Ask Leslie Ng, chief investment officer of Interstate Hotels & Resorts, his take on the current healthy state of the transactions market and he gets animated.
More transactions means more new owners and a greater likelihood these owners will be looking for a new operator, which plays to Interstate’s advantage, seeing that it is one of the world’s premier management companies.
“We usually grow the most during either turbulent times or good times when hotels trade. In the current cycle, we look forward to at least another year or two of a very fast trading transactions market,” Ng said.
At present, Interstate has about 450 hotels under management in 10 or 11 countries and a signed pipeline with about 50 more. But unlike pure third-party management companies, Interstate owns about 40 of the 450 of which five are wholly owned with the firm holding sliver equity in the remainder.
“We invest equity usually at the request of buyers who want us to have some skin in the game. They want to align their interests with the interests of the operator. We’ve been happy to do so and have had the capacity to do so,” he said. In most cases, the equity stake can be as small as 5 percent to as large as 20 percent.
Interstate acquired the five wholly owned hotels mostly in 2006-2008. Despite “some rocky times” in 2009-2010, these hotels, which are in “solid markets like Atlanta and Dallas,” have rebounded strongly.
The current strength of the transactions market notwithstanding, Ng doesn’t see Interstate in any hurry to dispose of them. “If we were to sell, it would certainly be with an eye to retaining our management agreements,” he said. “Actually, we’re still in the process of harvesting the investments we’ve made and the capital programs we’ve implemented.”
Intent on continuing to grow its third-party business, Arlington, Va.-based Interstate in July acquired the roughly 70 management agreements of Rim Hospitality. The Rim portfolio is especially strong in California, New Mexico and Texas.
Ng also sees significant opportunity in managing U.S. properties acquired by Asian interests. “Asian investors tend to favor the two coasts. They want quality assets in good locations and they’re willing to pay for them,” Ng said.
Outside North America, Ng sees even greater growth opportunities, noting that locally based management companies, including in Europe and Asia, often don’t have the breadth of experience their U.S. counterparts have. Owners, as a result, often turn to Interstate and its U.S.-based counterparts.
“We’re seeing that particularly in Europe right now, where both investors and the brands have a comfort level with management companies they’ve done business—and been successful—with before,” he said.
As an example, Interstate in August signed a series of deals to operate hotels in markets as far-flung as Amsterdam in the Netherlands, Sarajevo in Bosnia & Herzegovina, Minsk, Belarus, and Astana, Kazakhstan, among others. The brands involved were Holiday Inn, Courtyard by Marriott, Residence Inn, Renaissance and Marriott Hotels & Resorts.
It’s only a matter of time until the locally grown third-party management companies in these markets catch up, Ng predicted. “It’s already starting to happen in Europe, though it’s going to take a while longer in Asia,” he said.
Interstate itself went through a potentially transformative change in late-2009, when the company was acquired by a joint venture between the Thayer Lodging Group and Shanghai Jin Jiang International Hotels. “The new owners’ capital investment came at an opportune time. In hindsight, it allowed us to clean up the balance sheet and gave us the capital we needed to grow,” Ng said.