By Leah Etling, Contributing Editor
Eight years ago, high school classmates Vamsi Bonthala and Sheenal Patel combined their mutual expertise in law, finance, investment strategy and asset management to create Arbor Lodging Partners. Bonthala—the former attorney—and Patel—the former investment banker—are now both based in Chicago but are buying hotels across the country. Once purchased, the hotels are placed under the oversight of the affiliated hotel management company, NVN Hotels. And the acquisitions are coming fast and furious: Arbor Lodging acquired nine new hotels around the country in 2015, and there’s more in the pipeline.
Focused on adding value to the assets it acquires, Arbor Lodging has been flexible about geography. Two 2015 acquisitions included Hotel Phillips in Kansas City, Mo., and the Holiday Inn Express & Suites New Orleans Airport, while a 2014 acquisition was the Doubletree Park City Yarrow in Park City, Utah.
In the case of Hotel Phillips, a historic art-deco icon of downtown Kansas City, Arbor is beginning a comprehensive renovation to deliver a guest experience that takes advantage of all the amenities its downtown location has to offer. It is also scheduled to join Curio—A Collection by Hilton™, a global set of remarkable upscale and luxury hotels, in late 2016, after renovations are completed.
In New Orleans, a savvy purchase of a strong and cash-flow-positive asset was enhanced with operational improvements. “We are focusing on more targeted sales, focusing on higher-quality clientele and trying to figure out how we can push that average nightly rate up, and cleaning up operational costs so that the margins are stronger,” Bonthala explained.
CEO Bonthala, who previously practiced law in the private equity group of Kirkland & Ellis and the real estate group of Cadwalader, Wickersham & Taft, talked with CPE about the growing hotel investment business.
CPE: What attracted you to hotels as an asset class?
Bonthala: We were particularly interested in the hotel business because we liked that it wasn’t a pure real estate play but real estate plus an operating business. For a couple of guys that were willing to roll up their sleeves and really get into the operating details of an asset, the operating business gave a lot more leeway to create value, vs. just buying an apartment building or an office building, where you are buying the leases.
We had grown up around some hotel owners and operators and seen some very successful folks who had done the owner/operator model. They would throw their entire life into a single asset and live and breathe that hotel. You find all these ways to create savings and find success in your single asset, if you aren’t afraid to get your hands dirty. We like this hands-on approach, but in the context of applying it on a broader scale. We were coming from the institutional world, from Wall Street, where we were working with very sophisticated clients and working on very large deals. We saw a lot of best practices that were scalable. The owner/operator model was not so scalable. Our thought was to come up with a business plan that really took the best practices of entrepreneurial operators and those of sophisticated institutional investors and find success in the business using some of each.
CPE: Why Chicago?
Bonthala: We had been at it for a couple of years, our lease was up in New York, and pricing was about to triple on us. Plus, we were thinking of hiring some folks and it was a lot cheaper to do it in Chicago. We were also looking at some deals around the country, so being geographically central seemed like a big value. And at the end of the day, we both had Midwestern connections. We both went to (the University of) Michigan, and I grew up in the Midwest. Coming to Chicago was an easy transition for us because we knew a lot of folks here already.
CPE: You’ve been growing. Tell us about that.
Bonthala: Between September 2014 and October 2015, we acquired nine hotels and 20 loans, and have now laid the groundwork for more to close in early 2016. Between all of that, we have grown pretty drastically. In addition to the acquisitions, we have made additional hires in the corporate office, growing our infrastructure.
CPE: Where do you currently have the most properties and why?
Bonthala: Indianapolis, Ind. We have five hotels there. What initially attracted us to Indy is that it’s just a really diverse market. It’s got generally good demographics, it’s growing, and you have a strong health care base, strong manufacturing base, as well as distribution centers. All of these types of businesses lead to business at our hotels, and you have a healthy balance of strong business subgroups in the market.
The other thing we like about Indy is it hosts a lot of great citywide events—from the Super Bowl to the NCAA Final Four—which are great things to fill in rooms between your regular leisure and corporate business travel.
CPE: What makes you successful in the third-party hotel management space?
Bonthala: I think the key is that we are third-party managers—and also owners. The whole reason that we started a management company was that we felt we were not getting the type of attention that we hoped for. I would assume that we are one of the most unique management companies out there in that we were started by people with our background—that is, NOT hotel management.
However, everyone in operations has been in the industry for a long time and has worked for some of the largest management companies in the country. But at the top, we did not come to this business through operations. I think that having that different way of looking at things and challenging norms has helped us be really successful. When we bring viewpoints from the investment world, and the way that we’re challenged by our investment partners and asking tough questions during operations meetings, I think that we’re looking at things in a way that even our operations team admits they haven’t thought about.
CPE: Will you consider building your own hotels from the ground up?
Bonthala: It is always a possibility. We have looked at some deals in the past. We are looking at a couple of deals right now—with a couple of key recent hires, there’s significant new construction experience on the team right now. If we can get comfortable with the market and the operational story of the deal, we’d absolutely look at new construction opportunities—for unique markets where we see real value in building new.