HB
Carey Watermark Investors has been on a roll in terms of acquisitions, particularly this summer. How would you characterize the REIT right now in how it’s shaping its portfolio?
MM
There’s no question that we have experienced a pronounced growth phase. This has been consistent with our view of the market opportunity with demand growth outstripping supply, and an attractive acquisition pipeline. We believe that we have assembled a diversified portfolio that is consistent with our overall strategy.
HB
In the past year, CWI has invested in an interesting mix of properties in diverse cities, and across a variety of product types and markets. Are you looking for a particular balance?
MM
We believe that investing opportunities in the lodging space today are not limited to one subsector. We have been particularly active in three specific sectors: premium-branded, select-service properties in urban markets; full-service hotels; and resorts. There are, of course, many variants within each of those primary sectors. Given the more complex operating models associated with full-service hotels and resorts, these assets often exhibit more opportunities to employ asset-management disciplines to impact operations and profitability; more levers that can be pulled, if you will. Select-service properties may not present the same degree of value-added opportunities but often exhibit higher operating margins and therefore, current returns.
HB
As the REIT’s portfolio grows, do you expect to narrow the type of content it holds, e.g., fewer midscale, more upper-upscale/luxury?
MM
We will continue to pursue attractive acquisition opportunities and are not limited by either geography or property type within the lodging space. We evaluate each opportunity both on a stand-alone basis and in terms of how it will fit within our overall portfolio. I noted earlier that we are opportunistic in nature, and given that, we will be driven by our research and perceptions regarding markets and specific opportunities. So while we are pleased with the portfolio that we have accumulated, the portfolio mix may evolve as we grow.
HB
In looking across some of CWI’s recent deals, significant chunks of investment dollars are earmarked for capital improvements. Is it just a given now that investors will have to bat clean up as part of getting a deal done due to CapEx stalls during the downturn? Is this a good thing for investors who may be able to negotiate a better price on a transaction?
MM
During the downturn, owners went through a period of postponing and canceling CapEx projects, and as assets trade today, better-capitalized new owners are, in many cases, spending dollars that are overdue. This scenario has played out in a number of our recent purchases. U.S. hotel physical stock is therefore improving as this process continues to unfold; however, there are other reasons for capital expenditures within our and other portfolios. First, there is the ongoing process of brands exploiting changes in ownership to cause upgrades, thereby ultimately improving brand quality over time. Second, we and other investors make capital expenditures as one of a number of strategies for adding value to assets.
HB
What are some of the determining factors that mark an opportunity as a good investment for CWI, e.g., revenue generators, market barriers?
MM
We assess each opportunity across a series of filters. Quality of the real estate and the physical plant, barriers to entry, diversity of demand generators, economic fundamentals in the local economy, and branding and management are all factors that we evaluate. Of equal importance are financial structures, and in the instance of joint ventures, our underwriting of the joint-venture partners. We also evaluate prospects for enhancing value through repositioning, strategic capital expenditures and revenue, and expense management.
HB
Many in the industry, even those with deep pockets, feel they can’t compete with REITs in snagging the “better” deals. Do you feel CWI is sitting in the catbird seat?
MM
I would say our success is less a function of our financial structure than it is our investment style and track record. We employ a flexible investment approach where we work with multiple brand and management companies, which we believe broadens our investment alternatives. Similarly, we enter into joint ventures for some of our investments. We believe that a long track record of providing joint-venture capital to lodging owners and operators also expands our universe of investment alternatives. We have been pleased with CWI’s ability to source and execute on what we believe to be attractive opportunities.
HB
As an industry veteran, particularly on the financial side, do you feel there have been lessons learned coming out of the recession?
MM
We’ve seen three significant industry downturns since the early 1990s. While there were differences in each instance, each time markets have come back strongly. Travel is a dynamic industry with strong demand drivers. I have watched this industry become more transparent and efficient over the course of the past 30-plus years and I believe that serves everyone well.