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HB EXCLUSIVE: The Synergistic Effect: Hotel Equities, The Witness Group form strategic partnership between like-minded companies

HB EXCLUSIVE: The Synergistic Effect: Hotel Equities, The Witness Group form strategic partnership between like-minded companies

September 15, 2020 News

By: Adam Perkowsky (article originally published in Hotel Business)

pandemic is a time when most companies hold things close to the vest and keep the ship afloat by any means necessary. For Hotel Equities, based in Atlanta, it was a time to move forward and make 1+1=3  (synergize) with new strategic partner The Witness Group (TWG), an Ohio-based owner, operator and developer with a portfolio of 36 hotels located in Indiana and Ohio, including five under construction and one in development. After transitioning the TWG portfolio onto Hotel Equities’ platform, the management company’s portfolio will comprise 166 hotels in the U.S. and Canada.

“We started the conversation with The Witness Group pre-COVID. The deal had nothing to do with a number or geography,’’ said Brad Rahinsky, Hotel Equities’ president/CEO. “It had everything to do with two groups that were very aligned in terms of priorities, vision and the way they took care of their associates, and then creating a platform that is unique and powerful in our space. People will covet our services because of this 1+1=3 engine that we’re creating. It’s about getting better and groups that were very aligned making that powerful engine, versus a transactional piece of business for the sake of getting bigger.”

The two companies first came together via a chance meeting at a brand event, noted TWG Chief Investment Officer Sagar Patel. “I had the fortunate opportunity to connect with Brad a long time ago and we stayed in touch,” he said. “Originally, we were looking for operating partners or JV partners that were outside of our region because we’re a smaller company that does well in our little bubble in the Midwest. In no way did we go out and say, ‘Hey, we want to do a beauty contest and figure out who can be our operating partner.’ That was never the intention or goal.”

He added, “The first time we met in person, we were given the Hotel Equities mission statement and values, which mirrored what TWG is all about. Having that connection from a nonfinancial standpoint was important because the financial side will be there; Hotel Equities wouldn’t be where it is without that.”

Both of the company’s CDOs, Hotel Equities’ Joe Reardon and TWG’s Aakash Patel, agreed that the partnership made sense for both parties.

“Scale is key in any organization, especially post-COVID to ensure we have our best foot forward,” said Reardon. “Bringing two fantastic groups together with great locations and hotel brands adds incredible value. As we align all vendor relationships, further reducing cost, and look at future projects together, this deal makes all the sense in the world.”

Aakash Patel added, “In a meaningful way, this deal creates opportunity for our associates, hotels and owners. Alignment with Hotel Equities and Virtua Partners was key; by combining the best of all three companies, we will drive value for our stakeholders.”

Last year, Phoenix-based private equity firm Virtua Partners invested $500 million into Hotel Equities’ hospitality platform.*

TWG CAO Sachin Patel and Hotel Equities COO Bryan DeCort noted the cultures of the companies are in sync. “Our values are incredibly similar and both have a primary focus on people. We spend quite a bit of time getting the best talent and providing the environment and feedback where all of our team members can be extremely successful,” said Sachin Patel.

DeCort, who was recently promoted to his position after serving as EVP of Hotel Equities, said, “We share a radical focus on the preservation of our healthy culture, which begins with our passion for people and our relentless competitiveness. Both groups are highly transparent, collaborative and communicative; we look for these attributes with new partners to ensure alignment from the beginning.”

Sagar Patel called TWG a “true American success story.” It was formed in 2016 from a merger between Alliance Hospitality, run by his father and uncle, and KB Hotel Group, led by Aakash Patel’s father. “They came to the U.S. 30-50 years ago, and like other immigrant families, other folks they knew were in the hotel business, and so they naturally got attracted to it,” said Sagar Patel. “They realized with hard work and attention to detail, they were going to be successful. So, they took over a lot of troubled assets—15- to 50-room hotels—put cash into them, and then sold them. Then they got into development in the 1990s when flex service became really hot. We’re now vertically integrated across three verticals: investment, construction and management.”

The three leaders of the two companies that formed TWG—Nitin Patel (Sagar Patel’s father); Kirit Patel (Aakash Patel’s father); and Naresh Patel (Sagar Patel’s uncle)— are known as The Elders. Kirit Patel, on behalf of the three Elders, said of the new strategic partnership, “When Alliance Hospitality and KB Hotel Group merged to form The Witness Group in 2016, the foundation of the partnership was embedded in shared values, trust and integrity. We are excited to build onto this foundation with our newly formed partnership with Hotel Equities as we look to grow and create more opportunities for our team and owners.”

Fred Cerrone, who founded Hotel Equities in 1989 and serves as its chairman, said, “It’s humbling to have a group of highly respected hoteliers see value and potential in joining Hotel Equities to further enhance and grow their portfolio, especially a group who has managed to build their portfolio with integrity and with a deeply rooted culture. I am honored to have the confidence of the ownership group and leadership team at TWG and know that our team will make all of us proud of their decision to partner with us.”

Discussions of a possible partnership first began in February. “TWG visited our offices to get to know us better, and we felt immediate alignment there, but certainly took things slow,” said Reardon. “We look for partners who are aligned with our values, culture, passion and strategy and, as you can imagine, this is not easy to find. A long-term partnership needed to benefit both sides because our legacies, people, brands and assets would all be affected by this decision.”

Rahinsky added, “When we left that meeting, I said to one of my team members, ‘If I would blindfold you and drop you in a room, you’d be hard pressed to tell me if you were in a room full of Hotel Equities leaders or a room full of The Witness Group leaders.”

The conversation was put on pause in March due to the COVID-19 crisis. “We eventually picked back up early summer and decided that the temporary slowdown in business would allow us to integrate with less disruption and better position us for the rebound,” said Aakash Patel.

Both companies were well-positioned to weather the pandemic.

“Most of our portfolio is select-service and extended-stay with the power brands that have a high degree of contribution. Most of our portfolio is in secondary and tertiary markets, and markets outside of the top five or 10 gateway cities, which have been most significantly impacted,” said Rahinsky. “So, if you created the DNA on how to weather this black swan event, and who would fare the best in this particular scenario, we’re very fortunate in that our portfolio has done just that.”

He continued, “We’re nowhere near 2019 numbers, but we like the trajectory of what’s happened over the past 90-120 days, in terms of trend, off of April’s low. And although our visibility is limited into Q4, we’re starting to see some signs that would indicate to us that the business transient traveler is starting to have some confidence and some pre-bookings. As recently as 60 days ago, our booking window was literally in the week, for the week, almost 100%. We’re now seeing that booking pace extend out in some of our properties and some of our markets to where we can now forecast with a high degree of accuracy 30, 45 and 60 days out. Whereas 90 days ago, it was three, six and nine days out.”

TWG’s portfolio is very similar, with hotels in drive-to secondary and tertiary markets. Sagar Patel noted that occupancy rates at the company’s properties currently average between 60-80%.

“[We have] a lot of extended-stay in our portfolio. Everything that we’re opening this year besides one hotel is an extended-stay product, and with the alpha brands—Home2, Residence Inn, SpringHill Suites—so we’re very excited that that is the case, because opening to this market is very scary, especially going into the winter,” he said. “But, we’re faring pretty well. We’ve kept up on our payables. We’ve caught up on a lot of our interest that was

deferred. We’re also very conservative from a leverage standpoint. We own our own assets, so we have to be very careful in terms of how we capitalize ourselves, and always have been very conservative in our approach.”

He added, “I think our recovery will be stronger. We’re seeing good demand in the summer and into September/October. I just got the September pay stats, and it’s definitely stronger than I expected. I think once that vaccine hits or there’s more comfort around travel, you’re going to see a huge spike in leisure demand. Business travel will lag just because of companies and their response time. But our local companies are still traveling.”

The transition from TWG to Hotel Equities started on Sept. 1. “The focus of the first couple of weeks will be to integrate our teams, then focus on the tools and process,” said Sachin Patel. “Our companies have a similar approach and, with the continued involvement of TWG team members at Hotel Equities, the operational transition should be fairly smooth relative to how difficult these mergers can be.”

DeCort said the transition began when he and Rahinsky spent several days in Ohio and Indiana meeting with all of TWG’s property and corporate leaders in a series of town hall meetings. “These were collaborative sessions with TWG principals having a conversation with all their leaders individually to explain the ‘why,’ share the Hotel Equities story and answer questions,” he said. “We know this is extremely important and powerful; it humanized Hotel Equities and helped shift the weight and anxiety with the team toward enthusiasm and excitement. No question that this time together set the positive tone and energy needed to effectively integrate our groups.”

He continued, “Our senior leadership team across all disciplines spent several weeks conducting diligence that included visiting hotels, evaluating systems and meeting extensively with our new team. This process culminated in the deployment of several integrated transition teams that physically visited every hotel to meet with our new associates and complete our extensive transition checklists.”

Another benefit for TWG employees in this partnership is having access to Hotel Equities’ training programs.

“We have training programs in which we have invested a lot of time, capital and resources to ensure that they are the best in the industry because we know that that’s a real differentiator,” said Rahinsky. “We have affiliations and partnerships with a dozen-plus universities around the country, because we know creating our own bench is the best way to ensure that our growth is matched by our talent pool, and gives us the ability to promote from within as we continue to grow.”

“Hotel Equities has intentionally invested in developing and creating customized training roadmaps for our associates at every step in their hospitality journey,” added DeCort.

Going forward, Rahinsky pointed out, “You’ll see us do a number of JV deals where we will both be the owners and Hotel Equities will be the operator,” while Sagar Patel added that any organic growth within its portfolio will be managed by Hotel Equities.

Outside of the partnership, both companies are working on a number of things. “We have patient capital ready in the wings for value-add asset opportunities as well as M&A,” said Reardon. “We are speaking with a few other groups about strategic partnerships but will remain highly disciplined and selective in those conversations to ensure alignment and synergies.”

Aakash Patel added, “TWG continues to look for real estate opportunities. Beyond the assets in the partnership, we already have another five-plus hotel and mixed-use development deals at various stages of development.”

Reardon and Rahinsky expect great things from the partnership. “TWG could be in Hawaii, Canada or any other location,” said Reardon. “What made this deal attractive to us is the people, their impressive organization and the ability for us to do some special projects moving forward.”

Rahinsky concluded, “We really think that we’re going to look back in a year, five years, 25 years and say that this was the creation of something uniquely powerful in the hospitality space that other people are going to strive to emulate.” HB

*This article from Hotel Business incorrectly states that Virtua Partners has invested $500MM in Hotel Equities. Virtua Partners intends to invest up to $500MM in Hotel Equities over time on opportunities like the recent transaction with the Witness Group.