Mehul Patel on buying other people’s problems

GRAPEVINE, Texas – Mehul Patel loves the art of the deal. His NewcrestImage is known for buying and flipping assets more than just about any U.S. hotel owner. And there is a very definite method to his madness, which he discussed a few weeks ago with Hotel Investment Today.

Patel is managing through the current level of volatility with experience that has taught him cycles come and go. He also talks about his formula and approach to M&A, which often leads to him buying and fixing undervalued assets.

On the development side, he advises to be a purposeful developer with a plan.

Watch this interview via Zoom to better understand what Patel means about being purposeful and get his current take on market conditions and the implications.

Complete video transcript

Jeffrey Weinstein: Hi, I am Jeff Weinstein, editor-in-chief of Hotel Investment Today and this is On The Money. My guest today is Mehul Patel, managing partner of NewcrestImage, based in Grapevine, Texas.

Mehul came to the United States in 1990 and settled with his family in Garland, Texas.

After starting in the motel business, he created Newcrest management, which basically catered to the staycation traveler by developing limited-service hotels along interstate highways and in college towns.

In 2008, he recapitalized by selling 20 hotels in a single portfolio, jointly owned by Newcrest management and their partners at Image hospitality. The sale prompted discussions of future partnerships, and in 2012 the companies merged to form NewcrestImage.

As managing partner at Newcrest. Mehul drives strategic growth leading to acquisition of over 90 hotels. His expertise in hospitality, finance, acquisition, and market strategy continues to shape Newcrest’s success.

From 2013 to 2014, Mehul served as the youngest chairperson of the Asian American Hotel Association. He’s often invited to share his story and expertise with industry peers both at public and private engagements, and we’re lucky enough to have him with us here today.

Mehul, welcome and thank you for sharing some of your time.

Mehul Patel: Jeff, thank you for having me on this panel with you today. I’m really excited to be here.

Weinstein: Let’s get into it. So, let me ask you kind of an open question. What’s on your mind today? It’s interesting times from an investment perspective. When you’re thinking about NewcrestImage and direction, strategy, what’s top of mind right now?

Patel: In 2025, I think it’s an Interesting segue where we are today after our election year. I think everybody in the industry or the U.S. was watching the outcome of election. Finally, we’re over with that.

And you know, every four years we go through this cycle, red or blue. And we’re okay with whoever comes as long as they serve the country and the people of this country to take us to the next step on it. So, I think, we’re really excited that election is over now, and we’re hoping that next segment in our industry, especially, I’m just going focus on lodging.

We’re not quite there at ‘19 numbers. And I think we’re just looking for a new opportunity to say, ‘how do we bring the international traffic back to us.’ That’s what we are missing for us is continue to grow.

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I think lodging is really bullish for next three to five years because we’re really resetting the bar of what’s next to happen in this industry because since COVID everybody thought about it. Okay, how long it’s going to take back to get to ‘19 number. And we’re in year 2025. We’re not quite there at ‘19 numbers. And I think we’re just looking for a new opportunity to say, ‘how do we bring the international traffic back to us.’ That’s what we are missing for us is continue to grow.

I think the meeting businesses continue to grow year after year, and I think we have seen a unique, different travel perspective from staycation to adventurous to outdoor glamping. We didn’t have any of that prior to ‘19. So, we’ve seen a great deal of consumer who are looking to experience different for their travel needs, whether going for a work trying to add one or two extra days for their staycation. So, things have really looked different. And NewcrestImage has opportunity to invest in a that those segment that really cater to next three to five years. So, we’ve been really fortunate to be able to take a ride in those investment as well.

Weinstein: So, you’re talking about performance here? As an owner, what are your asset managers doing to drive bottom line? Bottom line is a tough place right now. There are so many expenses. Inflation has caused a lot of trouble. Insurance. You name it, labor. How are you driving bottom line?

Patel: Driving bottom line. That’s the biggest nightmare of any owner operator today or any management company. Because the control. How much control do you have? You own the asset, and the management company has control of the management. But obviously, we’re working really hard on focusing on utility. Making sure, do we have the utilities properly managed because the cost has gone up. So, the only way you can manage is utility. I’m just going pick out 2, 3 segment, so utilities. One item we looked at very thoroughly to make sure, proper led lighting, proper timer, proper utilization of utility and making sure that there is no waste on it.

We’re looking at waste management. Are we having pick up trash 3 times a week, 4 times a week?

Do we have extra phone lines. Can we cut that? Do we have enough Internet? So, we’re just looking at every item holistically.

Insurance is one other item. We’re working with our insurance company to make sure that we’re maintaining the cost or managing that cost if we did not any lost on it.

The other item we’re focus is service contract. We’re working with our vendor partners to make sure that if our cost has gone up, how can we find another vendor who’s able to match the cost or something. And that means we’re changing a vendor partner who we had. That choice isn’t available. If that vendor is not willing to work with us.

So, it is just a huge grind, line item by line item to make sure. How much can we save?

The things we don’t have control is the interest rate because everyone had a floating rate. Their cost has gone up.

Property tax hard to control because every municipality is underwater. So, they’re charging more for it. And so there is variable. And then, obviously, your most important cost is the human capital and payroll labor cost.

And you need the people who are loyal to you. And we’re trying to make sure that we get a good productivity out of our human capital, not trying to ask them to do more, but just be able to work smarter and trying to manage that. So, overall doing all that stuff we’re still able to maintain, not as good as ‘19, but still able to do better job on it. But it is a hard grind to be honest with you.

Weinstein: No doubt. So, what about top line? More recently, in the last 2, 3, 4 weeks, I’ve been reading a little bit more bullish reports about top line -- about both ADR and occupancy looking maybe a little better than expected. What are you seeing from your end?

Patel: I think we’re very hoping for that. So far, January was little softer because of election, and you know just things were out there. But group is having good pace on it. And obviously, when there is enough demand, we’re able to drive the ADR.

So, I think 2025 looking very promising, and the behavior shows from the consumer side, especially the business travel, business transient.

We’re trying to make sure that we get a good productivity out of our human capital, not trying to ask them to do more, but just be able to work smarter and trying to manage that.

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The only things worries me is how companies reacting to layoff. If we see a mass layoff, and I hope corporate doesn’t pull back on travel. So, that is the fear factor. I have a little bit there, that what? What's there to be seen? And because what happened is when you have a 4th quarter earnings coming at q 1. Many companies hit their earnings. And what's really happening? And they're reshaping their travel budget for 2025. So that is where I have a little fear factor that if there is enough layoff or companies trying to cut their travel budget that may hit the travel industry.

And we have seen pull back on the leisure travel a little bit on it, or people have went to international. So, we've seen that little softening side on it. But I hope that somehow we can find a balance approach to that item. Hopefully, we'll get inbound traveler coming from international that is lacking right now. So, I think it's a balanced approach, in my opinion, but still looking positive.

Weinstein: You're known as a bit of a wheeler dealer. You love a good deal. Where is Newcrest when it comes to deals? Are you net buyer, net seller, somewhere in the middle?

Patel: I think, as we said, like you said, we’re net buyer and seller every day. We have enough inventory in the hopper. So, any given day, we're buyers and any given day sellers. I think, in last 24 months we roughly bought about 100 hotel and sold probably 70 of them. And, so we’re continue buyer. Last year we bought 4 hotel and we probably sold 15. So, we'll continue to buy. We're always a buyer and always a seller, and we really like that space. But any given time we own 40 to 50 hotels.

Weinstein: The climate for buying and selling -- does it feel better? Everybody was hoping for a much better interest rate environment by now that hasn't quite materialized. How does that affect your strategy?

Patel: It’s hard because what we are trying to buy the interest rate is still high. We would have hoped it would have dropped by 100 basis point by now. But that hasn't happened. So, it is still a challenge. The bid-ask is still a wide gap margin between buyer and seller, and there are sellesr who really have to sell because of the lender issue or the brand asking them to put Capex, and they must sell.

We’re the logical buyer because certainty of execution. And we're able to buy larger portfolio in different geography. So, we have that opportunity to acquire. So, we still remain bullish this year for acquisition.

Weinstein: Do you think it's going to become more attractive price wise? Any prognostication on price the next 6 months.

Patel: I think the debt has become much more availability. Now CMBS market has opened up. Life insurance came into the market and regional bank, I think, based on the new administration. We may see some relaxation on the banking side of it. So, the lender are we able to more come in. And there is more private credit has opened up in the real estate segment now than the traditional bank. So, I think there is ample data available today. The issue is the bid-ask price. That’s the major issue that we’re seeing. That seller and buyer have their ask is wider gap than should have.

Weinstein: What do you like on the buy side, as far as what type of asset and location? What’s in your sweet spot.

Patel: We’re agnostic of buying anything select-service, focused-service, limited-service extended-stay, lifestyle, luxury nationwide. We like pretty much add value deal, or sometimes the opportunity we can create it. We're not even looking for sometimes add value. We're just saying, ‘hey, let us have the hotel,’ and we put our creative head and create a value on whether operation front, whether brand fixing or you know what's broken. We like to say. Okay, here is opportunity. What's broken on it? And can we fix it based on our ability? That's been our true success is finding something broken and be able to put a time and effort and invest a capital to fix that problem. We're buying people's problem.

I think if you're willing to, if you want to build something and develop something, be a purposeful developer. Don't just build because you're living in that town, or you're seeing a good market and you just build any brand. You have to pick a brand that serves the purpose of a community, traveler demand generator.

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Weinstein: As a developer, what would be your advice to next generation developers? People who want to buy and trade assets?

Patel: I think if you're willing to, if you want to build something and develop something, be a purposeful developer. Don't just build because you're living in that town, or you're seeing a good market and you just build any brand. You have to pick a brand that serves the purpose of a community, traveler demand generator.

So, today you have to, because the cost is very expensive to build and time, it’s hard to find that. So, there's a lot of challenges to build something. So, if you're going build something, it has to have a good purpose to invest your time effort and everything that goes on it.

I think, prior to 2019, we all become a developer and start building everywhere, signing a lot of brands which is still a good business model. But be purposeful. Be authentic that you could execute a deal. You just don't want to sign a deal and tied up a brand and not be able to build because you'll fool yourself at that point.

Weinstein: What would you tell your younger self right now if you could go back 25-30 years?

Patel: I would just say, be focused on it. Anything you take make sure you can execute it because we are in volatile segment. The industry is just all over the board. We live in an uncertainty environment in a good, positive industry. But today you have to make sure that things can happen - anything. So, are you prepared for that? You have enough reserve, be able to have a risk. Take a calculated risk on anything you do. I'm all for growth on it, but you must take a calculated risk and have enough reserve and be able to survive that if there is anything to happen today? We live in a world, anything can happen.

Geopolitical issues and things can slow down. Things can go up. And you know, everything's happened so the world we live in today is unpredictable world, and you have to navigate through those challenge. And if you can survive that, that's your new business model.

Today, there's nothing new, normal. Everything is just like, you wake up and kind of saying, Okay, this is the new new reality.

Weinstein: Mehul Patel, managing partner with NewcrestImage. Many thanks for being here today.

Patel: Thank you.