Belfonti Capital Partners, LLC


Equity Players Heat Up Hotel JV Market

The Crittenden Report

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Equity providers pursuing opportunistic returns in the hotel sector tout the ability to close deals with institutional money dictating the exit strategy, as institutional investors generally want to be in and out of a deal in three to five years rather than maximizing a deal’s return. AMC Delancey, Belfonti Capital Partners and Marathon Real Estate have professed an appetite for extended-stay properties and all have the ability to stay in the deal for as long as it takes to bear fruit. Marathon’s Managing Director and Senior Portfolio Manager Jon Halpern looks to have about $500M to invest in joint ventures by the end of 2006, but it can also tape into the $7.5B capital base of its parent, Marathon Asset Management, if necessary.

Marathon is building a Marriott Residence Inn in Montreal, and looking for similar extended-stay development opportunities elsewhere, including the United States. One of AMC’s current strategies is to build extended-stay hotels at infill locations on the East Coast. It has partnered up with Paramount Hotel Group to execute this plan and is open to hooking up with new development partners. Belfonti is sizing up an undisclosed portfolio of extended-stay properties spread over different states. Belfonti sees the deal as a reflagging play.

Marathon can’t efficiently compete to acquire stabilized assets, so it focuses primarily on development JVs. It studies the market when scouting deals, especially the competition. Marathon looks to align itself with great local development talent and likes its partners to have skin in the game.

Equity contributions start at $5M, but Marathon will consider deals of more than $100M. The IRR is tied to the degree of risk in the deal. For example, investing in a hotel in Latin America might command an IRR of 40% to 50%. for the aforementioned development deal in Montreal, Canada, the IRR is in the low 20% range. While Marathon’s sweet spot for a deal horizon is from three to five years, it will hold out longer if necessary, with some deals lasting seven to 10 years.

AMC looks to form joint ventures with development partners who are on the same page and have a replicable strategy. The equity player is not interested in recreating the wheel with each deal, so it tends to avoid one-off relationships. AMC usually takes the role of operating partner with an equity contribution of more than 50%. Equity contributions start at $1M, with AMC having gone as high as $20M. It looks for IRRs higher than 20%, as the equity provider looks for more complicated executions that will pay higher returns.

AMC’s money comes from high-net-worth clients. This type of capital fits in nicely with the company’s entrepreneurial approach to real estate. In contrast, companies answering to institutional money sometimes have to operate within time constraints, forcing them to pull out of the deal prematurely in some cases.

AMC President and CEO Ken Balin describes these companies as spending more time unwinding a deal instead of maximizing the returns on the asset. AMC concentrates on exit strategies that makes sense, maybe refinancing and pulling out equity on a tax-free basis, and is not married to a timetable.

Michael Belfonti, chairman of the board for Belfonti Capital, likes the extended-stay play, especially in suburban locales because of what he perceives as a dearth of product in those areas. Belfonti also likes hospitality in general, with travel becoming easier and more efficient given technological tools such as the internet. Also, China’s embrace of capitalism eventually means even more travelers hitting the road.

While Belfonti Capital has done commercial real estate deals with institutional money, it likes the freedom to possibly keep a repositioned asset if the strategy makes sense. The company seeks total deal sizes of $100M and up and a double digit IRR, higher than 20%. Its primary aim is to find a broken asset that needs fixing.

Source: The Crittenden Report, Vol. 32, No. 25 - July 17, 2006