REPORT FROM THE U.S.—Mark Laport would rather swing for singles than homeruns.
Having circled the bases in the hotel industry enough times over his decades-long career, the president and CEO of Concord Hospitality Enterprises knows continuous success is more likely to come with several stable investments than one or two blockbusters amid a flurry of misfires.
The difference often comes down to risk, which Laport and his team at Concord attempt to mitigate by choosing the right partners, brands, opportunities—and locations.
“It’s smart to hit singles versus looking for the homerun, which you can find and hit in the great gateway cities. You’re rewarded more consistently, albeit without the four baggers, when you’re in markets like Pittsburgh,” he said.
Pittsburgh has emerged as a major development hotspot in recent years for Concord, which has 15 properties in the market with an additional two under development, he said. The company has 86 hotels in its portfolio, of which it owns 40.
Concord is not alone in its enthusiasm for the secondary market. There are 13 hotels in Pittsburgh’s total active pipeline at present, according to STR, parent company of HotelNewsNow.com.
Owners range from individuals to institutions, with independent and brand affiliations alike. Differences aside, what each has in common—and likely what attracted each investor to the table—is their development in one of the most stable operating markets in country.
Make that the ninth most stable market in the country to be exact, according to HVS’ Volatility Index, which tracks historical and projected rates of per-room value changes for individual markets. The five most stable markets are: Cincinnati; Syracuse, New York; Buffalo, New York; Albuquerque, New Mexico; and St. Louis.
The five most volatile markets are: New York; West Palm Beach/Boca Raton, Florida; Las Vegas; Miami; and Wilmington, Delaware.
Underwriting for volatility
Primary gateway markets, which are typically subject to greater swings in performance and deal activity during each cycle, generally are more volatile than their secondary market counterparts, according to the Volatility Index.
“Markets that are more stable generally are perceived as less risky and people would buy them on a lower (capitalization) rate, meaning a lower return expectation,” said Thomas E. Callahan, co-president and CEO of PKF Consulting’s West region.
Thomas E. Callahan
In major urban markets, on the other hand, investors often “throw money” at assets, resulting in competitive bidding frenzies that can drive up pricing considerably, he added.
Those fluctuations are not lost on investors such as Laport and Adam Valente, managing director at RockBridge, which during 2012 acquired properties in Baton Rouge, Louisiana; Atlanta; and New York, among others.
“(Volatility) ranks high. We don’t necessarily have a direct volatility algorithm … but we are looking at volatility really as a subset of risk. What we do as we look at potential opportunities is first and foremost evaluate the risks of a transaction,” Valente said.
With highly volatile markets comes more of that risk and thus the need for a deeper understanding of cycles, said Stephen Rushmore Jr., president and CEO of HVS. “You don’t want to over-leverage yourself in a very volatile market because you could be at a higher risk of a maturity default.”
The RockBridge team tries to remove as much of that risk as possible during the underwriting process by having a business plan that focuses more on strong cash flows and less on exit strategy.
“The volatility associated with valuations, that’s something we try to take out as much as we can or mitigate by having a business plan and strategy that reduces the effect and requirement that we sell at the right time at the lowest cap rate,” he said.
But risk is inherent in all markets, not just the most volatile. That’s why Valente and his RockBridge team take the same bottom-up approach when analyzing any potential opportunity.
“It really becomes the sum of the risks, the sum of the rewards,” he said. “Our investments in New York, for example—New York both excites us and scares us. … We know that there can be premium risks, but premium rewards.”
Laport echoed that viewpoint.
“In some ways, (underwriting) is much the same,” he said, regardless of the market. “We want to be able to underwrite to at least a 20% (internal rate of return) with a five-year look back whether it’s a midsize market … versus a primary market.”
While volatility certainly informs investment strategies, it doesn’t have to constrain them, sources said.
RockBridge has assets in both the most volatile and most stable markets throughout the country. It’s more a matter of evaluating opportunities—not volatility, Valente said.
The company’s April acquisitions of a DoubleTree and Hampton Inn in New York, for example, stemmed from a strong, existing relationship with a sponsor who boasted a track record of success in the market. Those deals required the same analysis of quantitative and qualitative factors as would any other, Valente said.
Concord Hospitality Enterprises
“It’ the same philosophical approach to not allow emotion, to not allow a sexiness of real estate or to be in markets just so we can tell people that we’re in Los Angeles, Chicago, San Francisco and New York,” he said.
Laport champions a similar strategy at Concord. The company’s concentration in secondary markets has as much to do with opportunities as it does a risk-averse propensity, he said. There’s simply more opportunities outside of the top 50 MSAs, which have “pretty much been picked over.”
Lenders also are more likely to provide debt financing for a project in a more stable market, he added.
“When you go to a major market that really got hit, lenders tend to be harder to talk into greater leverage,” Laport said.“It’s easier in some ways to do deals that are in secondary markets.”
That’s not to say Laport isn’t sometimes tempted by the higher premiums in the major gateways.
“We recognize that more and more big time investors are more attracted to the top 50 markets than they are to (secondary markets). Since part of our investment strategy is to build or buy and create value and then eventually, when the market tells us, to exit, there is something appealing about primary markets in that regard.”
But on the other hand, he said it’s nice to be in “steady-eddy” markets such as Pittsburgh that don’t collapse with the broader economy.
Ultimately, most investors use both strategies, Laport said. But for those who want to win on a consistent basis, “you just pick your spots in strong, second-tier markets because they offer much more stability over time.”