One client that has worked with GRS Group on both the due diligence and title side is Peachtree Hotel Group. The Atlanta-based firm owns more than 30 hotels in the Southeast, most of them limited-service assets, and works in all aspects of this commercial real estate sector, including hotel management and construction. Jatin Desai, Peachtree’s chief investment officer, spoke with us about what about the current trends in the hospitality sector and what his firm is up to.
What is the attraction to the limited-service sector in hospitality?
It’s performing well because you’ve got a variety of brands, and there has been a shift in consumer preferences to be in executive lifestyle brands that are coming up that are more hip and more chic. They offer more select-service-style amenities. Some business travelers want to get in and out of the hotel. They don’t necessarily need to have the full-service experience. There is also a fair amount of distribution now. In the last 15 years there has been a huge number of limited-service hotels built throughout North America. They’re touching smaller markets, the secondary and tertiary markets where business travelers are going. They can stay at a Hampton Inn in Smyrna, Ga., or other small towns. That’s part of why, from a business standpoint, you can actually manage the expenses more efficiently. They’re more profitable from an ownership perspective. Particularly in downturns, you can manage the P&L a little more efficiently. As the demand goes down, you’re able to modify your labor structure and expenses. In full-service hotels you have to keep the same level of amenities, like the bellman and the room service. Items like that, which aren’t likely used, still have to be offered. In limited service, you don’t have those additional expenses.
But full service is still strong in downtown business districts?
There are different levels of full service. You’ve got the big-box meeting houses that are your downtown, 500-plus rooms with convention spaces, and those guys thrive in downtown markets and specialize in those locations. Where you’re seeing full service thrive are places like the Westin Tampa Bay. It’s a smaller-box Westin that’s found its niche in the downturn. It’s not massive, only 250 rooms or so. We purchased the Charleston Crowne Plaza, it’s only 166 keys. We purchased the Embassy Suites in Williamsburg, Va., and that’s only 164 keys. These smaller full-service boxes work in these secondary, smaller markets where you do have some need for full service, and you’ll get a rate premium for it. But you can’t have a 250 or 500-room hotel in smaller markets. The size of the full-service box has to be more appropriate for these locations.
The hospitality acquisition market seems to be heating up. What are you up to transaction wise?
There have been seven deals so far this year. We’re still seeing a fair amount of activity. Pricing has definitely gone up, but so have ADR’s (average daily rates) and so has occupancy. Valuations are getting higher, so it’s more difficult to find the value-add deals because a lot of them have either been picked off or the pricing expectations are too high. We still think that there’s still deals to be had in the right markets. But with Blackstone and some of the larger players doing portfolio trades, you can see how pricing has really shot up on the limited-service side.
Are you looking to expand outside of your core in the Southeast?
We’re pretty much Texas and east right now. We go up to the Midwest and up the East Coast, but we like our geography, and we can efficiently manage our properties from where we’re at in Atlanta. If we were to expand out West, that expansion would be very thoughtful as opposed to just trying to do a bunch of deals. We are working on that, but we are very happy with our geographic footprint right now.
I’ve heard that if interest rates rise, the hospitality sector will fare well compared to other types of assets. What is your take on that?
The most fundamental thing about hotels is that they are repriced daily. We’re not in long-term leases. We don’t have tenants that have five-year terms, or whatever the case might be. If interest rates go up, the expectation will be that the economy is better, and that would lead to the ability to increase average nightly rates. The relative impact on our NOI will be pretty minimal because, as the economy grows and the interest rates go up, we’ll be able to have higher revenues and higher NOI’s. That’s the theory, at least.
Are there any new initiatives that Peachtree is putting into place that you’d like to share?
We’ve always done more off-market transactions. We’re not really competing with the broader market. That’s really been our niche. We try to find a way that we can be creative in structuring, some structure where both sides can benefit. There’s really nothing different that we’re doing going forward, but we continue to do deals that are more off market, more structured and a little more creative than the typical transaction.
How did your relationship get started with GRS Group, and how have they served you in ways that other firms haven’t?
We met Andy Brownstein through one of my colleagues who works here. He came and told us about the title work that GRS Group does, and some of the due diligence services they provide. Obviously with our assets we do Phase I‘s, PCR’s, surveys and other things, and the next deal that came up that needed a that kind of work done, we hired them. GRS Group has done at least eight reports for us and closed on one transaction’s title work.
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