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March 06, 2019  

Fund Shop Waterton Links With Hotel Manager

Fund operator Waterton has formed a strategic alliance with a hotel-management company with an eye toward expanding its investments in that sector during the next downturn.

Chicago-based Waterton this week bought a minority equity interest in the company, Waterford Hotel Group of Waterford, Conn. While the two firms will continue to operate independently, they will jointly acquire value-added hotels, with Waterton scouting out investments and Waterford managing the properties.

The duo plans to proceed cautiously on purchases until there’s a reversal in key measures of hotel performance, such as revenue per available room. “We believe we are long in the tooth in the revpar growth cycle,” said Waterton co-founder and chief executive David Schwartz. “We want to set up this platform to be ready when we are on the other side of that cycle, when there will probably be more opportunities.”

Waterton was formed in 1995 to invest in multi-family properties, which make up 80% of its portfolio. It added a hotel affiliate in 2010 and a senior-housing platform in 2015. The company invests in apartment complexes via a series of value-added funds. The latest one, Waterton Residential Property Ventures 13, completed raising $920 million of equity about a year ago. Waterton and Waterford will team up with capital partners to make hotel acquisitions.

Waterton currently controls eight hotels, which it has operated via a small in-house team. Waterford will take over their management and absorb that team.

Waterford, which was formed 32 years ago, develops, owns and operates hotels. It currently manages 33 properties and has an equity interest in about half of them. The firm also manages some meeting and event space.

The two partners will see some immediate benefits from merging the management of their hotels, according to Schwartz. “Having a bigger management company with more properties gives you more scale, more economies of scale and the ability to provide for more services,” he said. “Having that scale can make us a better operator.”

Waterford chief executive Len Wolman said the alliance also better positions the companies to expand. “When you have a bigger presence in the industry you have bigger buying power,” he said. “It strengthens brand relationships and opportunities you can source with those brands.”

The timing of a turn in the cycle is uncertain, but there’s no question that revenue growth at hotels started slowing in the second half of last year. STR and Tourism Economics predict that occupancy rates will be flat this year for the first time since 2009 and will decline slightly next year. Meanwhile, room rates are projected to grow just 2.3% this year and 2.2% next year. That would result in per-room revenue growth of 2.3% this year and 1.9% next year, down from 2.9% in both 2017 and 2018.

Until the turn comes, the partners will selectively pursue value-added hotels whose owners are being squeezed by slowing revenue growth and rising operating expenses, as well as properties that need brand-mandated renovations or would benefit from improved management.

“We want to be very careful and prudent with the assets we do purchase and invest in,” Wolman said. “You have to go with where the market cycles are at.” For now, he said, the partners will primarily target “the right asset in a good location where some piece of the structure is broken.”

Combined, the duo’s platform encompasses full- and select-service hotels, mostly with Marriott, Hyatt and Hilton brands. A majority of the hotels are in the East and Midwest.