WASHINGTON, CT—The economic downturn of the past several years has claimed its share of victims in the hospitality industry, but the very same conditions can also present opportunity for those experienced enough to recognize it. As such, Waramaug Hospitality, LLC, which was formed by hospitality veteran Paul Nussbaum in 2011, is building a hotel portfolio by acquiring some of the many overlevered assets that have become available in the market at prices well below replacement cost.
The company—which represents a joint venture with an international equity fund and is named after nearby Lake Waramaug—also includes an asset management subsidiary, Waramaug Hospitality Asset Management, which is headed by Jay Litt. Nussbaum and Litt worked together at Patriot American Hospitality in the late ’90s and have remained in contact since. Nussbaum was founder and chairman/CEO of the paired share REIT, which owned the Wyndham brand, and he now serves Waramaug in the same role.
Waramaug Hospitality has acquired four assets in the past 18 months for some $40 million overall through joint ventures with management firm Interstate Hotels & Resorts and a private investment group, but Nussbaum noted that’s just the beginning. “We’d like to grow to at least 20 assets. We haven’t made a serious dent in the capital line that’s available to us. We have very deep pockets,” he said.
Nussbaum noted that most of the properties the company is looking at are distressed and what he described as “turnaround stories” or properties that have been “capital-starved.” But he maintained the company is in an advantageous position to acquire these assets versus many of its competitors. “The most interesting aspect is we have the financial strength to be all-cash buyers,” he said.
Meanwhile, Waramaug has invested some $24 million in renovations collectively in the four assets that the company has acquired. The most recently completed deal was the acquisition of the 295-room Williamsburg Hotel & Conference Center, which was formerly a Marriott. Following an anticipated $7.5-million renovation, the hotel will be converted to a DoubleTree by Hilton. Nussbaum feels this will help tap into the property’s vast potential for group business. “It has resort implications with more than 50,000 square feet of meeting space. The hotel can service a much larger area, and bring people from a much larger radius,” he said.
Just prior to the aforementioned deal, Waramaug opened the 265-room Sheraton Tampa East in July following an investment of $19 million for the October acquisition and
subsequent renovation. The hotel was converted from a Crowne Plaza. In addition, in January, the company acquired the 300-room Crowne Plaza Columbus North in Ohio, and it got started in the acquisition game with the Sheraton Denver Tech Center in Colorado in February of 2011. Both of those properties have retained their flags. Interstate is managing all four of the company’s hotels. Nussbaum added the company also owns a foreclosure judgment and underlying note on the Holiday Inn in Budd Lake, NJ.
He acknowledged that while the company has been able to find relative bargains, it’s the skill sets of Litt and his team that give him the confidence that the company can handle these multiple, deep turnarounds. “We focus on the special capabilities of Jay and Rick Erickson [project manager]. It gives us a real leg up in the marketplace,” he said.
Litt, for his part, previously worked for ITT Sheraton and was chief procurement officer for Patriot American, which acquired Interstate Hotels & Resorts before its merger with Wyndham International. He identified some of the keys to a successful turnaround. “The key thing to stress is ramping up the properties as quickly as possible. We like to get the PIP [property improvement plan]moving quickly so we can get it done sooner than later. We also focus on infrastructure and things that can help improve efficiencies,” said Litt.
He commented that the addition of new management to a distressed hotel can make a huge impact on the bottom line rather quickly. “When buying a property that has not had professional management, the result [of new management]does have a marked ability of raising rate and occupancy,” he said.
He further noted that working with Interstate has been “very good” in realizing additional efficiencies and it has a “very sophisticated yield management system.”
Litt credited Nussbaum’s extensive hotel experience for helping the company increase its chances for successful turnarounds. He noted that “one of the strengths Paul brings is looking at an area and feeling which brands will work in that area.”
Litt maintained that the company likes the Sheraton and DoubleTree flags, as well as brands with strong customer loyalty programs. He added, “Interstate’s ability to be a management company for any brand is a strength,” he said.
Continued growth
Nussbaum noted that the company is looking for properties in markets with multiple demand generators and that most of its pursuits have been realized. “There’s competition for most things, but we’ve been successful more than unsuccessful when we’ve gone after something we really wanted. They know we’re an all-cash buyer,” he said.
Nussbaum noted that while the company is not necessarily looking to flip the assets, Waramaug’s also not looking to hold them for an extended period. “We generally have about a five-year horizon; we’re not looking at a 20-year window,” he said.
The company expects to continue on its growth plan and Nussbaum sees more property becoming available on the select-service side. “We’re going to be active acquirers for the next couple of years at least,” he said, adding he thinks the company can take advantage of the current conditions. “The investment window is going to remain open at least through 2013, 2014 maybe.”