In October 2001, barely a month after 9/11 had investors walking from deals in droves, Rockbridge Capital LLC closed on a financing deal for a Renaissance hotel in Northbrook, Ill., and launched a $100 million fund. That deal was recently paid off, yielding a 25% internal rate of return to the Columbus, Ohio-based firm. In many ways it tells the story of the firm's long-term horizon in financing ho tels and its identity as an integral part of the hotel business, not just a supplier of capital.

The firm's partners, formerly of Banc One Capital Markets' Real Estate Investment Group, are ex-hotel operators and developers with long-term relationships in the national marketplace. Producing an average annual yield of 15%, the post 9/11 fund led to a second $100 million fund in 2003. This fall, Rockbridge launched a third fund, this one totaling $150 million. NREI recently spoke to managing partner, Jim Merkel, about the strategy behind this latest fund and the outlook for the hotel sector.

NREI: Who are the investors in the latest fund?

Merkel: Life insurance companies comprise 50% to 60% of the investors, while the rest are universities and foundations.

NREI: There are a lot of segments within the hotel industry. Which niche are you targeting and why?

Merkel: The bulk of our business is in upscale select-service (limited food and beverage, minimal meeting space) and upscale full-service product. We'll do an upper-upscale like a Westin, or a resort project that might be Westin caliber but it won't be the Ritz Carlton or Four Seasons. We're focused on providing predictable returns to our investors, and those are in the upscale select-service, and upscale to upper upscale full-service products.

NREI: What kind of deals are you looking for and whom do you like to partner with?

Merkel: We're focused on development deals as well as repositioning deals. The hotel business has an operating component to it, so there's always an opportunity in the marketplace to operate hotels more efficiently than the previous owner. We like to work with owner-operators that have the same philosophy toward the hotel business that we do, where there's an alignment of interests, where we can collectively leverage the relationship to do more business together, more efficiently and faster, and provide a competitive edge in the marketplace.

NREI: What is your assessment of the state of the hotel industry today in terms of real estate fundamentals?

Merkel: The hotel industry is fundamentally in its best position since 9/11. The growth rate in revenue per available room (a measure of performance that takes into account occupancy and average daily rates) has been in the double digits, while supply growth is historically low. In September, RevPar within our funds grew 25% over the same period last year.

NREI: What kind of returns is the fund seeking?

Merkel: All the investments that we make — first mortgage, mezzanine debt and equity — will deliver to our investors a return in the mid- to high teens.