LOS ANGLES—While hotel investors generally don’t dwell on transactions they missed out on because there’s always another deal to be done, deal envy is something often reflected upon at large industry conferences. Such was the case at last week’s America’s Lodging Investment Summit when four major investors talked about recent hotel deals they liked.
Three of the speakers on the “Investment Leaders Outlook” panel talked about deals their companies didn’t make in 2011 but that they admired nonetheless:
• Rob Kline, CEO and co-founder of Chartres Lodging Group: “The transaction I was most jealous of was the Helmsley Hotel (Host Hotels & Resorts’ March acquisition of the New York Helmsley Hotel for US$313.5 million). It was an amazing reposition opportunity, well located in a major market. Give Host a lot of credit—they paid above what the rest of the market was willing to pay. Over time people will look back and say, ‘Wow, that was great deal.’”
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Tyler Henritze of Blackstone
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• Tyler Henritze, managing director at Blackstone Group LP: “Northwood (Investors) buying The Palace in New York (in mid-2011 from an entity affiliated with the royal family of Brunei for US$400 million) is an interesting deal. It’s obviously a tremendous piece of real estate. They made the capital investment to bring the asset back to the quality it deserves. John Kukral, Northwood’s president and CEO, and former Blackstone executive and his team made a very smart investment with a tricky ground lease, but those guys are smart enough to sort through that and unlock some value.”
• Dave Johnson, president and CEO of Aimbridge Hospitality: “Monty Bennett at Ashford (Hospitality Trust) with the Highland (Hospitality) deal. (In partnership with Prudential Real Estate Investors, Ashford acquired a 72% stake in the 28-hotel portfolio for approximately US$1.28 billion in March). Over time that deal will be very lucrative for Ashford.”
Deal review
The panelists also discussed a couple of deals their own companies made during the beginning of the ongoing up cycle in the hotel industry.
Henritze said Blackstone’s re-acquisition of Extended Stay America in 2010 was a no-brainer after it sold the company in 2007 for approximately US$8 billion. The 2010 buy was a US$3.9-billion purchase by an investment group led by Blackstone Real Estate Partners VI, Paulson & Company and Centerbridge Partners.
“What’s easier to buy than assets you know real well?” he asked, mentioning the leadership of ESA president Gary DeLapp and his executive team as a key component of the deal. “We sold that business, which was good for our investors, at the height of the market. It’s easy from an acquisition point, especially when the price is half of what you sold it for.”
Suril Shah, VP at Starwood Capital Group, said his company’s deal in August to acquire 18 hotels from Hersha Hospitality Trust for US$155 million represents a microcosm of the current acquisition environment.
“A trend we’ve seen is to put a bid on a portfolio and not hear back for a few months because (our bid) was much lower than others,” Shah said. “(In the Hersha deal) we then get a call back in a few months and hear, ‘The price just got knocked into your range.’
“We acquired about 18 hotels in the Northeast, typically not markets we normally would have looked in,” he said. “They were select-service assets, we were able to purchase them at a (capitalization) rate that was attractive enough to assume leverage to lever into mid teens to high teens return from day one. … This was something we felt we could run the upside, and if things stayed flat we could still make a pretty decent return.”
Kline echoed Shah’s stance on the elongated deal process.
“In this age it takes a lot longer to make an investment,” he said. “We spent 12 months working on Novotel in Times Square. We had property tied up in May, the summer winds swept lenders out of the market, and it took awhile to wait for lenders to come back into the market.”
2012 plans
Looking ahead to the rest of 2012, Henritze said Blackstone’s bias will “always be toward larger transactions.” He said the firm recently bought a couple of debt pools that had debt pieces securitized by hotel assets. Blackstone controls more than 500,000 hotel rooms globally, including the Hilton Worldwide portfolio, which has under its umbrella more than 3,750 hotels.
“We tend to have to be a bit more creative in terms of how we go about transactions,” he said.
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Dave Johnson of Aimbridge Hospitality
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Johnson said Aimbridge will only buy into the debt stack if the executive team is confident it will get a chance to fully acquire the asset at some point.
“See a lot of opportunity in the Caribbean,” he said. “We’re working on a fourth deal there. Most of the resorts, the resort piece is doing very well. It’s the residential piece that has tanked the project. Ironically, it was the residential piece that was the reason for getting financing seven or eight years ago.”
Aimbridge has a direct investment in 68 of the 80 assets it manages and looks for opportunities to make an investment, Johnson said.
Shah said Starwood Capital has several strategies in play for 2012, including “going straight for the management team of the companies we want to acquire because you need a motivated seller in order to do anything,” including acquiring loan pools and providing preferred equity.
Kline said his first target is Chartres’ existing assets.
“Sometimes there’s an opportunity to buy down your debt at an extraordinary discount,” he said.
Other than that, the company will target distressed properties, which haven’t been abundantly available during the downturn and subsequent redound.
“There’s a lot of zombie owners out there but not a lot of forced selling that’s going on,” he said. “We’ll target meetings-oriented hotels. It’s the one segment that hasn’t bounced back dramatically yet.”
Improving outlook
The panelists expect the hotel environment to improve. Kline said the mixed message of solid operating fundamentals amid an uncertain lending scenario is less than appealing.
“It’s like a diaper,” he said. “It looks good on the outside but you don’t know what you’re getting until you open it up. There’s a lot of confusion out there with the world economy and how we’re all related. It’s a very strange capital markets dynamic but the operating fundamentals are growing. As long as we keep new supply in the closet for the next four or five years it’s going to be a fantastic time to buy hotels.”
Johnson said the fundamentals continue to outperform expectations.
“We budgeted 7% (revenue-per-available-room) growth on comparable stores, and in the first quarter we’re going to exceed that,” he said. “The majority of our competitors did too. We’re more bullish than the prognosticators”
He said the healthy nature of corporate America—there is US$2.7 trillion on corporate balance sheets—is one indicator that things will only get better for the hotel industry. But in the world of hotel investments, nothing is ever certain.
“The debt markets are schizophrenic,” Johnson said. “If you’re buying cash flow, the pricing is going to get bid up. There are some great real-estate deals out there, but every time I think I have debt markets figured out, two weeks later it changes.”
