Build, buy, sell: How deals are getting done

ATLANTA — Mehul Patel wishes he could remove the word “distressed” from the hospitality industry’s vocabulary.

“That’s a curse word in our industry, I would say because the seller has to win, and the buyer has to win. That’s the only way transactions happen… Whenever a seller sells something, there’s no transaction if he’s not needing it. Let’s be real: You can talk about bid-ask everything… [But] what is the seller’s motivation? Either he’s tired of the business, or he’s not getting success. That’s the reason he wants to sell.”

Patel is the managing partner of Grapevine, Texas-based NewcrestImage, a company that has bought and sold 300 hotels. He said occasionally, you might find a deal where you feel you did better than the other party, but that isn’t a formula for long-term success or working with that party again.

“We’re a good buyer and a good seller,” he said. “Every time we sell something, we want the buyer to be very successful so that they can buy from us again, and every time we buy something, the seller wants to sell us more or vice versa.”

The “Build, Buy, Sell” panel on Day 2 of the Hunter Hotel Investment Conference featured Patel; Krystal England, chief investment officer for Charleston, South Carolina-based TMGOC Ventures; Dustin Fisher, senior vice president for Atlanta-based Noble Investment Group; and Mike Wilbert, senior managing director and head of acquisitions for Denver-based Mission Hill Hospitality. The panel was moderated by Charles Ryan, senior vice president of Atlanta-based Hunter Hotel Advisors. 

Buying in 2024

England said there are lots of potential buyers these days, but it just depends on the price. “There is capital available to buy, and, therefore, there’s not much distress,” she said. “While you might find different values today than what existed in 2021, so long as we [the companies on stage] and a lot of you guys in the audience are buying, there’s not going to be this kind of dislocation that causes the distress.”

Wilbert said the backdrop for the word 'distress' is if there is not enough capital on the credit or equity side to continue pushing up values.

“If somebody wants or needs to move on from an asset, there’s going to be 15 people that show up and say, ‘I’m a buyer, or I’m a lender, and that’s going to help support the value,’” he said. “We haven’t seen it in the products we want to own. Everybody [has seen] a deal that looks like a steal. It’s very discounted, but do you really want to own it? That’s up for debate. 

“But to predict a windfall, at least in the products we’re looking at, that are branded, have strong cash flows and are in new or vintage decent markets? I wouldn’t expect that from our side.”

Fisher said the current credit environment shows the value of having trusted financial partners. “It’s a good cautionary tale, and why you manage relationship lending for times like this,” he said. “All of our transaction activity right now is with truly trusted groups that, while they might be shut off to a broader part of the market right now, still believe in [our] track record, expertise, and brand we cultivate.”

Building in 2024

When discussing the new-build market, England said TMGOC loves that supply growth is muted right now.

“We have a number of really transformational properties that are under construction… it’s a product of timing. We’ve been working the last several years on getting two very large projects through pre-development and ready to break ground,” she said. “While nobody really likes the interest-rate environment right now, it’s generally our perspective that the interest rates right now don’t make or break the deal, and the time is right for us to work through and deliver new products.”

You can’t ignore what the discount-to-replacement cost opportunity is right now. While we’re incubating new development for future funds, I think we’re probably part of the catalyst for this muted supply growth because many of our resources have just pivoted to buying at discounts at an opportunistic time.

Dustin Fisher

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Fisher said Noble has an active pipeline, that’s the culmination of a long incubation period. “You can’t ignore what the discount-to-replacement cost opportunity is right now,” he said. “While we’re incubating new development for future funds, I think we’re probably part of the catalyst for this muted supply growth because many of our resources have just pivoted to buying at discounts at an opportunistic time.”

Patel said the construction market will be “choppy” for the foreseeable future because costs are only headed in one direction. “Once the labor goes up, it never comes down. That’s the fundamental issue… I don’t think we’re ever going to see for the foreseeable future where construction costs will come down,” he said. “Construction and development are becoming very complicated to understand because there are so many layers to consider. There is ample capital, but you must understand your business model. Can I be building this hotel, and does it make sense?”

Wilbert said Mission Hill is looking in business-friendly, labor-friendly markets with positive migration patterns like the Southeast, Texas, Arizona and the Mountain West. “That’s where we’re spending most of our time today,” he said. “Mission Hill is not a developer… however, we are working with groups and institutional and regional developers who have track records and are building the products we want to buy. We’re getting traction with them on forward takeouts, where we sign a contract early on, they build it for a guaranteed maximum price, deliver it in 24 months, and everybody walks away, hopefully, happy.”