CEO Duncan and Executive Chair Schwartz are rolling out a
bigger investment platform that they say can crucially close with more
certainty.
NEW YORK CITY – First Investors CEO David Duncan calls the
new institutional grade hotel real estate investment platform, First Investors
GP Fund, the next step in a spinning flywheel that should lead to the
40-year-old, Chicago-based owner-operate to initially acquire six to 10 assets for
between $200-400 million. Rinse and repeat.
But Duncan was also quick to point out there is no gun
pointed at their head to quickly deploy capital similar to a PE firm. “We
suspect it will take two to three years to deploy the fund. We have time,”
Duncan told Hotel Investment Today during a meeting at the NYU investment
conference. “One of the things, just as a general philosophy, that’s important
to us, is that we don’t feel pressure to put the money out.”
The reality is, the ability to close today with certainty is key to sellers, and we want to make sure we have demonstrated that ability.
David Duncan
However, Duncan feels having the fund at hand will help them
close faster. “We think having organized capital ready to acquire things so we
can act quickly is a market advantage,” Duncan said. “The reality is, the
ability to close today with certainty is key to sellers, and we want to make
sure we have demonstrated that ability. And so having that ready to go, unlike
a lot of people tying up deals and then trying to find the capital, we think
will be a benefit and we’ll be able to acquire assets at a better discount or
better bargain.”
First Investors has GP capital (about 20% of the fund), will
add LP capital and debt, and Duncan said they are ready to transact as soon as
they find deals they like. He added that First is generally looking for
dislocation from an asset capitalization structure perspective. Having said
that, Duncan said they have underwritten literally 300 deals in the last 18
months and executed one.
First Investors has two LOIs going now, and Duncan said he
feels like the problematic bid-ask spread is narrowing. “I thought that right
before Liberation Day, and it then seemed to widen a little bit,” he said. “But
now it seems to be settling back in.”
The sweet spot for acquisition will be in the $20-50 million
range, but First could go higher. “The parameters are proper risk-adjusted
returns, but we’re looking for 20-plus leveraged IRRs for value-add
opportunities,” Duncan said. “We also have some interested investors that are
looking for generally lower returns – dividend yielding, cash flow generating
year two cash on cash distributions with sort of 10% dividend.”
Duncan added that First Investors is more than happy to take
construction risk or redevelopment risk if they can buy the asset at the right
price and generate higher returns at 20- to 22-plus leveraged IRRs.
“We’re probably biased towards the opportunistic value-add,
but we’re trying to keep the aperture wide,” Duncan said.
Everything they do will be underwritten to a five-year hold,
depending on the nature of the deal, with some longer term holds, Duncan added.
Adding alpha to management
The other opportunity here for First Investors is buying
assets that add alpha to the First Hospitality management company. Over the
last five or six years First has been able to double the portfolio size to 70,
mostly through third-party management.
First currently own significant joint-venture positions in
18 hotels totaling 3,100 keys. Current representative investments include the
Hiltons at McCormick Place in Chicago; Hotel LeVeque, Autograph Collection in Columbus,
Ohio; Tempo by Hilton Louisville Downtown NuLu in Kentucky; and the newly
opened Hotel Ardent, a Tapestry Collection in Dayton, Ohio.
“We can do a better job than your average investor because
we have this captive, fully integrated management company,” Duncan said. “We’re
active in a lot of markets today, with GMs on the ground that will help us
source deals and underwrite. We think we’re a better underwriter because of the
operating company.”
Duncan said being an owner-operator also gives them an
advantage versus private equity trying to grow and focus on the top line. “We’d
like to grow in the right opportunities, and that’s a real advantage for us,”
he said. “We’re not artificially inspired to grow, even if it’s poor quality.”
We’re active in a lot of markets today, with GMs on the ground that will help us source deals and underwrite. We think we’re a better underwriter because of the operating company.
David Duncan
Executive Chairman Sam Schwartz added that the platform has
been around for 40 years, and they’re leaning into what the next 40 years will look
like. “We’re really focused on a long-term
orientation in our thinking, and that’s another advantage that we have, and
something we’re leaning into,” Schwartz said. “It’s the ability to be strategic
in how we staff the management company, in the investment strategies we pursue.”
Big picture
Looking at performance this year, Duncan said First will
year-over-year revenue in the 5% range, even though they are seeing softening in
transient leisure.
He said business transient and group are carrying the day with
forward bookings holding up. They are fully staffed on the sales side and
rewarding increases in BT and group indices. “We’re overcoming national
averages with better hand-to-hand combat with local corporate group rates,”
Duncan said.
Big picture, Duncan said the group is hyper-committed to
maintaining a stellar reputation. “If we’re going to go under contract with
something we’re going to close, first and foremost,” he said. “As a result, we
believe we’ll be able to buy assets at a slight discount to others because we
provide that certainty.
“We think that is where you’ll make your money – on the buy.
And one of the reasons we’ve really reinforced the capital is to affect
discounts and returns.
“On a long-term basis, we’ll be patient. We don’t need to be
a hero. In the next six months, we’re going to invest very methodically, keep
leverage low, be over-diligent, outwork our neighbor, and as a result of that
deliver superior returns.”