Why location was motivation for TMGOC, Certares’ first deal

DELRAY BEACH, Florida — Sometimes, in hotel dealmaking, proximity can be the most important factor.

TMGOC Ventures’ Co-Founders Glenn Alba lives about a mile from The Ray Hotel in Delray Beach and was keenly aware of the asset and its build quality. So, when the hotel came to market, Boca Raton, Florida, and Charleston, South Carolina-based TMGOC Ventures was interested.

“From a TMGOC perspective, we were well-positioned with our knowledge and our background of the asset, as well as the overall opportunity that we thought it represented when the owner was ultimately ready to transact,” said Krystal England, chief investment officer for TMGOC Ventures.

Krystal England

Last week, TMGOC announced a joint venture with New York City-based Certares to acquire the 141-key hotel from Delray Beach-based Menin Development for an undisclosed price.

Mike Kusy, a director at Certares, said Alba’s knowledge was key to making the deal happen. “His boots-on-the-ground in-market relationship was pretty critical to putting this all together,” he said.

While the two companies wouldn’t specify percentages of the JV, they did say that TMGOC will be the day-to-day operating partner, with Philadelphia-based HHM Hotels taking over management.

This is the first partnership for TMGOC and Certares, but it doesn’t sound like it will be the last. “We’ve been pleased to see the similarity and thinking that we have between the firms both in our strategy with respect to this asset and, I would say, hospitality investments overall,” England said. “There are a lot of common themes that we both pursue, and this was really an ideal transaction for the first of, hopefully, a few JVs.”

Kusy said the two companies have been fostering a potential partnership for years. “We’ve had a long-standing relationship with [the TMGOC] team for multiple years,” he said. “We always would trade notes on things and it was clear that we viewed the world in the same way. We target the same types of opportunities.

“Now that we have the nuts and bolts of the partnership together and we’ve worked through a deal together… we’d love to do a lot more with the TMGOC folks.”

Inside the deal

TMGOC had been tracking a potential deal since the asset was first brought to market last year. England said the company started looking more closely at ways to acquire the asset in April, with a potential JV with Certares soon after that. The deal went into contract in July.

Mike Kusy

Kusy said there weren’t any unique challenges to this transaction, but the enhanced F&B structure did make it more complicated. “It’s an incredibly well-built asset but a relatively complicated asset operationally because there’s a fair amount of food and beverage operations (three F&B operations with two distinct parties),” he said.

England said the JV was well positioned when the seller was ready to transact (not to mention the existing relationship with the owner that had developed over the course of TMGOC tracking the asset).

The one nuance to the deal that required the most structuring and dealmaking, Kusy said, was the assumption of the loan with an existing lender (Uniondale, New York-based ACRES Capital Corp.), which came with fresh terms and a new capital structure. “The existing lender had fresh capital and came to the table with a partnership they believed in and a sponsor they believed in, and we could benefit from an attractive loan that was in place. It was a win-win for everyone.”

Why Delray Beach?

The market appealed not only to TMGOC but also to Certares, which loves to find “pocket” neighborhoods with outsized growth.

“It’s clear that in a post-COVID world, Palm Beach County, in general, has been one of the most concentrated pockets of growth,” Kusy said. “Then, on a more micro level, Delray is a place that excites us tremendously. It’s centered between West Palm and Boca Raton directly in the path of growth and caters to demand from both markets, as well as this leisure and amenity hub.”

There’s no [new] supply right now. Another thing we obviously focus on is investing in markets with strong supply-demand fundamentals. From a supply perspective, there is no supply under construction in Delray, and there likely won’t be any time soon.

Mike Kusy

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England said TMGOC has always viewed Delray Beach as a great location to invest for a number of reasons. “Like all of the most attractive destinations in the U.S., which we consider Delray Beach to be among them, there are extremely high barriers to entry,” she said. “We’ve always viewed Delray Beach as an incredibly attractive place to invest when opportunities arise.”

There’s another appealing factor to the market, Kusy said. “There’s no [new] supply right now. Another thing we obviously focus on is investing in markets with strong supply-demand fundamentals. From a supply perspective, there is no supply under construction in Delray, and there likely won’t be any time soon.”

England said she doesn’t expect a lot of asset transformation under the new ownership. “It’s our goal to take the vision that the owner had and bring it to the next level… because we think it’s in extraordinarily good shape as it is,” she said. “We’re going to make some improvements up to the rooftop bar and some changes up there to make it more of a destination that works in all weather.”

Kusy said there are some projects the JV will tackle that improve margins, but the F&B is what really makes the asset special, not only for guests but all of Palm Beach County as well. “They’re true destination outlets… I would say most of the business comes from non-hotel guests,” he said. “It drives everything at the hotel in a lot of ways. It drives the activation at the hotel and it drives the hotel demand. In a lot of ways, the fact that we have these destination F&B outlets is pretty integral to our operation.”