AMERICAS NEWS: Capital improvements

Being creative in sourcing deals is what private equity real estate investing is all about. And as capital starts to eye the US hospitality sector once again as a possible opportunity, Noble Investment Group founder Mit Shah says that’s exactly what industry investors are doing.

A lot of hotels actually needed physical upgrades before the downturn occurred and their owners either can’t afford those improvements or are now in need of fresh capital. Noble Investment Group founder Mit Shah

Rather than relying on banks offloading toxic hotel assets, Shah argues the opportunity is in finding hotels in need of updating or rebranding, with the potential to increase revenues, compared to relying purely on market growth.

“There is a lot of competition out there today, yet over the last couple of years not much capital was re-invested in existing hotel assets,” he said. “A lot of hotels actually needed physical upgrades before the downturn occurred and their owners either can’t afford those improvements or are now in need of fresh capital.”

The Atlanta, Georgia-based firm has just acquired a performing, 126-room Holiday Inn in the historic district of Charleston, South Carolina. Noble also acquired an adjacent site and secured entitlements to develop an additional 50-rooms and 2,500-square-feet of meeting space, which will be added to the Holiday Inn.

The deal came about after the previous ownership needed to recapitalise other assets in its portfolio. Shah said Noble had spent the past year securing all the necessary permits and acquired the assets in May at a substantial discount to replacement cost.

Opportunities are scarce because the reality is the banks didn’t pull the trigger and push a lot of property into the market place. Instead, financial institutions restructured and held onto assets recognising that in many cases, with time, there could be value growth. Shah

The process wasn’t easy though. Charleston has had a “moratorium” on new hotel builds above 50 rooms in the historic peninsula for almost 17 years. “The previous owners spent 10 years getting these entitlements to the stage where we took over,” he said. The 50-room and meeting space addition, together with the existing hotel refurbishment, will start later this year and is set for completion at the end of 2011. The hotel will then be rebranded as a 176-room Courtyard by Marriott, with 5,000-square-feet of meeting space.

“Opportunities in the hospitality sector are currently somewhat scarce, but they will come,” Shah said. “Senior leaders are getting back on the road to do business and that bodes well for the industry,” he explained.

He added that with GDP improving and consumer confidence showing some positive signs, the US hospitality industry had seen gains “year-on-year” in RevPAR and average daily rates since March. However, Shah offered a note of caution, saying macro risks, such as US unemployment, the European debt crisis, the impact of new domestic policies and the Gulf of Mexico oil spill, could impact the industry’s recovery. “Opportunities are scarce because the reality is the banks didn’t pull the trigger and push a lot of property into the market place. Instead, financial institutions restructured and held onto assets recognising that in many cases, with time, there could be value growth.”

With that in mind, Shah said Noble would be targeting opportunities that “look and feel much like the Charleston deal”. Noble invested in the Charleston properties through its third fund, Noble Hospitality Fund, which closed on $310 million in January 2007, and is roughly 50 percent invested.