A recent acquisition of 89 hotels will almost certainly go down as the largest U.S. hotel transaction in the second half of the year. Notably, the dealmaker Flynn Properties remains in a shopping mood.
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- The deal had a $1.1 billion implied total enterprise value.
- It will probably be the largest hotel portfolio by valuation to change hands in the U.S. during the year’s second half.
- Flynn Properties is a privately held company in San Francisco that’s the largest restaurant franchisee in the U.S. and the owner of a handful of upscale resort hotels.
- Värde Partners is an investment firm based in Minneapolis.
- The sellers were affiliates of Highgate and Cerberus Capital Management.
The portfolio included the following:
- 58 Marriott-branded hotels
- 24 Hilton-branded hotels
- 4 Radisson-branded hotels
- 2 IHG-branded hotels
- 1 Choice-branded hotel
The transaction was eye-catching because it appeared to be the precursor to a multi-year push by San Francisco-based Flynn Properties to invest in hotels, especially in select service.
- Flynn began by betting on the office real estate market in the 1990s. It has played the cyclical waves of the commercial office market since then.
- Over time, Flynn has also built up a portfolio of chain restaurants. It has about 2,400 Applebee’s, Taco Bells, Paneras, and similar franchised restaurants that generate $4 billion a year in sales.
- Around 2019 it sold all but one of its office assets, timing a market peak. Since the pandemic, the office market remains disordered. So Flynn is looking elsewhere for now.
- Select-service hotel brands appear to be a segment Flynn is expanding into.
To learn more, I spoke with Greg Flynn, founder, chairman,and CEO.
- “This deal gives us a growth channel for years or decades to come,” Flynn said.
- “We’re in early innings. We’re going to school to learn about hotels from the very best, like Apple Hospitality and Highgate.”
- A year ago, Flynn Properties and Varde Partners did a joint venture to acquire 20 select service, Marriott- and Hilton-branded hotels from Apple Hospitality, a real estate investment trust, for a cash consideration of $211 million.
- Flynn hopes to become a major player in U.S. select-service hotels.
- “For our restaurant brands, we interact very closely with our franchisors, like by sitting on the councils,” Flynn said. “We’re new in the lodging space, but over time we hope to have a constructive relationship there as well.”
- “We’ve always made the most money term buying when other people weren’t buying, and in a market like this, that requires creativity and risk tolerance,” Flynn said. “We’ve got both.”
What has Flynn learned from becoming a franchising giant in restaurants that he thinks is relevant to select service hotels?
- The typical advantages of scale in many industries are for well-known things like being able to negotiate volume discounts for supplies and advertising.
- “But the one thing I think is a little underappreciated is the attraction to scale of top talent, and a consumer-facing hospitality business is all about people,” Flynn said.
- The best talent in hospitality will be attracted by jobs at companies that are large and growing.
- Flynn said he has seen his restaurant business become a talent magnet through scale, which has given the giant franchisor an edge in operational skill and strategic acumen, he said. The same idea may apply in select-service hotels.
- The best brands also deliver significantly better returns over time, Flynn said.
- “I’m a big believer in the power of brand,” Flynn said. “We’ve stuck with nothing but the best brands in that they’re all mature, they’ve proven their legs over every geography, they have broad demographic appeal, they’ve survived multiple economic cycles.”
Flynn believes the select-service hotel segment has macro tailwinds supporting its growth.
- “Full-service urban hotels and convention centers and full-service suburban are in a tough place,” Flynn said. “The market has evolved to create a better mousetrap.”
- “I don’t think they have the broad mass appeal that’s been seized by the select service segment, which has a cohesive model that’s figured out the perfect combination of price and service,” Flynn said.
- The select-service cost model is better than the mid-market full-service model, he said.
- Select service properties cover the basics for many business and leisure travelers efficiently, such as free breakfast and maybe a bar in the evening but no full-service restaurant, daily turndown service by housekeeping, or a large lobby.
But it’s not just select-service hotels that Flynn Properties cares about. Since 2006, it has taken investment stakes in five luxury resorts:
- Esperanza in Los Cabos
- Chileno Bay Resort in Los Cabos, Mexico
- Carneros Resort & Spa in Napa
- Solage in Napa
- Hotel Madeline in Telluride, Colorado
In short, it looks like Flynn is aiming to throw its weight around in the U.S. hotel sector during a post-pandemic, inflationary period that will likely favor opportunistic investors.
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