SpanishREIT.com interviews Mr. Sánchez, Managing Member of Walker Reynolds Lodging Partners, LLC
Francisco J. Sánchez is a Managing Member of Walker Reynolds and oversees the company’s investor outreach and relations. He served as Under Secretary for International Trade at the U.S. Department of Commerce until 2013, a post President Barack Obama nominated him to in 2009. Sánchez is also the founder of CNS Global Advisors, a company that provides strategic advice to companies and governments looking to expand or resolve issues in foreign markets, including the USA & Latin America.
As at the 25th of February, the Dow Jones U.S. Hotel & Lodging REIT Index has seen a 1Y performance of +6.28% (DJUSHL) on the back of growth in previous years and recovering from a decline during the last semester of 2018. The UNWTO confirmed the USA’s ranking as the world’s largest destination by receipts with over US$210bn, significantly ahead of Spain which ranks 2nd with US$68bn.
Q: Could you comment on the performance of US hotel REITs and hotel funds and why you believe the current environment presents a good opportunity to launch the Walker Reynolds Lodging Partners Fund?
FS: Generally, we feel that US hotels, both public REITs and from a private transaction standpoint, have continued to trade at discounts to other major real estate asset classes throughout the recovery since the recession and in the last 6 months in particular has traded at a steeper discount than its peers which we believe is creating some buying opportunities not available in other major CRE categories.
Q: Walker Reynolds Lodging Partners, LLC, will focus on acquiring quality select-service hotels with major brand affiliations (such as Marriott, Hilton, Hyatt, IHG). Why have you decided to focus on this segment of the hotel sector and target the 100 largest Metropolitan Statistical Areas?
FS: WRLP is a cash flow focused fund and we have chosen to focus on select-service hotels because of the significant yield premiums to other major alternative investments. Many commercial real estate sectors are facing major head winds in today’s environment, while lodging has continued to see record demand along with supply growth remaining in check. While we are focused on the top 100 largest MSA’s, we consider ourselves market agnostic. There is not one specific region or market in the U.S. that we place priority over others. We go where we find the best deals.
Q: The Fund is targeting $100 million in capital and will be seeking to maximize returns through cash flow generation as opposed to relying on outsized appreciation and market timing. What stage of the fundraising process is the fund at and what will you be requiring from the individual properties you purchase?
FS: We have currently raised close to $20 million in equity as of January of this year. We are still raising capital for fund one and we expect to have a few new investors on board in the next few months. We will be raising until at least the end of Q1, where we will most likely shut down fund one and begin raising a second fund sometime in mid to late 2019. We focus on properties in the $15-$40 million market segment where larger institutions are less active. Given where we are in the current cycle, and what we see as an environment of continued slow growth both domestically and internationally, our strategy focuses on acquiring assets with significant yield that can be maximized through better management and light capital work.
Q: I understand you want to minimize development, construction and repositioning risks yet achieve gross IRRs of 16% overall which can be a complex ordeal given investor demand and competition for hotel properties. Could you comment on any acquisitions the managing members have formalised or seen trade during the last years which are good examples of the type of transactions you would like to carry out during the fund’s 3-year investment period?
FS: The fund purchased our first property in February 2018, which was a Residence Inn in North Charleston, SC. We are also a few weeks away from closing on 3 Hampton Inn’s located across the Midwestern US. These properties were all purchased at quality current yields (8 – 9% before debt) and have a proven ability to generate significant cash flow stemming from solid market demand. Additionally, in each case there were noticeable operational deficiencies that WR has/will clean-up to further increase cash flow to achieve favourable cash on cash returns.
Q: According to Nayan Patel it is of the utmost importance “that investors in the fund receive the maximum return on their capital”. What fees will the fund have and how does the capital distribution work?
FS: WRLP charges a management fee of 1.5% of committed capital during the investment period, and 1.5% of invested capital thereafter. The fund distributes quarterly to investors and offers a preferred return of 12%. We do not charge any ancillary fees for acquisitions, financing, disposition, etc that typically eat into investors’ returns.
Q: Nayan served as the President & CEO of District Hospitality, Brett advised in over $2.7 billion of lodging sector transactions at Eastdil Secured and you were Under Secretary for International Trade at the U.S. Department of Commerce until 2013. How is the fund structured in terms of departments and numbers of employees and how does the track record of each of the managing members contribute to the vehicles mission?
FS: Nayan Patel and Brett Rush are responsible for deal origination, structuring and asset management of the company’s investments. Francisco Sanchez and Greg Dunston oversee the company’s investor relations and assist in day to day operational activities of the firm. The combined experience of the managing members, from Nayan Patel’s track record of owning and operating hotel assets to Brett Rush’s background in hospitality capital markets, make for a well-rounded team that covers every facet of hotel investment.