Successful real estate investors know that buying right is just as important as efficient execution. In some cases, a good buy can make a deal work even when the execution misses the mark. It’s difficult to build a sustainable business on a single deal, though. A healthy flow of opportunities in your hotel acquisition pipeline allows your business to stabilize and grow.
Hotels are different than other commercial real estate. Operations and asset can consume an owner, which draws attention from growth. The addition of a renovation leaves you with little to no time for business development. This challenge keeps the barriers to entry high and returns among the highest of all commercial real estate asset classes.
A sustainable hotel acquisition pipeline revolves around three key areas – strategy, systems, and network, in that order.
U.S. real estate is among the most competitive markets in the world regardless of your target size, geography or risk profile. Dozens of buyers are competing for the deals that you want. Still, you need to know your target before you even step onto the battle field.
Geography and Product Type
Hospitality real estate is a street corner business, and the right location is a basic, threshold requirement for most guests. Hotels fill a unique need that is at the cross section of residential and retail uses. An astute owner maximizes guest satisfaction and property value by matching property type with geographic demand.
Room type, amenities, and service level encompass the major hotel classification. Limited service, select service, extended stay, full service, and resort room types vary wildly, respectively, from compact to expansive. Smith Travel Research (STR) chain scales simplify the classification further by aligning revenue potential for each brand.
Geographic and property type specialization saves loads of time in evaluating deals and attracting financing. You can create tools, processes, and systems that transfer easily between deals, and your presentation will be sharper because of the focus.
This type of specialization is a no brainer for many investors and is the primary concern for filling a hotel acquisition pipeline. However, disciplined execution – when ignored – is where many strategies start to come off the rails.
Execution and Risk
Execution involves every stage of the investment lifecycle from acquisition, operation, and renovation to stabilization, refinance, and disposition. Your business plan may only selectively cover these areas, but collectively, they define your execution strategy. As an example, your execution strategy may include third-party management, a minimal brand-mandated property improvement plan (PIP), and five to seven year hold.
Risk is directly correlated with return. A deal’s risk profile falls on a spectrum that includes four classifications – core, core plus, value add, and opportunistic – where core is the least risky and opportunistic the most.
- Core: stabilized and replicable cash flow
- Core Plus: stabilized cash flow with an opportunity to increase yield through slight operational improvements or very light renovations
- Value Add: underperforming their potential due to poor operations or deferred maintenance
- Opportunistic: little to no interim cash flow with major capital requirements – usually new construction or adaptive reuse
Hotel acquisitions typically fall in the core plus and value add categories. Brands always require a change of ownership PIP that brings the property up to current brand standards; the scope of which defines the risk category. Further, your ability to take on a project depends entirely on your organization’s infrastructure and systems.
A property becomes a deal when you combine financing with the momentum of a transaction.
Capitalization is a central part of your investment strategy. This covers the type and amount of equity you will commit to each opportunity and the lenders that you target to fill the rest of the capital stack.
Capital providers fall into one of three categories – private capital, middle market, or institutional. For rough sizing, an individual with no partners can close a private capital deal. Larger middle market deals involve a syndication of multiple individuals or a small institution. Institutional deals are the realm of large real estate funds.
Each segment is approachable regardless of your size. Capital markets relationships develop over time by reviewing deals together to get comfortability with a potential partnership. Your hotel acquisition pipeline reflects these relationships because your targets must fill the appropriate bucket.
Debt capital markets are more efficient than equity because of the different rights associated with these contracts. You can “speed date” with lenders, but investors require a longer courting process.
A high-quality financial intermediary generates a variety of options to fit with your execution strategy. Competition among lenders allows you to reduce risk by aligning interest rate, maturity, and recourse provisions with your execution strategy.
The acquisition process spans a long cycle that goes from initial introduction to underwriting, offer, and finally closing the deal. A deal can easily slow to a halt with all these points of potential failure. System design and implementation is where you convert your acquisitions strategy into a tactical plan.
Prospecting, offer, and closing are the three major stages in your hotel acquisition pipeline. Prospecting involves calling owners and third parties to surface the deal. Underwriting and purchase agreement negotiation comprise the offer stage. Finally, closing falls into place as a result of diligent preparation.
The prospecting phase is the longest and most frustrating of the three stages. It is also what most people think about first when you talk about an acquisition pipeline.
Most owners have a bittersweet relationship with prospecting. While it’s fun to meet with people and find deals, the feast or famine nature puts undue pressure on the activity. That said, you miss 100% of the shots you never take, so you must get in the game.
Prospecting requires a tremendous amount of diligence, research, cold calling, follow-up, and other sales-related tasks to bring a deal to the surface. Most of the relationships you build in the prospecting stage never amount to a single deal. Focus on probability by targeting the three most likely deal sources – brokers, owners, and influential third parties.
Consistency is essential when developing new business. Therefore, pay extra attention to systems that build or enhance your ability to execute on a regular schedule. A quality CRM is the best technological tool to track targets, set follow-up reminders, and note important information about them. On the human side, routines and rituals are your best bet.
You are competing with dozens of buyers for a limited set of opportunities. Accordingly, implement a strategy to stay top of mind with your prospects that includes regular value-oriented touchpoints.
The credibility of your offer starts building the minute you engage with the owner or her representative. Every move you make could be under the microscope, including the quality of your questions and the time you take to follow-up with diligence requests. Your actions signal motivation and ability to transact.
A robust underwriting system that includes checklists, an efficient underwriting model, and a step-by-step approach sets you apart from more haphazard competitors. Underwriting speed and quality are critical, as it allows you to process more deals effectively. Sellers take notice when you spend time on their deal before submitting a written offer.
Take care when staging your interactions with the owner. A property tour is an opportune time to show interest and preparedness. The composition of your touring group, the quantity of notes taken, and quality of questions asked can add or subtract from your written offer’s credibility.
This stage in the hotel acquisition pipeline is the most overtly competitive. Your written offer will cover the essential deal points. However, systems that enhance your image as a real closer through consistent messaging could tip the scales in your favor.
The final stage in the hotel acquisition pipeline involves two distinct periods – inspection and operational transition. Each period has its own demands and risks so preparedness will ensure a smooth closing and transition.
Think again if you assume you’re out of the competitive woods. A handful of hangover buyers are waiting around to claim their prize. Their resolve may subside once your deposits become non-refundable, but the pressure of this reality may be helpful to rally the team.
The inspection period involves property tours, executive interviews, and early service contract negotiations. You’ll also be arranging financing during this time in most cases.
Everyone is always amazed at how quickly 30-45 days goes when you consider the time it takes to coordinate third party reports, lender tours, and other critical time-consuming tasks. Again, this is a time where checklists, a working parties list, and a robust plan of action is essential to a smooth closing.
An army of internal and external stakeholders will become your primary focus in the operational transition. This is a challenging task. It will consume most of your attention, and mistakes and oversights could cost fortune immediately or throughout the investment lifecycle. Consequently, a system that includes checklists, reminders, and multiple approvals ensure that nothing falls through the cracks.
A robust hotel acquisition pipeline is composed of two basic components – investment opportunities and financing. Each person in these categories has unique needs and desires regarding their investment strategies. Your objective is to learn about them and meet them where they are.
Network segmentation helps you develop targeted messages for each group of prospects. After all, an irrelevant message has a worse impact than on message at all. The two segments previously mentioned break further into their role in the accessing the relationship’s benefits – direct, intermediary, and third party.
- Direct: decision makers in selling a property or providing financing, such as owners, investors, and loan originators
- Intermediary: brokers that represent the direct crowd in marketing properties or financing opportunities
- Third Party: service providers of the direct crowd that may have insider information or the ability to make an introduction for opportunities or financing
A strong network links each of these constituents together through you. Ultimately, you’re providing a service to many of these people, whether you realize it or not. Focus on their needs and wants to become a person of value in their lives, and the result will be positive in unexpected ways.
An introduction between an attorney and an asset manager may not seem like much to you, but it could transform their businesses. Who do you think they will call next time either hear about something that fits your investment criteria?
Consider these two tricks when it comes to building a productive network.
First, be sure that everyone in your network knows your objective in collaborating with them. Believe it or not, most people genuinely want to help you. The problem most people face is that they don’t make it clear what they want from others. Therefore, a productive networker prepares a clear ask from each segment of her network.
Make it easy for people to help you, and they’ll be more apt to come through.
An ask from a potential investor may be to review a sample deal to be prepared when you come with a live one. On the other hand, the ask for a hotel broker would be to introduce any deal that fits your clear and simple investment criteria.
Second, networking simply comes down to just being a friend. Your objective should be to give more value than you take from each person in your sphere of influence. Don’t underestimate your contribution, as something of little value to you may have tremendous value for someone else.
Industry relationships are important, but they’re only as good as how you engage them. Our society and industry are more connected than ever. However, many of these connections are shallow and transactional. The greatest value in your network comes from deep, meaningful relationships built on trust and contribution.
A consistent approach to stay relevant will position you as the de-facto chief of your chosen tribe. It only takes a few value-oriented touches every year to stand out from an increasingly noisy crowd. Something as simple as, “just checking in to say hi,” has lots of mileage in this noisy world.
Hotel investing is difficult, and a healthy hotel acquisition pipeline is essential to consistent growth. All the strategy, systems, and networking in the world are worthless without decisive action on your part.
Dozens of deals grab your attention daily. They get your creative juices flowing, and it’s easy to lose yourself in that distraction. Stay close to your expertise in a thoughtful way by periodically reviewing your progress toward clearly stated goals.
Guests, employees, investors, lenders, and other stakeholders also consume your time and attention. An acute awareness of how you use your time relative to your priorities helps you maintain focus. Find ways to delegate or postpone the many tasks that you may perceive as urgent an important. A deal sponsor’s time is usually better spent making deals than servicing them. You can build your business into the one you want in no time with some clear goals and dedicated focus regardless of where your it is today. Don’t let excuses get in your way. There’s never a market good enough to prevent a bad deal, nor a market bad enough to prevent a good deal.