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Buying Spree

By Dennis Nessler

 

I

n the years since the financial collapse of 2008, the hospitality industry’s recovery has been slow and protracted. As such, growth for many long-standing companies has come in the form of the addition of maybe two to three properties in a year. Then there’s MCR Development LLC, which by way of comparison has typically executed on two to three multi-property portfolio acquisitions each year. In fact, the New York-based owner/operator has grown its portfolio from six hotels to 71 within the last three-and-a-half years.

Formed in 2006 by a trio of executives with substantial hospitality experience, the company has opportunistically built a collection of select-service assets, according to Tyler Morse, who is the CEO of the company and the M of MCR.  Morse, who was previously an investment banker with Morgan Stanley, describes himself generally as a “real estate guy.” He cut his hospitality teeth in the early 2000s at Starwood Hotels & Resorts Worldwide working as the assistant to the chairman for well-known industry icon Barry Sternlicht, who was chairman and CEO at the time. 

Morse was joined by Randy Churchey, whose experience included executive positions with companies such as RFS Hotel Investors and FelCor Lodging Trust, and Rick Reiss, who was one of Bill Kimpton’s initial investors and also served on the board of directors of RFS. Both Churchey and Reiss maintain advisory roles with the company.

The CEO described the culture of a company that has rapidly expanded through a series of transactions. “It’s very entrepreneurial because that’s the foundation of our growth. When we had six hotels, we did a deal to buy 10 more, so it tripled the size of the company instantaneously. Then we bought another 10, and then we bought 26. We had to be very nimble early on, and I think that’s carried through to today’s culture. We were able to build the company from the ground up; we didn’t inherit any corporate baggage, if you will,” he said.  

The company initially took a ground-up approach to growth before the strategy was significantly altered. “We built six hotels right off the bat, then the world turned upside down and we took a hiatus from building,” he said. While the company does what Morse described as a “smattering of new development,” he noted that MCR executes what is effectively a “buy-and-fix strategy.”

Morse acknowledged he didn’t anticipate such rapid expansion and attributed much of it to the fact that other forms of investment, such as municipal bonds and treasuries, for example, haven’t been as profitable. “I think a big reason for the growth is because there’s no yield in the marketplace today and it’s been that way for a long time. People are starved for yield, and select-service hotels, in particular, have great yields on a risk-adjusted basis,” he said.

Morse said he would consider a full-service property if it was part of portfolio deal, but the company would likely look to reposition or sell such an asset following the deal. He re-emphasized MCR’s preference for select-service properties referring specifically to room service in full-service hotels as a “money losing business.” 

Morse further detailed why he identified such a strategy for MCR. “I always saw select-service as the opportunity in the marketplace. It was underexploited. A lot of hotel dollars chase full-service or CBD (convention or business district) hotels,” he said, adding that the CapEx requirements make it harder for those deals to pencil out. “But at the select-service level, the FF&E reserve works. And, frankly, it’s a better customer experience… it’s a good model. The entry point in terms of a per-key basis is much more reasonable,” he said. 

Morse noted the company has a pair of Residence Inns in Florida under construction, and is looking at a couple of other opportunities, but he underscored the company’s preference for growing through acquisition. “I worry about the end of the cycle. If you start a new development project today, it’s going to be two to three years before you’re done, and I don’t know where the world is going to be in three years,” he said.

As of press time, the company’s portfolio, which covers some 19 states, consisted of primarily Marriott and Hilton brands, numbering some 35 and 25 properties, respectively. Morse touted the performance of both companies and two of the brands, specifically. “If there are roughly 80 major hotel brands, the best ROI in the entire industry is Residence Inn by Marriott and the second best is Hampton, by a country mile. Then there’s a big chasm and you get into market by market,” he said.

A handful of other brands round out the MCR portfolio, which Morse noted has achieved 9-10% RevPAR growth over the last couple of years “mostly because of all these portfolios we’ve purchased.” 

The portfolio acqusitions began in earnest in 2010 when MCR purchased 10 Marriott and Hilton extended-stay and focused-service hotels encompassing 1,100 rooms across markets in Connecticut, New York, New Jersey and Pennsylvania from The Briad Lodging Group for $164 million. In addition to several smaller portfolio deals, the company in 2012 acquired 10 Marriott and Hilton hotels in four Baltimore submarkets from Skye Hospitality. In 2013, MCR acquired 26 Marriott and Hilton hotels from Western International for $430 million. 

Morse maintained that when a lot of the money came back into the market in 2010, a substantial portion of it went into major markets he terms “the usual suspects,” such as New York, San Francisco and Miami. Meanwhile, MCR maintained a focus on secondary markets, which carried a much lower price of entry. “We were out buying in suburban Maryland; suburban Allentown and Bethlehem, PA; Long Island; and suburban Jersey,” he said.

Morse did note that roughly 75% of the company’s deals come to them from existing relationships, but he acknowledged that while acquisitions have been the linchpin of MCR’s growth strategy, the environment is becoming a bit more challenging. “The competition has heated up markedly in the past year. I would say for the first three years of our big growth phase, there wasn’t a lot of competition,” he said. 

Morse was asked if MCR plans to remain an active acquirer of assets given the changing market conditions. “To the extent we can continue to find good deals, we’ll keep buying, but they’re harder to find. There’s more people focusing on the same space, so reasonably priced deals where we can add real value are becoming harder to find,” he said.

The company, which operates all of its properties under its management arm, MCR Property Management LLC, continues to invest in its portfolio as well. For example, the 131-room Residence Inn Baltimore White Marsh just completed a renovation to all the areas of the hotel, particularly the lobby, meeting space and guestrooms. The newly renovated lobby offers guests an elegant open floor plan, according to the company. In addition, the property’s 875 sq. ft. of meeting space now includes brand new carpeting and chairs, and the guestrooms feature new stainless-steel appliances as well as contemporary decor.

Morse noted the company—which gets its funding from a variety of limited partnerships, endowments, pension funds and some family offices— remains disciplined in its financial approach often being “overequitized,” while it also looks to leverage its operational expertise. “This is not financial engineering. This is good, old-fashioned real estate investing. We own and manage all of our hotels. We manage because we can add a lot of value on property through our management team,” he said, adding the company has no plans to get into third-party management.

Meanwhile, the senior management team of MCR consists of Chris Korinek, SVP, operations; Frank Garrett, SVP, finance; and Russ Shattan, SVP, acquisitions and development. The company now includes roughly 2,000 employees, but Morse noted it remains entrepreneurial in nature and continues to run fairly lean.

He cited technology, for example. “We don’t have an IT department; we’re never going to have an IT department because you don’t need one these days. Everything is in the cloud, and part of everybody’s job is to do IT, rather than having just an IT specialist. As a company, we don’t own a server. Only in 2014 can you do that,” he said.

Morse noted that’s just one of a number of differences from many of the large corporations that compete in the hotel space. He cited, for example, how the company rewards performance, specifically at the property level.

“It’s a meritocracy as well. We have very detailed bonus plans for teams on the ground. You eat what you kill. If your hotel performs spectacularly, then you get a huge bonus, as you should,” he said.

When talking about long-range plans for the company, Morse remained non-committal. “We’re opportunistic, so we would sell if it made sense but we don’t have any plans to sell right now. We’re investors so if we can continue to find good returns, we’ll continue to invest capital. We have about $130 million of EBITDA right now. If that gets higher, great. If it stays there and grows at market rates, that’s fine too. Our yields to our investors are great so our limited partners are very happy,” he said.

Morse noted it’s not just the company’s partners who are happy. “We’re having a great time. We have a great team of people, and it’s a ton of fun. It’s a great business,” he said.

Morse shared his personal goals for the company moving forward: “I hope it keeps its entrepreneurial culture as we grow and get bigger, and that people think it’s a great place to work. I want people to get paid for performance and enjoy what they do. If you get those components right, the hotels run better and the result is increased RevPAR index performance,” he said.

Morse talked about the benefits of working side by side with someone like Barry Sternlicht at Starwood Hotel & Resorts and what he learned from the experience: “Look at every deal that’s out there. You never know where you might find a diamond in the rough. He looks at everything. For two years, we looked at every hotel that was for sale on the planet from Europe to Africa to Asia, and obviously all over the U.S. If you don’t get it today, it may come back to you a year or two from now,” he said.

Given the explosive growth of MCR over the past few years, it seems that Morse and his team have certainly heeded that advice.

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