To grow a portfolio of fewer than 30 hotels to more than 100 is a feat that presents both challenges and opportunities.
In a deal with a $1.1 billion implied total enterprise value, commercial real estate owner Flynn Properties and global alternative investment firm Värde Partners acquired an 80% stake in 89 select-service and extended-stay hotels from affiliates of Highgate and Cerberus Capital Management.
The deal grew Flynn Properties’ select-service portfolio to 115 hotels.
The company took a big bite and needs to digest it a bit, but will not stop looking for deals, said Greg Flynn, founder, chairman and CEO of Flynn Properties and its affiliate, Flynn Restaurants. Both companies are divisions of San Francisco-based Flynn Holdings.
“We wouldn’t have gotten into this if we didn’t have a view to it becoming potentially as large as our restaurants,” he said, referring to the 2,400 restaurants his company owns and operates across 44 states.
Achieving Scale
Over the past 25 years, Flynn Restaurants has grown to be the third-largest operator of restaurants in the U.S., behind only Starbucks and Chipotle, Flynn said. It’s through that experience that he said he’s come to appreciate the benefits of scale in a consumer-facing operating business. It helps not only in purchasing and administration but also attracting talent.
The best companies can attract the best people, and the best companies are able to grow and create scale, he said.
“They have lots of movement and therefore generate a lot of upward mobility opportunities for their people,” he said. “We’ve really benefited from that in our restaurant business, and I think we can do the same on the hotel side.”
Flynn’s company first entered the hotel industry through its 2006 acquisition of the Esperanza, Auberge Resorts Collection, in Los Cabos, Mexico. The company today has five hotels in its luxury hotel portfolio. Flynn said as much as he loves luxury resorts, it's not a business that can grow in the way chain restaurants and select-service hotels can.
By focusing on branded select-service and extended-stay hotels, the company seeks to grow its portfolio in the most scalable way and with the broadest appeal to guests, he said.
“It delivers the best value for money, and therefore it's the largest segment and it’s the fastest-growing segment,” he said. “It did the best during the pandemic, is doing the best coming out of the pandemic, and so I'm just a big believer in the segment.”
Flynn Properties and Värde Partners worked together last year to acquire a portfolio of 20 Marriott International- and Hilton-branded select-service hotels from Apple Hospitality REIT.
The deal with Highgate and Cerberus Capital Management is the mutually beneficial result of two executives with great respect for each other looking to collaborate, Flynn said.
Flynn said he has gotten to know Mahmood Khimji, co-founder and co-chairman of Highgate, over the years, and the two had been looking at possible projects to collaborate on.
During the pandemic, Highgate had grown its select-service portfolio through acquisitions and was looking to lighten the portfolio, so the two companies were able to strike a deal that worked around some of current challenges in hotel transactions.
“We were able to come up with a structure of the deal that works very well for them and works very well for us,” he said.
Highgate, along with Cerberus Capital Partners, retains a 20% interest in the hotels. Highgate will also continue to operate the properties.
Portfolio Plans
Flynn said his company has set aside capital to continue to upgrade the hotels in the deal, almost all of which require property-improvement plans or remodeling.
“That’s the main business plan, to be honest, and to ride the rising tide,” he said. “I believe our investment is at a very favorable basis to begin with, and with the proper upgrading and the proper sort of market recovery from COVID, I think it will be really well-positioned, and we will benefit from all the scale economies that I believe exist in the business.”
The transaction market is tough, and financing has become expensive and less available, Flynn said. Where his company might find opportunities, though, is in portfolios for which the debt is maturing. Fewer distressed assets have hit the market than expected, but when they arise, Flynn Properties will consider them, he said.
Though an opportunistic buyer, the company also looks for stabilized properties, Flynn said.
“We’re playing a very long game, so it doesn’t have to be buy low, sell high quickly,” he said. “We can buy quality, pay a fair price and own it for the long term.”
As Flynn Properties continues to evolve its portfolio, it’s possible the company may expand into hotel operations as well, Flynn said. Flynn Restaurants already operates its franchised restaurants.
Flynn Restaurants has built roughly 90 new restaurants this year, but Flynn said he prefers to buy assets below replacement cost and then invest to make them competitive.
“That's what we're doing here,” he said. “We’re well below replacement cost, and even after we spent all the capital to fix them up and make them competitive, the product will still be well below cost.”
The select-service model has simplified food-and-beverage offerings — usually breakfast in the morning and a bar in the evening — making it easier to operate, he said. However, there is potential for a crossover from Flynn Restaurants into its hospitality business given the expertise in running franchised restaurants.
It may be as simple as building an Applebee’s Neighborhood Bar & Grill in a hotel’s parking lot, Flynn said. It’s something his company has done with hotels belonging to other owners, so it’s an idea worth exploring, he added.