Mission Hill targets more than 35% growth

DENVER, COLORADO – Two decades of mentorship at the top of the hotel investment market—initially with Strategic Hotels & Resorts and, most recently with KSL Capital Partners, are giving Greg Kennealey an innovative playbook for mining select-service and extended-stay opportunities in what many predict will be a bumpy 2023.

Tapped by his KSL bosses to helm the August 2021 launch of Mission Hill Hospitality, their entrée into the high-performing, highly competitive select-service and extended-stay hotel sector, Kennealey’s blend of high-low tactics successfully fast-tracked this startup from 12 hotels at rollout to 26 properties in January 2023. Five more are slated to join the portfolio before the end of Q2 2023.

However, any helpful tailwinds have pretty much dissipated. The Mission Hill CEO shares the industry’s view that the deal pace will moderate this year as the asset pipeline coming to market thins and the macroeconomy braces for at least a few more bumps.

Looking out over the remainder of the year, Kennealey’s strategizing his deal pace against the backdrop of a slowing economy, not a crash. “Our first concern is always the performance of our existing portfolio,” Kennealey said. “As for acquisitions, my guess is we’ll do a handful of deals this year. There’s a lot less [product] to choose from. But, on the flip side, a lot of people are a little more content to stay on the sidelines. I think our growth trajectory will moderate this year.”

These factors could create a ripe market to test the viability of channeling the instincts behind building a successful 5-star portfolios to a more mass-market brand world. Kennealey’s basic strategy is built around hand-picking each asset rather than risking the “asymmetry” of larger portfolio acquisitions. It’s about “good” small deals rather than big numbers.

Mission Hill's recently acquired Holiday Inn Steamboat Springs, Colorado

Here, Kennealey shares his playbook on financing, asset selection and why he doesn’t like large portfolio deals. Bookmark these pages.

Look for complexity. KSL Capital Partners’ financial clout, real estate connections and expert teams give Mission Hill the capabilities to look at the 360-degree potential of monetizing each project. It’s little different than shopping for trophies; it’s just that these “trophies” live within major brands in smaller markets with tailwinds and underserved urban markets. Kennealey is a realist about managing expectations within market conditions.

“We’ll make a return through cash flow and multiple equity rather than IRR, and that’s ok,” he said. “But we have to be smarter and hopefully we are going to create a structure that allows for that. The other thing we do is underwrite a downside case on a lot of our hotels that covers how long they can survive if things go very wrong. How bad is that for us? And what can we do to minimize the odds of maximum regret?”

Look at the real estate for value creation opportunities and be aware they could come in many forms. “Getting in on an attractive basis is ultimately critical to generating a very good return. Then, in the current environment, we’re doing our very best to hardwire the financing early in the pursuit to make sure that we’re going to be able to execute on the transaction at closing. So far, that’s worked out well for us,” Kennealey said.

Be honest about the deal and the deal environment. “I’m more conservative and more stringent about sticking to our playbook than I might have been a year ago,” said Kennealey, Strategic’s former vice president, asset management and KSL principal and head of hospitality. “A deal that poses problems [outside of Mission Hill’s playbook parameters] makes unlocking that value more challenging. It probably makes more sense for us to take a pass on that kind of deal.”

SVB collapse or no, local banks remain pivotal partners. “It’s become more challenging to get financing done and, yes, the KSL family has been a huge help in that regard,” he added. “That said, like many others, we’re finding the most love right now with local banks who have the balance sheet to lend direct on 24 or 26 hotels [or the 30 that Mission Hill will probably have by the end of the quarter]. The large global banks are not as active. So, we pivoted to the local and regional groups. The sponsorship really matters, but we’re finding that they’re dropping the loan to value a little bit, maybe 5% or 10% more than what might have been two years ago. But for good hotels, with a good track record and a sponsor, we’re getting things done at a level that works for us.” And yes, he’s finding the terms more owner-friendly and the rates a little lower.

Use caps to help mitigate interest rate uncertainty. “What we have historically done is pursued variable rate debt, which gives us maximum flexibility in terms of timing our exit. However, we also use interest rate caps, which effectively function as insurance if rates go above a certain level,” Kennealey said. “The team that helped me put Mission Hill together had the foresight to buy a large amount of those interest rate caps about two years ago at very attractive threshold pricing. So, that’s been a huge benefit for us in the current environment. We’re sort of replicating that with the insurance piece if you will, and that’s working for us. Those caps were 3% roughly two years ago, while caps that we’ve entered into recently have been more like 4.5%.”

Forget about deal FOMO. “I would 100% rather do a small number of good deals than grow faster but have some deals not work out well. As you know, we are a portfolio company of KSL Capital and that’s been their DNA for 30 years,” Kennealey said. “If we miss something that could have been a good deal, that’s frustrating. If we reach or talk ourselves into something we shouldn’t, and we end up with a bad deal in the portfolio, that is extremely problematic and that’s the thing we’re trying to avoid at all costs. Mission Hill puts that in black and white on its website – we will keep growing through hand-picked single asset transactions rather than coping with the asymmetry of portfolio deals.”

The aim now is to make a return through cash flow and multiple equity rather than IRR, and that’s okay. Hopefully we are going to create a structure that allows for that.

Greg Kennealey

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Be opportunistic but don’t abandon overall strategy to survive short-term market conditions. “Our current portfolio is a bit weighted towards the eastern seaboard. That was, in many ways, a reflection of where we found opportunities. Now, we are targeting growth markets such as the Sunbelt. We’d love to get some traction in the West,” Kennealey said.

“It’s sort of a sub-market by sub-market for us, or even street corner by street corner. When we start looking at an opportunity, one of the first things we screen is ‘does this market have tailwinds or headwinds?’ Once we find the market with tailwind, then we find asset value creation opportunities. We like that formula a lot. Those opportunities are hard to come by. But those are the types of deals that we’re looking for. We’re not inclined to deviate from our overall asset strategy. I don’t think market conditions change that for us – the strategy remains the same over the long term. We have to look at tactics in the short term based on what’s going on in the world. Right now, that means a lot more looking to uncover off-market opportunities and maybe get a little more creative with where we see value, ability to add revenue sources – sort of the straightforward under-capitalized and undermanaged asset that everybody keeps trying to get.”

Make sure to underwrite downside protection so that the asset can weather even severe economic, environmental, geopolitical or pandemic storms. “While I was at KSL, I learned to emulate their situation where they have fundamentally good, well-capitalized real estate so that we can underwrite downturns and never be forced to sell under suboptimal conditions,” Kennealey said. “We’ve all been in tough markets seven, eight, nine, 10 times. We know we can handle those downturns; we just have to get smarter in terms of how we do that.”

Prioritize assets with hard-to-reveal paths to profitability. Drill down beneath the under-performing or undercapitalized assets to find “non-prototypical assets” with the potential to cultivate “a more whimsical design that could invite incremental ROI, Kennealey said. He likes working with brands to create slightly non-prototypical assets. “If you’re the right person for that conversation, the brand’s response is usually very reasonable,” he noted.

Stay focused on the most important resources and assets. Kennealey isn’t staying up at night over the “asset that got away.” It’s the wellbeing of his team that he goes to bed and gets up thinking about, as well as coping with macroeconomic factors that could threaten the performance of the current portfolio.