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Capital Gains Hotel Equities, Virtua Partners team up on $500M investment

Building out a holistic hospitality platform is what many companies have been trying to do. Some companies in the market are able to carve out a portion of the management market, while others bite at the development side of the industry. Hotel Equities had both, and the only thing it was missing was capital—so it found a partner.

“The joining of our two organizations is best described as a strategic alliance,” said Quinn Palomino, principal of Virtua Partners, a Phoenix-based private equity firm specializing in commercial real estate. “It’s a partnership that takes a best-in-class hotel developer, owner and operator, and marries that expertise with a leader in raising capital and acquiring high-yield, high-return asset classes, such as class A office space, multi-unit housing and mixed-use projects.”

Virtua Partners has agreed to invest a total of $500 million into Hotel Equities’ hospitality platform. “[The financing] runs the vertical in all phases of the capital stack, including equity, debt and bridge,” she said. “We are also receptive to potential JV and rescue capital opportunities.”

Some of the private equity firm’s new financing will be deployed through hospitality investments, acquisitions, new development and opportunity zones, which are economically distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.

Hotel Equities cannot access the funding at will, though. “As with any of our raises, there is considerable protocol around the deployment of capital,” Palomino said. “We are highly disciplined investors and have a very methodical and strategic acquisition and development model that has proven successful during all stages of the cycle going back nearly 30 years.”

The firm’s acquisition and development model strategy is twofold. “On the acquisition side, the keyword is optimistic: projects that are undercapitalized, under or mismanaged projects that can be repurposed or converted creating a stronger return,” she said. “On the development side, we like underserved or emerging markets. We are very bullish on ‘opportunity zone’ projects and are focused on a number of these currently.”

Currently, Hotel Equities is the sole partner of Virtua Partners’ hospitality division. “With their platform, best-in-class performance and ability to scale, there is no need for additional partners,” Palomino said. “That being said, with Hotel Equities’ guidance, one of our strategies is to acquire small and midsize management companies and roll them into the Hotel Equities portfolio.”

For Hotel Equities, this partnership is unique. In the past, it has formed partnerships with other private equity firms, but “never with this type of structure or capacity,” said Brad Rahinsky, president and CEO of Hotel Equities. “The scale and diversification enhances and improves what Hotel Equities will look like for years to come.”

Lasting relationships

Vibrant now, the partnership between Hotel Equities and Virtua Partners began like any other business relationship: They had a meet-and-greet at a well-known industry conference to get to know one another—and the rest is history.

A few years back, the two companies initially met at The Lodging Conference in Phoenix to discuss a particular property Virtua Partners had been assessing—the SpringHill Suites by Marriott Houston Medical Center/NRG Park, to be exact. The following January, the companies then had a follow-up meeting at ALIS. That’s when they really began feeling each other out to determine if there could be a strategic partnership of sorts down the road. Eventually, Hotel Equities and Virtua Partners realized they both had been in the lodging business for the right reasons.

“As we furthered the conversation and went through the relationship and realized the opportunity that was in front of us, we saw that there was a real moment here to create a platform enhancement for both organizations between two cultures that were extraordinary similar,” Rahinsky said.

It was during these meetings when Hotel Equities and Virtua Partners learned they had the following qualities in common with each other: taking care of their respective associates, holding their respective teams accountable and ensuring profitability for their respective stakeholders. Combined with their platforms—one with a focus on hospitality, the other with an extensive background on capital raising—the values between the two companies make a “perfect example of one plus one equals three,” he said. After three years of the “long dating process”—done purposely to ensure both companies involved were “aligned and then lock stepped with all things we deemed mission critical”—Hotel Equities and Virtua Partners married their platforms in September 2018, Rahinsky said.

“It was a long three years, but time lets you really get a sense of what people say is really what they can do,” Palomino said.

Why Hotel Equities?

For a private equity firm, “service, at the end of the day, means everything,” she said. After experiencing too many disappointments with management companies over the years, Virtua Partners—a Hong Kong-based company with a background in multiple disciplines, including restructuring, development, structured finance, debt and equity origination, asset and property management, and fund management—had enough. “Year after year, you just find out it’s brain damage to work with the wrong people,” she said. It was time for the financing firm to move on by finding a partner with the right values.

“You start realizing that life is too short, and you want to work with people you know you can trust, who believe in what they do, and they care for their team,” she said.

From day one, Hotel Equities stood out to Virtua Partners. For the    SpringHill Suites property in Houston, the private equity firm initially met with more than 25 management companies. After the initial meeting with Hotel Equities, things began falling into place. Palomino continued to notice how impactful Hotel Equities’ leadership team was on the company’s employees, from the person picking up the phone to the development team.

“I don’t think people realize that when you’re working with other people, the attitude from the top trickles down, so when you talk to people, you know what the culture is at a company,” Palomino said.

Before signing the latest deal—the $500 million in financing—Virtua Partners agreed to work with Hotel Equities on the following properties over the years: SpringHill Suites by Marriott Houston Medical Center/NRG Park; Fairfield Inn & Suites by Marriott in Tolleson, AZ; Hampton Inn & Suites by Hilton in Mesa, AZ; and SpringHill Suites by Marriott in Avondale, AZ.

Culture fit

Known to his employees as Coach, Fred Cerrone, chairman and founder of Hotel Equities, founded the hospitality company back in 1989. “I started Hotel Equities 29 years ago, and so we’ve done a good job of being known as a company with high integrity, high standards, high-value statements and a very strong culture based around training and caring for our associates,” he said. “It’s kind of our secret sauce.” Hotel Equities’ culture has contributed to its continued success for nearly three decades.

“I think every company has a culture—whether they realize it or not—and it’s amazing how many people don’t even realize what culture is,” Cerrone said. “What is culture? If we’re talking about an individual, it’s kind of like the soul of a company. A soul of a person is the intersection of your mind, your will and your emotions. The soul of a company is in essence the same thing. What makes the company tick?”

For him, there are two main types of cultures: one is healthy, the other is unhealthy. “Our main goal is to create a healthy culture,” Cerrone said.

In order to keep the culture at Hotel Equities healthy, the leadership team tries to instill values early.

“I personally teach a class we call Foundations,” he said. “Basically, in that class, I’m trying to connect the dots for new people, inviting them on the Hotel Equities journey. I teach them about the history of the hotel business, which is fascinating in and of itself, and then the history of Hotel Equities.”

For nearly 30 years, Hotel Equities has been distributing commitment cards to new employees. Twelve value statements are listed on the tri-folded document, some of which include the following: Do unto others as you would have them do unto you (The Golden Rule); hire an attitude and teach them the business; inspect what you expect; guests aren’t always right, but they are always guests; and all people matter to God.

During the Foundations class, Cerrone said, “We review all of the value statements. From my heart, I share with them where they came from and what they each mean.” Also on the card is a welcoming note from Cerrone; iCARE (influential, community, authentic, responsibility, engaged), an acronym used to express the company’s culture; Hotel Equities’ vision, mission and culture statements; and some general contact information.

“We tell them that they ought to have goals in their lives,” he said. “If they don’t have priorities and goals in their lives, they may end up somewhere they didn’t intend to be—and that’s not a good thing.”

A company’s culture is now more important than ever. With unemployment low and the lodging industry being in direct competition with other low-earning industries, hospitality companies need to become a bit more creative with culture by providing some flexibility.

“We may have a certain structure for days off in the year,” Rahinsky said. “Here’s your 12 days off, but maybe those days aren’t important to that individual, so we take those same 12 days, and we say to that individual, ‘Which 12 days are important to you?’ We’re going to get those off your schedule now. While we might not be able to compete from a payroll standpoint with certain industries, we can get flexible in other ways.”

The management company has about 1,700 associates currently, but at this time next year, based on projects in the pipeline, Hotel Equities expects it will hit 2,500 associates.

“Our commitment, in my mind, to our associates is we’ll always try to promote from within, and then we look them in the eye and say, ‘Your responsibility back to us is to be ready for that next promotion,’ and we provide training for them to do that, so they have to have the initiative to step forward and take one of these training programs we offer,” Cerrone said.

A well-trained team

Another reason why Virtua Partners partnered with Hotel Equities: the company’s training programs. “I think one of the secret sauces of the Hotel Equities team is their leadership training,” Palomino said. Hotel Equities offers its employees four different programs: Management Development Program, Leadership Development Program, Management Internship Program and Management Training Program.

“The programs are rigorous,” Palomino said. “It’s not just ‘show up and check off the box.’ In fact, people can get dropped from the programs if they don’t do their part.”

The company’s Management Development Program—which lasts a total of six months—is the first in a series of leadership programs. The class is intended for managers and supervisors new to a supervisory/managerial role within the management company. The entire curriculum includes many aspects of management and leadership skills that one needs to be successful within Hotel Equities and leadership in general.

A six-month class, the Leadership Development Program is intended for employees with multi-unit responsibilities. The curriculum includes many aspects of leadership skills an employee needs to be successful within Hotel Equities when leading other employees.

Designed to jump-start a potential management trainee, Hotel Equities’ Management Internship Program offers college students opportunities to understand the hospitality business from an operations perspective. Time spent in the intern program typically includes front office, housekeeping and F&B. Participation in the summer internship can shorten the training program by up to three months.

Hotel Equities’ Management Training Program is for recent college graduates who are interested in the hospitality industry and need to learn more about the day-to-day operations of a hotel. The program lasts for an entire year and offers trainees hands-on experience, including hotel operations—transitions, takeovers and new hotel openings. Graduates are typically promoted to the role of operations manager or assistant GM.

There’s another training program Hotel Equities is involved in—with Bethesda, MD-based Marriott International Inc. Hotel Equities runs a program called Operators Coaching Program (OCP), which trains new Marriott owners who express interest in managing their own assets. Hotel Equities and Marriott first began discussing the program nearly seven years ago. Recently, eight owners graduated from the program, and about five ownership groups are currently undergoing the class.

The program itself takes anywhere from 24-36 months to complete. “[Marriott] wants to make sure that when an owner’s coming in—and maybe it’s a first-time Marriott owner—that owner is set up for success,” Rahinsky said. “That they have the tools, resources and understanding of what it’s going to take to be an owner of a Marriott asset.” The OCP program trains trainees on above property ownership expectations and requirements. “Marriott wants to protect their brand,” he said.

The OCP program is designed to ensure a mutually rewarding relationship between Marriott and new owners.

“Marriott had enough confidence in Hotel Equities to be the only company that will train their owners to ensure that they’re set up for success as new Marriott owners,” he said. “We’re humbled by it. We’re honored by it. We don’t take it lightly. We’ve spent a lot of time, resources and capital to make sure that program was exactly what it needed to be.”

In the zone

Some of the financing from Virtua Partners allows Hotel Equities to develop projects in certain opportunity zones. A fairly new concept, opportunity zones were added to the tax code by the Tax Cuts and Jobs Act in December 2017. The first set of opportunity zones were designated on April 9, 2018.

“There’s 8,700 census tracks across the U.S. where there are tax benefits to invest and to build,” Palomino said. “It’s really for development, so it really caters itself to new development or complete gut and remodel.”

One positive aspect of opportunity zones is the ability to grow. Some areas of interest to Virtua Partners include the Southeast, the Southwest and Texas. “There’s a lot of growth” in those areas, Palomino said. While opportunity zones do open up new regions for Hotel Equities (the company is in 28 states currently), each property really depends on its own key drivers.

Where to next?

Before partnering with Virtua Partners, there had been some missed opportunities for Hotel Equities. “Brad and I would have to locate a site we wanted to develop, and then find the appropriate flag for it, and then go out and raise the money for it,” Cerrone said. All those steps take time, so as a result, Hotel Equities didn’t grow as much as it could have in the past.

“Now that we have the capital that Virtua Partners is allowing us to have access to, we don’t have to worry about the finance piece,” he said. “We can actually take advantage of our deal flow—take a white map, decide, with intentionality, where we want to be.”

Hotel Equities’ portfolio has a little more than 115 hotels in total. Currently, Hotel Equities is bicoastal. “We’re in every region of the country, and that geographic diversity is matched by our segmentation and brand diversity,” he said. “We’re in primary and gateway markets. We’re in secondary and tertiary markets. We’re in resort markets. We have properties in the sand. We have properties in the city. We do all of these things extremely well.”

The majority of properties under Hotel Equities’ umbrella are brands from the Hilton and Marriott families. The company is also focused up north—in Canada, where Hotel Equities is opening up an office in Q1 2019.

“We were approached by a couple of the brands about a year and a half ago because there was a void of good management in Canada,” he said.

Nearly three years ago, Hotel Equities had zero properties in Texas. Today, the company has 20, including everything in the pipeline. “We’ve grown it organically,” Cerrone said. “We were invited by one of the major brands to start off with, and once we made our presence known, we developed staffing. Then we just grew it from there.” The company had wanted to be in Texas for years.

“The development pipeline for the brands is as healthy today as it’s ever been,” Rahinsky said. “Today, there’s a record number of hotels that are open in the United States, and there’s a record number of hotels in the development pipeline.”

To examine the current portfolio and where it could go, Hotel Equities brought on a strategist, and together, the team created “verticals,” which divide the portfolio up into self-sufficient teams made up of operations, revenue management, sales, marketing and accounting. The corporate office reinforces the support of each of the verticals.

Currently, Hotel Equities has five verticals; the company will add a Canadian one shortly.

“We’ve always had a great deal flow, just because of being in the industry so long,” he said. “The franchisors know us and trust us. The lenders know us and trust us. The brokerage community, the same, so we see as many deals as anybody. I think we’re one of the fastest growing hotel companies in the United States that nobody knows about, but we like that.”

On average, Hotel Equities expects to add about two hotels per month for the next 24 months. “We’re opening either through acquisitions or new-builds, and that’s a pretty good pace,” Cerrone said. “It’s a healthy pace, but it’s one we’re comfortable with now that we have our new infrastructure set up.”

“We now have a unique, powerful opportunity that really can change the industry in a lot of ways, in terms of creating opportunities for associates, as well as developers, owners, managers and families—it’s all the things we talk about,” Rahinsky said. “As focused as we are on making sure that we are a for-purpose, for-profit organization, it also doesn’t escape us that this creation—really, there’s a lot of intrinsic value in it, too, in the ability to do good.” HB

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