Vertically integrated boutique hotel company Life House has secured $100 million in equity commitments (approximately $250 million-$300 million in total asset value) from Boston-based investment and development firm Blue Flag Partners to fund its expansion through the acquisition of seven to 10 additional hotels.
The investment comes two months after Life House took over operations for The Roberts Collection, a 58-room hotel spread across four houses in Nantucket, Mass., that Blue Flag acquired in April for $25 million. “They've been really impressed with how we've been executing it,” Life House CEO/Founder Rami Zeidan told Hotel Management, citing the company’s tech-centric operations approach as a main factor in the company’s appeal.
Last year, Life House raised $70 million in funding between venture and real estate capital with investment from Global Founders Capital, Rocket Internet, Comcast Ventures, Trinity Ventures, Henley Investments and others. At the time, the company claimed to be the first U.S.-based lifestyle hotel company to be backed by such capital.
“We're not diluting our venture capital investors with this raise,” said Zeidan. “We are keeping this separate, so our venture capital investors can continue to get venture capital returns by owning our technology company, and our real estate capital partners can get real estate returns and [hire] the operating company that is backed by venture capital. It's somewhat of a standard opco/propco [operating company/property company] structure.”
Life House was founded in 2017 by Zeidan and Yury Yakubchyk, a technology expert and entrepreneur. Zeidan got his foot in the door through the real estate side of the hotel business, working in private equity and then in acquisitions, hotel asset management and brand management at Starwood Capital. After that, he was a director at hotel operator Sydell Group, giving him a comprehensive education in operations, brand management and mergers and acquisitions.
“What was particularly interesting was the fact that hotel rooms are primarily sold online and the businesses are not set up like online e-commerce businesses,” he said. “The technology therein is really antiquated.” Hospitality technology is rooted in real estate management, he explained, “and so you have all of this outside-of-industry technology being pieced together in a messy way” that causes inefficiencies in operations.
Zeidan and Yakibchyk began developing a different platform that would streamline a range of processes, making it easier and less expensive to both develop and manage a hotel, “driving incremental revenue and automating operational efficiencies” and ultimately yielding a return on hotel investments that is 30 percent to 50 percent higher for its real estate partners than traditional management companies. “We pass on those savings to our customers, so we're able to deliver a boutique-hotel experience at a budget-hotel price point,” said Zeidan.
Larger lifestyle brands are typically backed by real estate equity groups with limited amounts of capital and can only grow as fast as their capital will allow them, he said. “The Ace Hotels of the world, the Sydell Groups of the world, the Standards of the world—after decades, they still only have 10 hotels or so across the country or world,” said Zeidan. The small footprints leave travelers “locationally underserved,” forcing them into certain neighborhoods if they want to stay in the kind of hotel they like, he noted. “So we saw an opportunity to create a network of hotels with several in each market that can cater to travelers without them having to make sacrifices on price, location or experience.”
Life House opened its first hotel late last year in Miami’s Little Havana neighborhood and will have five more hotels in the city by the end of 2019, as well as a further five beyond Miami. In total, Life House has signed more than 500 rooms across nearly 10 projects so far, spending less than $5 million of venture capital and positioning the company to raise a Series B round of funding this summer.
Zeidan’s asset-light growth plans for Life House are focused on markets with high hotel prices and where home-sharing services are highly regulated. Miami’s Airbnb regulations and seasonality made a boutique brand a good fit, he said, and the high prices on hotels in Nantucket made that city optimal for a lifestyle brand. “And there's an under-supply of hotel inventory there,” he added.
By next year, Zeidan expects Life House to have more than 20 hotels open or under construction across the country, with new developments in Brooklyn, N.Y.; Denver, Colo.; and Lake Tahoe, Nev. “Ninety percent of our hotels are historic buildings that we convert and re-imagine into lifestyle products,” he told HM. In developing each property, the company’s creative team examines both the logistics of the asset and the narrative of the building and its location. “Historic buildings have a tremendous amount of stories and inspiration to draw from," said the executive.
Blue Flag will own the Life House hotels that its $100 million investment will fund. “We are seeking to deploy all of this in the next 18 months,” Zeidan said, estinating the $300 million in buying power could ultimately translate to as many as 15 hotels like the Nantucket one in other markets.
Looking ahead, Zeidan expects to bring Life Hotels to Canada, Mexico and beyond. “We're looking at a project \ in the U.K. and one in Spain as well.”
Small and Profitable
While Zeidan expects significant growth for Life House in the coming years, he does not expect to go after large properties. Instead, the company will focus on smaller properties with fewer than 120 guestrooms. “We can make a small hotel profitable—or more profitable—in a meaningful way,” he said, acknowledging the niche can also have low profit margins. “They have so [many] fixed expenses and GM and director of finance, housekeepers and housekeeping manager—all those positions in a small hotel really add up.” By automating everything from the front desk to front-desk management to the housekeeping supervision, the technology can bring those costs down and make a small property much more profitable, he suggested. “We've built software that basically acts as middle management so that a housekeeper doesn't need a human-being supervisor, and our community managers can basically act as GMs. And then we've automated revenue management so all of the revenue is [handled] at our corporate entity. So, the hotel can really operate efficiently," said Zeidan.
Life Hotels has data from its existing hotels to back up its savings claims. “It's just a function of driving returns to NOI,” he said. “By taking a hotel from basically unbranded to an upper-midscale lifestyle hotel, there's data that suggests that a cap rate for that hotel should be lower because it's safer.” That segment of the chain scale, he added, was the least impacted by the last two recessions, making it a good investment option for a volatile economy. “Lifestyle hotels tend to target travelers that are less sensitive to price and are more focused on the experience.” At the same time, Zeidan believes this sector is less affected by new supply and the home-sharing market. “So we're able to add value not just in the operation but also in terms of the kind of the asset as a category.”
Blue Flag co-founder Terry Sanford said Life House is driving approximately 40 percent higher total revenue for The Roberts Collection in Nantucket since taking over management, with nearly 80 percent total bookings. “We're able to add a lot of value even without a renovation,” Zeidan said of the hotel, noting a renovation was scheduled for later this year. “And because we've cut staff, we're able to allow these seasonal hotels to operate profitably, even in the off season.” Nantucket’s occupancy is seasonal, he added, and the hotel has been reporting high occupancy since Life Hotels came on board. “I think a more interesting metric is how we're doing in Miami,” he said. “We're north of 85 percent occupancy across our Miami hotels … [with] about 50 percent direct bookings.”
Through the repositioning of the Nantucket project, Life House expects to more than double the property’s NOI per year, increasing the value of the hotel by $15 million and catalyzing Blue Flag’s interest in a partnership to grow a larger-scale platform.