Columbus, Ohio-based RockBridge Capital, which provides capital to hotel owner/operators (sponsors) through equity funds, has continued to find success in the lagging hospitality segment of the real estate industry. Last year, the company originated more than $200 million in first mortgage mezzanine and equity investments. These numbers are more than twice what RockBridge originated in 2002, and the company plans to continue its transaction velocity this year by sticking to a proven philosophy.

“We build strong relationships that continue to provide additional business,” says James Merkel, managing director of RockBridge. The company crafts relationships over time, sometimes interacting with a sponsor for years before a deal is transacted. This method allows the company to complete the right transactions.

“It takes a strong understanding of the hotel business to effectively invest in it,” Merkel says. “We understand the issues our borrowers and partners are going through first hand.”

This experience comes from the company’s principals, some of whom have owned and operated hotels during the course of their careers. RockBridge Capital was formed in 1999 by Ronald Callentine, president; Stephen Denz, managing director and chief financial officer; Kenneth Krebs, managing director; and Merkel. Before launching RockBridge, the group had successfully closed and operated four real estate funds while working in the Real Estate Investment Group of Banc One Capital Markets.

Currently, RockBridge has closed one fund and will have its final closing on its second in May. The first fund, The RockBridge Real Estate Fund, attracted $110 million from institutional investors like Nationwide Life Insurance Company, Delaware Lincoln Investment Advisors, The John D. and Katherine T. MacArthur Foundation, ORIX USA and Huntington Bank. The RockBridge Real Estate Fund II had an initial closing in May, 2003, and will have a final closing this May, with approximately $100 million worth of equity.

“Investors are looking to funds that are specialized, such as ours, so they can control their asset allocation and get a competitive advantage in that segment because of the fund’s specific focus,” Merkel says. RockBridge focuses on experienced hotel sponsors with five to 25 properties and, as a result, the company has a good understanding of the market and its sponsors.

“We do as much due diligence on a hotel sponsor as we would on the real estate and location of the property,” Merkel says. Through this research, the company is able to find sponsors who have an active interest in the ownership and management of their properties and are interested, primarily, in growing the real estate value.

“These groups value a relationship where they know who they are dealing with and there is a certainty of execution,” Merkel says. This type of trust and familiarity, combined with RockBridge’s knowledge of the industry, helps all parties involved when the economy stiffens.

For example, after September 11, 2001, a number of properties that RockBridge had investments in were in violation of certain covenants contained in the transaction. “When we looked at and understood the anomaly occurring in the market at that time, we could see the negative monthly trends of our sponsors were decreasing less than their competitors. In those situations, you roll up your sleeves and work through the problems instead of creating more problems,” Merkel says.

A capital provider that did not understand the market would likely have seen negative trends and begun making unnecessary changes, such as firing the management team or foreclosing on the property.

“Putting the screws down on a management team and borrower who are doing everything they can in that market environment will not typically solve the problem,” Merkel says. “By working closely with our borrowers and having a significant portfolio of hotel investments, we can see what everyone is doing and are well informed to make the right decisions.”

RockBridge’s experience also helps the company navigate the sophisticated market. “The hotel industry is very segmented,” Merkel says. Different hotel segments include business hotels, hotels that cater to the transient traveler (1- or 2-night stays), luxury hotels that cater to the high-end traveler, hotels that cater to associations or big groups, and hotels that cater travelers staying for an extended period of time. These segments run in various cycles within different submarkets, based on local demand generators.

“Our diligence gives us a strong understanding of the current and projected health of a submarket and the viability of a hotel to attract the appropriate business. This enables us to uncover good opportunities in bad markets,” Merkel says. “Historically, lenders are very biased to a market that is perceived as down and they miss opportunities there.” For example, according to Merkel, Chicago is a market that has been hurt significantly in the hotel industry in recent years, and while there are still some lingering challenges in the market, there are also deals that make financial sense.

RockBridge will continue to find the right deals in 2004, which it feels will bring an improved market environment. “Since the market is believed to be bouncing along the bottom, the industry has the general sentiment that the hotel market is a good investment, and new funds are being raised,” Merkel says.

RockBridge is primed to take advantage of new opportunities this year. The company’s selective lending, solid relationships and specialized focus helps to give it a competitive advantage. “When you have the equation right, you can make good money in the hotel industry in both good and bad markets,” Merkel says.

©2004 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.