Success in the hotel sphere requires a strategy for investment and growth. Andres Szita, chairman of the Laurus Corporation, a real estate investment and development company with properties worth more than $1 billion under management, summed up his business philosophy simply: “If it’s perfect, it’s not for us,” he said. Instead, he and his team look for opportunities in growing markets and select assets they can customize to their own tastes.
“Each investment company typically focuses on specific investment strategies,” Szita said, explaining that Laurus has two such mandates. The company’s Ethika platform focuses on value-add (repositioning, restructuring, redevelopment) and top 30 markets, targeting hotel, office and retail sectors in areas that exhibit attractive employment growth and high barriers to entry. “This platform targets investment opportunities, which typically range from $20 [million] to $100 million of total capitalization,” Szita said.
The company’s Queentia Global Capital platform aims at core/core plus, direct hospitality investments, assets that already produce sustainable cash yields, investments that provide attractive purchase prices relative to replacement cost in prime domestic markets, including business hotels holding global brand affiliations.
Once an asset fits those parameters, Laurus’ underwriting team begins studying to better understand the market, focusing on what is unique about the opportunity and the balance between risk and expected returns. Szita said:
“At the end of the day it is a very systematic process. We underwrite probably 30 assets a month, issue no more than three [letters of intent] to acquire and probably win (since it is a competitive process) about eight assets a year.”
When choosing a market for investment, Szita said Laurus considers some obvious aspects (what he calls the “macro level”) like population, income, industries, employment, education, inbound travelers and overall growth. But on the micro level, he said, a developer should also consider the demand generators for the specific submarket where the potential asset operates. These can include trades on similar assets, types of institutional investment activity, markets reports, mortgage information on similar assets, trends, pending construction permits and overall supply and demand.
“We look at markets first before allocating an investment, but the market analysis is also driven by the opportunity,” Szita said. For example, while the company is looking to invest in San Francisco “at a reasonable basis,” Szita and his team have not yet found an opportunity that would work for Laurus’ strategy. “Provided the market fits our investment strategy and an opportunity appears, we will underwrite the acquisition and pursue it aggressively—understanding that, based on return criteria, we can pay only so much.” As such, if pricing exceeds that maximum target, Szita said that Laurus would not hesitate to move on to the next opportunity.
In June 2014, Laurus acquired the Marriott San Antonio Northwest at what Szita calls a “very compelling price” (a little less than $13 million as well as closings costs). The company is now investing approximately $14 million in renovations, to reposition the “very tired hotel” at the top of the competitive set. “This investment was attractive to us from several fronts,” Szita said. San Antonio is the seventh-most populated city is the U.S. and the second-most populated in Texas, he noted, and attracts 26 million visitors per year. While the cost of the renovation exceeded the purchase price, Szita looked at the work as a chance to make the hotel into what he wanted it to be.
“As an investment, the Marriott San Antonio Northwest has the right balance between healthy returns and a moderate investment risk,” he said. “Marriott, as a reservation system, is strong, and the particular location of the property within the submarket is definitely prime since it is in close proximity to USAA, North Star Mall and the South Texas Medical Center.”
THE VALUE OF DESIGN
Design, Szita believes, is an underrated asset in driving return on investment. "Design and beauty drive our decision-making and spending on a daily basis, yet it’s not too often you hear investment managers discussing the topic,” he said. “For many of them, it is all about spreadsheets, numbers and the bottom line. For us, the product is absolutely critical to the success of the business plan." While a hotel can easily determine ROI on a restaurant, bar or meeting space, an owner may overlook the corridors between these spaces. "Your guest, however, won’t forget that corridor when they use it to go from one area to the other," Szita said.
A hotel's entryway and check-in area should reflect the overall experience the property is aiming to provide, he continued. "After check-in, your guest will get on the elevators to go to their rooms, and an opportunity presents itself to improve the elevator landing and corridors leading to the guestrooms." Of course, he acknowledged, hoteliers should invest more in the guestroom and entry than on the transitional areas, but every part of the hotel that a guest sees matters.
When working with designers, Szita added, Laurus' underwriting team determines the budget based on what is sustainable within the investment thesis and target returns. "As an organization, we look at the overall picture and we prioritize but never forget the entirety," he said.
Hero Image: Laurus renovated The Hilton San Antonio Airport Hotel in August 2015.