth from an operations standpoint on the hotel side, but it will rise exponentially because of our capacity to do those deals.”

“Market-tunistic” on where next

Pekovic said the companies have historically bought assets from institutional investors and “squeezed where we can” to drive top-line growth.

Most of the assets are in the Midwest and Southeast, including Texas, but Pekovic said they are “market-tunistic” about where to grow next. “We’re not necessarily focused on a particular region; it’s more about the opportunity and whether that market is an opportunity.”

Sadoff also said they have looked for deals with a good story. “Generally, those come with interesting story or background, and that actually makes for an interesting acquisition,” he said. “And that story generally leads us to find the value.

“The older, generally cookie cutter acquisitions for us, they may have a little hair on them… and they may be a smaller asset owned by a large institution that we feel has not gotten the attention it deserves, or the opportunity lies to grow that top line and shrink that expense. We like those kinds of things.”