Finding Mr. REIT
Few hotel REITs, if any, do joint ventures, he says. Public REITs, which are followed by the analyst community, are hesitant to enter into joint ventures, partly because they can be more difficult to evaluate. “There’s no question that there’s work associated with [joint ventures]. As opposed to just asset management, you have to manage the relationship with your partner,” Medzigian says. “But we believe it’s worth doing the extra work for those additional opportunities that get presented to us. If someone has a real estate situation, and they need a partner to capitalize it or buy an asset, we’ll come in as the majority investor to help them out. Typically REITs don’t do that, though some private equity funds do. We get some of our best opportunities working this way.”
Watermark focuses on balancing two major components in its portfolio growth/income and capital appreciation. The former typically includes high-quality, premium-branded
select-service properties in urban markets, such as a vertical construction Hilton Garden Inn or Marriott Courtyard. “We like them in urban markets,” he says. “They provide some barriers to entry—it’s a lot tougher to build something new to compete with us in an urban market than it would be in a suburban one.”
The second part of the portfolio—capital appreciation—focuses on complicated full-service assets, which often require market repositioning, brand changes, management changes, and renovations. As one example, Medzigian points to the New Orleans Hyatt French Quarter. Originally built in 1849 as a DH Holms department store, the property was converted to a hotel in 1995. “Post-Katrina, it went through the same struggles as a lot of properties in New Orleans did,” he says. “When we found the opportunity, it was really in need of capital, so we did a $17.7 million renovation to the property, and today it’s an entire city block on Bourbon Street—very different than what it looked like a couple years ago.
“This was significant construction—little returns over the short term, but over the long term we have a great opportunity to create value.”