McNeill Hotel Company, an owner, developer and manager of hotel properties based in Germantown, Tenn., is going double or nothing. The company has big plans for expansion into secondary and tertiary markets within the U.S., and thanks to a $150-million deal with Almanac Realty Investors, the real estate investment arm of Rothschild North America, McNeill’s options are open.
Mark Ricketts, president and CEO of McNeill, said the company began looking for investors in early 2017. The company had worked with Almanac previously, and began talks with the company last October regarding potential investment. Ricketts said Almanac was an attractive partner because the company has previous experience investing in the lodging industry, and McNeill’s existing platform of 18 hotels resonated with Almanac.
According to Chris Ropko, CFO at McNeill, the company will be seeking to deploy its newfound $150 million strategically, with one third targeted for development and two-thirds put to use in acquisitions.
“Right now there are a decent number of acquisitions in our pipeline, so it may be skewed a little more in that direction,” Ropko said. “Ideally, it will balance out to two-thirds in acquisitions.”
Some of that acquisitions capital has already been put to use. On Oct. 4, McNeill closed the purchase of a 137-room Homewood Suites by Hilton in Carmel, Ind. While the property’s purchase price has not been disclosed at this time, the hotel completed a $6.4-million renovation as recently as fall 2016, and McNeill also set aside $1 million for a further property improvement plan.
This Indiana purchase is in line with what can be expected from McNeill in the coming months. Ropko said the company is heavily focused on projects in secondary and tertiary markets because pricing there tends to be more favorable. Still, McNeill is unlikely to venture too far from the top 25 U.S. markets.
“Anywhere we investigate must have strong and sustainable demand generation,” Ropko said. “We have a lot of investment taking place right now in university markets, as well as areas with strong biotech development.”
McNeill’s strategy is clearly mindful of a potential downturn. Ricketts volunteered that university markets such as Morgantown, W.Va., and Waco, Texas, have consistent, predictable demand trends that don’t fluctuate wildly even when the economy suffers, and as uncertainty increases heading into 2019 it pays to pick a safe bet.
Perhaps because of this, Ropko said investors like McNeill are seeing more instances of institutional investors sniffing around secondary markets in search of hidden gems. However, he still has yet to see a full-fledged push from institutional capital in these markets to the point where valuable assets are difficult to locate. A more pressing challenge, he said, comes from increased supply.
“I don’t know if institutional investors know how to underwrite these markets, but they may not appreciate the demand drivers as much as we do,” Ropko said. “New supply is more pressing, since it creates potential competition for assets we are targeting, but institutional capital drives yields down, making it a little more tenuous for us.”
“Another issue is the quality of flags available in some markets,” Ricketts said. “We’re staying with branded hotels, that’s our strength and we are a proponent of the brands.”
Branded or not, Ricketts pointed out that McNeill is looking for unique hotels in order to differentiate its portfolio from others. The company’s existing stable includes a Hampton Inn outside of McNeill’s home base of Germantown, Tenn., which offers generously proportioned outdoor seating options.
“We are trying to make sure our offerings are unique,” Ricketts said. “This is what the customer wants. We know people want to be outside, so we are looking at offerings that provide that, such as rooftop bars.”
A Different Take
For development, Ricketts said McNeill makes use of an owner advisory committee, as well as any brands attached to a project, to inform a property’s construction in order to take advantage of any unique positioning available.
“They tell us to look at certain designs, at how to incorporate guestroom design into the surrounding area,” Ricketts said. “From a development standpoint, it’s great to have that relationship.”
In terms of the McNeill’s operating structure, the company’s officers will report to a board of directors comprised of its own members and Almanac's, but aside from that Ropko said it will be business as usual.
“Almanac invests in platforms, not specific real estate,” Ropko said. “Over the past five years we have negotiated with them a lot on several deals. They do a lot of diligence ascertaining management teams, with who they are getting in bed with, so to speak. Once they deem a platform worthy they don’t want to disrupt that. It’s not a turnaround private equity play, it’s true growth.”
Of course, time is money, and while Almanac may have invested in a platform it also invested in what will eventually become a larger hotel portfolio. Ropko said there is no firm timeline to double McNeill’s portfolio, but the venture with Almanac has an investment window of 36 months. Time enough to be picky, but not too picky.
“If we can find something unique, it will jump to the top of the list,” Ricketts said.