Sitting on millions of ready-to-deploy funds,.Noble investment Group is poised to turn aggressive
Monday September 7th, 2009 - 12:44AM
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When it comes to having “cautious optimism,” Noble Investment Group appears to have a lock on this attitude which is often brought into play during “we-know-it-will-get-better” times.
For the past 16 months, the privately held, Atlanta-based company has made a point of being ultra-conservative in its investment spending, sitting on approximately $206 million in its most recent of three funds. In fact, beginning in May of 2008—well before the markets imploded in the third quarter—the 16-year-old firm did not let loose one dollar for investment from Noble HospitalityFund, LLC, a tactic it touted to investors this past May when posting its first-quarter report.
And from where he sits as senior managing principal and CEO, Mitesh “Mit” Shah believes being frugal will now allow the company greater leeway in the months ahead to make some advantageous—perhaps even bold—moves.
“When we look forward we see the greatest opportunity to take advantage of the crisis in the marketplace that we’ve seen in our existence,” Shah said. “My goal and the goal for this organization is to be in a position to take full advantage of the opportunities that come out of this crisis.”
During the next 16 months Shah expects Noble to behave in a way that is the polar opposite of its recent conservatism. “We’re going to be very active as it relates to making investments,” he said.
Shah noted Noble invests capital on behalf of pension and other funds and university endowments with a time horizon of five to seven years. Of three funds it has raised, it has made 41 investments, 18 of which have been fully realized for a 32% internal rate of return (IRR) and more than a 3X equity multiple, according to the CEO. “Those numbers are eye catching and allow us to do things,” he said.
Investment groups, however, have appreciated the company’s tightness with the latest fund, which was closed in January 2007. “Two years and eight months later, the fact that we’ve invested less than a third [$104.9 million is committed] of that fund is very, very comforting to our investors,” Shah said, adding some of the investors have been players in problem-plagued, billion-dollar “behemoth” funds.
It’s not that Noble hasn’t been keeping tabs on the marketplace, but even when presented with what seemed an ideal deal last year, Noble paused and eventually punted. “There was an asset in a top 20 [metropolitan statistical area] that we had looked at for three years that we really liked. The price that we were able to negotiate was based on a 10 cap on 2009 forecasted numbers; this is back in December,” Shah explained. “In January we put it under contract with a very quick closing timeline based on what we all collectively forecasted as a 10% reduction in RevPAR for 2009 and a corresponding 18% reduction in [net operating income] and a 10 cap on that number. That number represented a 35% discount in price…so that was pretty significant for us. But then, what happened that first week of January—20% down RevPAR [for three weeks]. So the question everyone was asking was: blip or trend? We terminated the contract because we did not know if this was a blip or trend. We really felt it was more likely a trend…and it turned out it wasn’t a blip. That asset in today’s terms is worth significantly less than for what we would have bought it.”
The decision was a wise one not only for investors, but for Noble’s principals as well since they co-invest their own capital along with investors into the equity funds.
Shah is no stranger to the type of economic turmoil that has kept the global financial community and the lodging industry twitching of late. Indeed, it was in 1993—another tumultuous time for hospitality—that Noble came into existence. Since then, he and his executive team have made it their mission to produce strong returns while remaining prudent investment managers [See sidebar].
So it’s no coincidence that a sense of calm permeates Noble’s headquarters in the Monarch Tower on Peachtree Road here. Soothing tan and beige tones play against dark woods in offices from where the low hum of activity emanates as executives and staff strategize, involving themselves in the firm’s core competencies of investment management, property operations as well as development, re-development, conversions, design and construction.
In addition to its fiduciary role, Noble currently operates close to 9,000 guestrooms affiliated with Marriott, Hyatt, Starwood, Hilton and IHG brands; convention and conference centers representing more than a million square feet of meeting space; as well as day and resort spas, restaurants and branded retail coffee stores.
From his 11th floor office, Shah can look out over a portion of Atlanta’s changing landscape, part of which Noble itself shaped when it converted two properties into W hotels for its own account in the Buckhead and Midtown neighborhoods.
The vantage point likely inspires visionary thoughts of what could lie ahead for Noble as 2009 and 2010 spool out. Shah, comfortably ensconced in a design-forward chair, willingly shares one avenue the firm is poised to go down.
Almost a year ago, Shah told HOTEL BUSINESS® there were a number of opportunities in the market that were not distressed but were what he termed “dislocated assets” that had debt coming due or that the investor thought 30% equity would be sufficient and now it’s 50% or assets that needed to be sold to raise cash. “We’re waiting for distressed,” emphasized Shah at the time.
Shah now feels distressed is arriving. “The reality is setting in across the board that not only is 2009 not getting better—we’re at 16% negative RevPAR (at press time), which is better than minus 20—so still down significantly…but the pundits are saying 2010 is going to be down,” Shah said.
Continuing monetary defaults—commercial mortgage-backed securities as well as traditional banks—foreclosures and approaching maturities also are factors likely to force decisions on assets for many owners who previously thought they only had to get through the end of the year. “All of that coming together is going to create real distress,” Shah said.
With expertise ranging from the limited-service sector to luxury and resort properties, Noble is well situated to choose among the opportunities Shah anticipates. However, the CEO noted there’s been “a paradigm shift to thrift” among consumers that will find Noble “extremely focused” on the select-service sector. “It’s an area that’s performed unbelievably well for us when we’ve made investments,” Shah said, citing investments into Hyatt Place, Courtyard by Marriott, Residence Inn by Marriott, Hilton Garden Inn. “Even an Aloft that we opened in January, new construction in Charlotte [NC], is producing double-digit cash on equity.”
Noble also is setting its sights on distressed debt, “which is going to come in all shapes, sizes and formats,” Shah said.
Toward that end, the company has formed Noble Lodging Advisors, which will provide resources to owners and lenders of distressed lodging assets. The strategic sourcing initiative, which will review potential investments for the remaining two-thirds of Fund III’s equity, will allow Noble to stay ahead of the curve in assessing distressed property opportunities as it interacts with lodging lenders and institutions, many of which sought out Noble for guidance, Shah said. “We can partner with a lender to resize debt across a wide spectrum,” Shah said. “In six to 12 months, the lenders are really going to be the equity on a number of different hotels, so what do they do? Do they sell the note at 40 cents on the dollar because that’s probably what it’s worth? Do they foreclose and just own the asset? Do they restructure the debt with the existing sponsor and does the sponsor have the wherewithal to get through? What they’re looking for is how to create the opportunity to salvage what the value is on the debt side. So, we’ll come in and say there’s a $50 million loan and it’s worth $30 million today. We’ll put in $10 million in capital, [the lender] keeps $20 million in place, we’ll resize at $30 million—don’t sell it at $30 million, don’t restructure at $30 million. We’ll buy into it and give [the lender] a share of the upside. So now they can earn back up the food chain and that’s very compelling for lenders and how they ride through.”
Noble will work with a group of lenders who have been supportive of the organization during “up” times, Shah said. Discussions have begun with such institutions as GE Capital, CapMark, Anglo Irish, Principal, Wells Fargo, Deutsche Bank, Barclays and Merrill Lynch, among others.
“I never want to be perceived as this vulture that’s stepping in, but what’s going to happen is there’s going to be a complete reset as it relates to a lot of these assets that are out there and lenders are going to have to come up with some decisions,” Shah said.
While Shah suggested “distress knows no boundaries,” right now he’s seeing it primarily in the resort and luxury segments. It was less than two years ago that resorts loomed large in Noble’s expansion plans, with the company looking to double its resort portfolio by 2011. “There was a unique opportunity on the public/private side to go in and get subsidies from residential developers that wanted to build residential communities around resorts,” Shah recalled, noting there were several opportunities teed up at the time: Jekyll Island, GA; Swan Point, MD; and at Reunion and Hammock Beach in Florida. “We were going to get subsidies from the land owner and the residential developer to basically buy down 40% of the development costs of the hotel. Why would they do that? They needed the hotel and the resort component to drive the momentum so they could go sell real estate.”
Noble would have built and owned only the hotel tower, but would have operated the entire resort, including the golf and spa.
The bulk of the deals were iced because of the fallout in the residential resort markets. However, both Reunion and Hammock Beach became the first opportunities for the expertise of Noble Lodging Advisors. “We’ve got two massive resorts there that represent the first wave of distress that is happening in our industry,” Shah said.
Noble also is keeping busy with other things as it waits for those floodgates to open wider. It’s preparing this fall to open the 220-room Macon Marriott City Center that it owns in Georgia and which is connected to the Macon Centreplex that includes a 100,000-square-foot convention center and a 9,250-seat coliseum, both of which Noble will operate. Shah noted with the city subsidy into the asset “we’re building a full-service Marriott for just a little over $100,000 a room all in.”
Noble has a handful of similar properties with extensive meeting space and despite industry-wide declines in group demand, Shah remains confident in the model.
“Even in these kinds of times, state associations and small groups travel,” he said, noting traveling to the Macon Marriott does not carry the so-called “AIG effect” of perceived extravagance.
Shah acknowledged less group demand is of concern in the near term. “That’s a reality, but because of the economic model we have structured in each of our convention center situations we have the ability to ride out certain downturns because of the cost-sharing model,” he said, adding the properties also are open to renegotiating existing group meeting contracts. “I also like the idea that in a property like Macon that we only have to sell 110 rooms on average a night at the rate the [local] Courtyard is getting right now to make money based on the way [the city and Noble are] sharing expenses.”
Noble also is involved in mixed-use development with projects that include the 244-room Hyatt Regency Valencia, which is part of the Valencia Town Center in Valencia, CA, a one-million-square-foot, mixed-use development. The hotel, which Noble is operating, also encompasses the 16,000-square-foot Santa Clarita Conference Center. Another development is the Aloft Charlotte Uptown, which is part of a vertically integrated project with office and retail components in the city’s new $275-million Epicenter complex.
Shah felt MUDs reflect the new lifestyles that consumers and travelers are embracing, where office, retail, entertainment, dining and lodging may all be accessed easily in one destination. In the current marketplace, however, and despite numerous opportunities, Shah said building in such scenarios is not as compelling right now as acquiring.
With the amount of success the organization has had, investing more than $1 billion in the lodging sector since its inception, Shah was asked if there was any consideration of taking the company public. “We currently are focused on the private equity side of the business because we view that as the most efficient. We always pay attention to the public side because we’ve always believed the public side has been leading in terms of its thoughts and its perspectives. We believe the public side right now is gaining some real efficiencies in terms of the marketplace and also as it relates to lodging,” he said. “When we look at our role and responsibilities, there are some platforms that we believe will continue to be best suited for private platforms and there are platforms that could be better suited for public platforms in our space.”
Although it has business in many different buckets, such as three Starbucks coffee stores, four spas and several restaurants owned outright, in joint ventures or leased, including some that are currently experiencing significant slowdowns, Noble is well positioned to go forward in a variety of directions. But again, it shall remain prudent, Shah said.
“The reason why we’re in different segments of the business, the reason why we’ve built competencies in those segments is because opportunities change over time,” he explained. “We’re always focused on opportunities but we’re going to be extremely selective going forward.”
—By Stefani C. O’Connor
The most recent NYU Conference, earlier this month proved, once and for all, that the lodging industry has finally turned the corner and happy days are, indeed, here again. While the economists and pundits all provided plenty of anecdotal evidence to bear that out in terms of supply and demand ratios, RevPAR projections, asset values and all the other metrics, that’s not what has me convinced.