ROSEMONT, IL—With much of the industry spending the past few years on a deal diet, First Hospitality Group last month decided to feed the increasing appetite of lodging investors, carving off a portfolio of 11 hotels and putting it on the plate of purchaser Starwood Capital Group. The purchase price was not disclosed for the mix of six Marriott-branded products and five Hilton-branded hotels.
According to Robert Habeeb, president/COO of FHG, the hotels are all “performing” assets. “We saw there was demand in the market for high–quality product; it’s a good portfolio. At the moment, there seems to be an appetite in the market for high-quality assets and not a lot of high-quality assets out there,” said Habeeb.
The select-service properties operate under the Hampton Inn, Hampton Inn & Suites, Hilton Garden Inn, Fairfield Inn, Residence Inn, SpringHill Suites and TownePlace Suites flags and are located in heartland states, including Indiana, Minnesota, Illinois and Ohio.
The COO said the multimillion-dollar deal, which brings back a long-term management contract to FHG through an affiliate that also maintains an equity interest in the portfolio, allows the company a platform for growth. “Because we were able to realize some proceeds from the transaction, it gives us some seed money to grow our own portfolio as well,” said Habeeb, who saw the deal as a “win/win.”
From that portfolio, FHG last September “cobbled together” a selection of assets for an on-market offering, with some assets substituted over time as Starwood Capital did due diligence. “Where there was an asset where we seemed to be different in terms of our view of the value, we were either able to bridge the difference or, in one case, we dropped a hotel out and put another one in,” said Habeeb. In total, Starwood Capital gained 1,234 rooms in the deal.
The deal also strengthens FHG’s platform in third-party management, the executive contended. “At one time, we managed strictly for our own account. We’ve taken another big step toward diversification with this transaction where we’re putting in increased resources on the third-party managed side…right now we’re about 50/50; half owned, half managed.”
FHG currently has 53 properties.
Like this deal, which was handled by The Placencia Group, Habeeb sees opportunity ahead for the industry as well as FHG. “We think the market is starting to come around and there’s going to be a lot of opportunity in the next 18 months; we’re putting ourselves in what we believe is a good position to take advantage of it,” he said.
Habeeb said FHG is “really cranking up our development engines again because even though we know the economy’s got a long way to go before it’s back to health again, we’re probably hitting that point in the cycle where it’s prudent to start looking at acquisitions and development. We see some freeing up of credit; we had a strong balance sheet to start with and this (Starwood Capital) transaction helps us really shore up a very strong balance sheet. All those factors together have caused us to get very aggressive in looking at acquisitions and development.”
For example, FHG, through affiliate First MKD, LLC, bought the Loyalty Building in Milwaukee, WI, a historic office building that is now under construction as an estimated $20-million adaptive reuse project that will eventually yield a Hilton Garden Inn of approximately 130 keys.
Habeeb said the deal was attractive on several fronts: the robustness of the downtown market; entrée into the market; “and the building had really good bones. It’s a very beautiful building.”
The Loyalty Building was part of a two-building deal FHG closed. The other structure—the Mackie Building—is opposite the Loyalty Building and houses the three-story Grain Exchange Room used for social events and office space. FHG will retain that model with the expectation it will be a revenue generator for the new hotel when it opens later this year.
Habeeb said this latest venture was analogous to what FHG had done previously in Indianapolis, IN, converting a building listed on the National Register of Historic Places to the Hilton Garden Inn Indianapolis Downtown Hotel.
Additionally, FHG recently bought the Federal Building in downtown Omaha, NE. In partnership with Nelson Development of Des Moines, IA, FHG is investing more than $20 million in adapting the property, which is now under construction to become an approximately 150-room Residence Inn by Marriott that is slated to open in 2013.
Habeeb said the company will continue to be proactive in sourcing deals and is looking at “a couple of other ground-ups, as well as a couple of acquisitions now.” He added FHG has “had really good luck” with doing adaptive reuse projects.
“The buildings generally convert well to a hotel, but like with any old building, you have to do your homework; you have to know what you’re doing because you can certainly get yourself into a lot of trouble very quickly with surprises. Old buildings aren’t as clearly documented as new ones, so you have to do a lot of detective work to make sure there aren’t conditions behind the walls that are going to be ‘spoilers’ once you get under construction.”
Overall, Habeeb said growth expectations for the year “could be as many as 10, but certainly at least five. That gives us a full plate.”
