LOS ANGELES—Greg Friedman has learned the benefits of going with the flow when it comes to economic cycles and their effect on the hotel industry.
Friedman and Mitul Patel launched Peachtree Hotel Group in July 2009 during the most precipitous performance drop in the U.S. hotel industry. That was followed up by an ongoing growth spurt that continues into 2018. Friedman, Peachtree’s CEO, said the company maintains the same approach regardless of the cycle.
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Greg Friedman, |
“We take what the market gives,” Friedman said during an interview held in conjunction with the recent Americas Lodging Investment Summit. “If there’s an opportunity to go buy 50 hotels next year and that makes sense for us, we would do it. If only we can find one hotel, then we’ll just acquire one hotel.
“We’re going to sell whatever is accretive to our investments,” he added. “If we can go out and sell a bunch of our portfolio tomorrow, we would—if we could get pricing that made sense.”
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Friedman and Patel—who serves as the company’s COO—started Peachtree when the pair acquired a hotel and then bought distressed bank notes as the recession deepened.
“We didn’t have a master plan when we started the company,” Friedman said. “We went out and started doing deals, and it led to what it is today. We’re really proud of what we’ve done.”
Since its founding nearly nine years ago, Peachtree has invested in more than 160 investments valued at approximately $1.6 billion, Friedman said. It currently has 75 hotels comprising 8,991 rooms, including owned hotels and lending notes. Peachtree has 65 corporate employees.
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Brian Waldman, |
The company focuses on premium brands in the select-service, limited-service and compact full-service arenas, according to Brian Waldman, SVP of investments. SVP Brent LeBlanc added Peachtree has evolved since its inception.
“It’s an evolution of the company to go from an acquisition company to management to actually lending money on hotels,” LeBlanc said. “In any cycle, our platform can be successful. We can lend money at 70% to 80% of cost and feel good about our position in the capital stack. And in the bad times when (the industry is) in a lull, we can buy a bunch of hotels.”
Peachtree has well-defined goals for the first quarter of 2018 as it is targeting seven hotels—which comprise more than 800 rooms—for acquisition, the executives said. They declined to reveal the specific targets. In addition, Peachtree plans to develop 11 hotels for roughly $255 million totaling about 1,300 rooms throughout Florida, Georgia, Indiana and Tennessee.
Friedman summarized the company’s structure this way: Peachtree Hotel Group is a hotel investment management platform that manages multiple fund and investment vehicles. It invests on the equity and the debt side of deals. It owns multiple companies that service the investments—a hotel property management company (Peachtree Hospitality Management), a hotel development and renovation management company (Peachtree Hospitality Development) that develops and renovates anything PHG invests equity in, and a hotel lending platform called Stonehill Strategic Capital that originates, underwrites and services the debt market.
Peachtree and Stonehill remain independent of one another—Peachtree does not use Stonehill to finance its deals so it can avoid any conflict of interest, executives said.
Peachtree typically acquires 100% of an asset through its investment funds, Friedman said. Peachtree Hospitality Management manages the assets.
“If you bring us a deal, we don’t care if it falls into Peachtree or Stonehill; none of us are focused on it’s one fund versus the other,” Waldman said. “We want to find the best execution for us and the counterparty.”
A successful 2017
Peachtree closed approximately $200 million in acquisition and development deals in 2017, according to Waldman.
“It’s a tough time to find deals, but we’ve done a good job finding deals that sort of match our criteria,” he said. “By being outside of the top 10 markets, it’s just given us a lot more opportunities; there are a lot more deals to look at.”
The company closed on five of the 500 deals it looked at in 2017, LeBlanc said.
Last year’s deals included the addition of three hotels in separate transactions in September: the 123-room Element Denver (Colorado) Park Meadows; the 135-room Hampton Inn Green Bay (Wisconsin) Downtown; and the 136-room Aloft Tempe (Arizona).
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Brent LeBlanc, |
“We get 20 calls a week (asking), ‘Can you do my new-construction deal?’ because what they’re finding locally is their regional banks are pulling back in leverage, so it’s tougher to get those hotels in the ground and under construction,” LeBlanc said. “So we’re seeing a pent-up demand there. “
Friedman said many regional and community banks remain skittish to provide hotel construction loans, and those that are lending are mostly within the 55% to 70% loan-to-value.
“It creates issues for anyone that’s trying to develop a new project because it’s requiring them to put in a lot more equity, and obviously that’s going to drive up in terms of whatever that project needs to generate to make sense,” Friedman said. “The banks have continued to be very selective in what they’re financing. They want to sponsor what they have a relationship with, more than just a money relationship. They want to see that they’re truly banking with that bank; having deposits with them. It’s hard to have 20 different banking relationships.”
Peachtree in several cases chose to develop a hotel because the prices for acquisitions in some markets are too high, Waldman added. The company completed five development deals in 2017, including:
- the 98-room Hilton Garden Inn Jackson, Tennessee;
- the 106-suite Home2 Suites by Hilton San Antonio (Texas) Stone Oak;
- the 140-room Hotel Indigo Celebration Pointe in Gainesville, Florida;
- the 100-room Courtyard by Marriott Kennesaw, Georgia; and
- the 90-suite Home2 Suites Prattville, Alabama.
Seventy percent of Peachtree’s investment portfolio is Hilton- or Marriott-flagged, according to the executives.
“Typically, we prefer hotels less than 10 years old,” Friedman said, adding that the company has also purchased older hotels that needed substantial renovation work.
One example is the acquisition of the Holiday Inn in Atlanta’s Centennial Park—a 30-year-old hotel that Peachtree acquired, put in $20 million in renovations, rebranded it as an AC by Marriott property and subsequently sold.
“We don’t have a problem buying an older property if there’s an opportunity to create value and rebrand it,” Friedman said.
Value remains the name of the game
Peachtree, like many other investors, is searching for acquisitions that provide value-add opportunities.
“You still can find value, even at the top of the cycle; it’s just a lot tougher,” Friedman said. “There’s always some corner where it makes sense to be investing in today, and we feel like we’re still finding some of those opportunities. But you have to be really patient.
“We’re probably finding more development deals than finding true heavy value-add deals where you can only do a major renovation,” he added.
“It’s really important to us that we’re buying assets where we can create cash flow,” Waldman said.
LeBlanc said that in economic environments such as what exist today, it’s existing relationships that create the best opportunities to find value-add deals.
“It’s about being in the right place at the right time, and sticking around the hoop,” LeBlanc said.
Value add for Peachtree means renovating an asset, changing the management company or finding a market with shifting performance metrics—especially on the demand side of things, according to Friedman.
“We’re extremely cautious, just given we’re in the late stages of this current cycle,” Friedman said. “We feel like there’s still some leeway in this cycle, but we’re being very defensive in everything we’re doing, whether it’s investing on the equity side or the debt side.”
“Given where we are in the cycle, we have to be careful where we put out dollars,” Waldman added. “But because we have the ability to go into secondary markets and we’re looking at so many deals, I think 2018 will still be a good year for us in terms of putting out dollars. We’re just working a lot harder for it.”
The positive vibe carries over to the Stonehill side of the business.
“We see a big opportunity for our debt platform,” LeBlanc said. “As banks pull back and it gets tougher, we can be flexible and really play in any part of the capital stack. We feel the next 12 or 18 months will be very good for us.”