ATLANTA—Mit Shah knows the importance of maintaining a fresh portfolio of hotels. Not every property is destined to become a long-term hold—this is especially true for Shah’s Noble Investment Group, a private-equity real-estate firm that owns 45 hotels with 7,957 rooms.
Shah, the CEO of the group, along with Noble’s management team constantly assess opportunities to churn the company’s roster of hotels to enhance its overall value. That’s no different than the approaches of many companies as the hotel industry continues to dig itself out of the recession and take advantage of a positive business climate during the next few years. What is different is Noble’s approach to building a defined portfolio of assets that have certain characteristics.
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Mit Shah, CEO of Noble Investment Group
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“What’s likely to happen is we’ll be sellers over the next couple of years on certain assets, and then we’ll be looking to put together a very nice, homogenous portfolio of transient demand-oriented hotels that have a very attractive yield associated to them that will look and feel like great portfolios that have existed in our industry over time,” said Shah during a break at last month’s Hunter Hotel Investment Conference. “We’ve always had a real bias for transient demand hotels. While it’s day-to-day (business), you can predict the stability of it.”
Noble’s current portfolio includes 17 full-service hotels; the balance is comprised of select-service and extended-stay properties. Although it will develop properties from the ground up—Shah said Noble has built 30 hotels during its 19-year history—the company’s wheelhouse is acquiring, upgrading and converting hotels to a brand in a segment that commands higher average daily rates.
During the past 15 months, Noble said he has used its third Noble Hospitality Fund investment fund to acquire 15 hotels that are driven by transient-travel demand.
“Our thesis has always been to invest $100 million of equity a year, so leverage that between ($200 million) and $250 million of assets a year,” he said. “Last year we did $350 million in assets. A lot of that was things that we had been incubating over time. We’ll continue to find one-off opportunities, $20 million to $30 million individual investments on an ongoing basis.”
Targeting specific assets
The company’s acquisition targets are clear.
“As you see our portfolio going forward, it will have a very, very high bias to premium select service and extended stay and compact full service, which generate most of the demand from the transient traveler,” Shah said.
He said a ‘compact full-service’ hotel has between 200 rooms and 250 rooms where at least two-thirds of its business comes from transient travelers rather than group business.
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The 255-unit Hyatt Regency Valencia (California) is one of 17 full-service properties in Noble Investment Group’s portfolio.
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“While we believe that group will always be a big part of our industry, our real concern is that until there’s really robust labor growth that the group demand is not going to be able to pick up in volume and the spend is not going to be what it historically was,” Shah said.
Noble executives know the specific market type in which they want to own hotels and refer to those markets with major universities and medical research centers as “Eds & Meds.”
“(Those markets have) stable demand that doesn’t get as much impacted through economic periods as do corporate and leisure travel,” he said. “It creates a base of business.”
Shah said there should be plenty of opportunities during the next few years for Noble and other hotel investors to scoop up assets.
“We’re now in a scenario where about $175 billion in lodging loan maturities are going to take place while, at the same time, brands are going to mandate property-improvement plans,” he said. “A lot of the owner-operators in our business … are going to face challenges they’ve never faced before in terms of a lender saying, ‘We need an 11% debt yield on the asset to refinance. And we think the world of you, but the FDIC is mandating we do this.’ At the same time the brand is saying, ‘We know we haven’t forced you to do X, Y, Z over the last three years, but it’s more than carpet, wall covering and televisions, its technology systems and the like, and it needs to be in place.’”
Technology plays a major role
The acquisition, renovation and repositioning of properties are all in Noble’s repertoire. The wildcard, however, is the unknown technological advances that are occurring in the industry, according to Shah.
“The technology side of our business is something that’s going to require some significant investment in everybody because of the transparency and because of how business is done today,” he said.
The need for mega amounts of bandwidth at hotels is at the top of the list.
“It’s fascinating,” Shah said. “It used to be where people would just come in with one device, whatever it was, and used bandwidth to check email. Now people are streaming everything. The real question is ‘can you charge for that?’ We’ll go to a model in our industry that is X (cost) for email versus Y (cost) for streaming video and a variety of other things that consumers do today. But let’s make no mistake: People want the ability to have access to the same things they have in their home. As an industry, we have to provide it.”
Shah said that investment in technology will occur naturally for Noble as it churns its portfolio.
“It’s likely that we’ll invest the current fund that we’ll have over the next two years before we start monetizing the broader portfolio,” he said.
The CEO likes Noble’s direction
There are three important things for Noble to consider when investing in properties, according to Shah.
“One is that we’re inherently lower-leveraged than what the market is. Even in the heyday, we were no more than 65% (loan-to-value ratio). Today it’s probably closer to 60%,” he said. “Two is we want to achieve a double-digit, unleveraged yield in the first 36 months of our investment. And lastly, we’re very focused on two times equity multiples in terms of our overall exit.”
With all of that said, Shah is bullish on Noble’s outlook for the rest of 2012 and beyond.
“I like our organization’s structure,” he said. “We have simplified our business, and we’re focused on a niche of the business that I believe is very, very attractive and is very financially oriented to historically the right ways in which to make money in our business. In times past I’d be the first to admit that we were all across the board. We were looking at public/private opportunities, we were looking at some resort opportunities, full-service opportunities and selectservice. We’ve really synthesized that to a very simplified approach that I’m very, very eager for us to continue to take advantage of. With simplicity and with focus comes quality of life.”
