PE: Why Brookfield deal makes for a nimbler Thayer Lodging

The recent acquisition of Thayer Lodging Group by Canada’s Brookfield Asset Management will prove to be useful for the Annapolis, Md.-based private equity firm: it will allow them to make bigger deals—faster and quicker. That’s what the company’s founders, Leland Pillsbury and Fred Malek, told Hotel Management during the New York University International Hospitality Industry Investment Conference in June. “[Brookfield] is a major source of capital going forward,” Pillsbury said. “We can spend less time going out and looking for money.”

The derivation of the deal came as Thayer was raising funds for its fund six, which, according to Pillsbury, stands at $300 million, with just over half coming from Brookfield. Thayer’s seven funds (with three still active) have made 43 hotel investments, with total acquisition costs of about $2.5 billion.

“It’s a good deal for Brookfield,” Malek said, citing Thayer’s 25-percent internal rate of return since the group’s inception in 1989, a robust number Brookfield can now take to their clients. “This is their platform into hotels. Now they can take that out to their clients, and it gives our people a source of capital.”

“It’s a natural fit,” Pillsbury said of the deal, the seeds of which were planted during a November call Pillsbury made to Brookfield in regard to raising money for fund six. “There is merit in Brookfield having a hotel platform.” Up until this deal, Brookfield had limited exposure to the hotel space, concentrating more on office buildings and shopping malls.

“This transaction will provide us with ample resources to grow our business,” Bruce Wiles, Thayer’s COO, told Bloomberg at the time of the announced transaction. “The competition for hotel assets has been pretty keen lately. We do value-add work, we take large assets that aren’t performing well and turn them around. With Brookfield, we are at a much better vantage point.”

The composition of Thayer will remain intact, as Malek explained it. Thayer’s corporate staff of 28 will remain in Annapolis. The deal also does not include Interstate Hotels & Resorts, which Thayer and partner Jin Jiang acquired in 2010 and whose managed portfolio consists of around 450 hotels. “Interstate remains untouched,” Pillsbury said. “They have a global platform and in the past we weren’t able to support them. With Brookfield, that may change.”

Asset Philosophy
While Thayer’s reach into hotel real estate will most certainly change due to the Brookfield acquisition, its ideology as it relates to scouting and buying assets will not.

It’s a philosophy voiced simply by Malek. “We acquire [hotels] only if we can double the income in three to four years,” he said. Toward that, Thayer only invests in full-service hotels. “There are levers to grab share and reduce costs,” Malek said. “Full-service is the right place to be.”

Pillsbury said Thayer has a recipe for success to boost revenues, and it consists mainly of increasing the RevPAR index by changing up the business model—amenities, food and beverage—and also by taking a strong rate stance as it relates to revenue management. “Rates can be managed aggressively,” Malek said. “Take occupancy down, rate goes up, margins go up.”

For instance, as Malek told it, when Thayer bought the JW Marriott San Francisco for $96 million in 2011, it was able to triple its net operating income in three years. How? Small things that made a big difference, like creating a small executive meeting center, attracting more group business and even changing the reimbursement formula for Marriott Rewards members.

In addition to the JW in San Francisco, Thayer also owns the Ritz-Carlton there (acquired for $161 million in July of last year) and the Hilton Los Cabos Beach & Golf Resort, in Cabo San Lucas, Mexico. While both Pillsbury and Malek passed on disclosing what properties they were currently targeting for acquisition, they did say they had four under contract—“big, full-service hotels.”

While the focus will remain on the U.S., Malek did admit that, since Brookfield is based in Toronto, “Canada could be an opportunity.”