National Report – Hilton Worldwide’s sale last fall of the iconic Waldorf Astoria Hotel in New York for $1.95 billion to the Anbang Insurance Group, a leading Chinese insurer, continues to reverberate through the industry. The milestone sale reflects on the health of the transactions market and, by extension, the health of the lodging industry as a whole.
But it also touches on the sensitive subject of the huge amount of outbound Chinese capital being invested in U.S. real estate, a wave that shows no indication of abating, and promises further increases in foreign investment in U.S. real estate, from a variety of sources and regions.
“The Waldorf sale was clearly a watershed. Now no one will be surprised to find the other nine top Chinese insurance companies interested in acquiring U.S. real estate assets, whether it be lodging or other real estate asset types,” said attorney Peter Benudiz, a partner in Milbank, Tweed, Hadley & McCloy, where he is co-leader of the gaming and hospitality group.
In the past few years, the capital coming out of China has become much more targeted, noted Simon Turner, Starwood Hotels & Resorts Worldwide’s president of global development. “It’s increasingly focused on the luxury segment,” he said.
Alan Fuerstman, founder & CEO of Montage Hotels & Resorts, sees this as evidence of the luxury lodging segment’s strong comeback, post downturn. “There’s an important lesson in staying focused on your one goal. You wouldn’t want to put a Montage hotel in a market that can’t support luxury,” Fuerstman said, noting that a Montage is presently under construction in San Diego. “It’s been tempting to waiver from our one brand strategy, but you need to resist temptation.”
Hand-in-hand with the spike in Chinese capital investment is the ongoing influx of outbound Chinese travelers to the U.S. “As the middle class there has grown, we’ve seen—and continue to see—more Chinese visitors here,” said Omni Hotels & Resorts president Michael Deitemeyer.
Turner cited a 20-percent increase year-over-year in the number of Chinese visitors to Starwood’s U.S. hotels in 2014. He attributed the jump, in part, to the company’s extensive distribution in China.
Given the recent acquisition of Delta Hotels & Resorts by Marriott International and the Kimpton Hotels & Restaurants Group by InterContinental Hotels Group, industry executives believe this wave of M&A activity is just the tip of the iceberg. “Are more acquisitions coming? If you don’t think so, you’re naïve,” said Michael George, Crescent Hotels & Resorts president & CEO.
According to Deitemeyer, some further level of industry consolidation in the coming months is inevitable. “There’s just a lot of capital out there, investors looking to park their money in a place they think is safe,” he said.
Benudiz, Turner, Fuerstman, Deitemeyer and George spoke on one of the “View from the Boardroom” senior management panels at January’s Americas Lodging Investment Summit in Los Angeles.
Daniel Peek, senior managing director of HFF, which provides capital markets transaction services to the real estate industry, described the supply of capital available, both domestic and foreign, as “unprecedented.” Foreign capital aside (Chinese capital included), suitors range from private equity funds, hedge funds, institutional investors, high-net-worth individuals and publicly traded REITs, among others.
Kevin Mallory, senior managing director & global head of CBRE Hotels, identified three types of foreign capital: sovereign wealth, wealthy families and wealthy individuals. “Wealthy individuals can be the most challenging of the three because it can be the hardest when it comes to due diligence,” Mallory said.
In January, CBRE arranged the sale of the luxury Canyon Ranch Hotel & Spa in Miami Beach to private equity firm Z Capital Partners.
Advance legwork can be critical. Advisory firms with a network of international offices have the advantage. “We rely on our people on the ground in places like China and Singapore. Consequently, we may know as many as 75 percent of these sources of capital before the deal comes together,” said Arthur Adler, managing director & CEO of the Americas for Jones Lang LaSalle. “This intelligence is especially helpful in cases where there’s unusual risk.”
MORE TO COME
Adler expects transactions volume to be up significantly higher in 2015 than in 2014, which itself was a robust year. In February, JLL’s Hotels & Hospitality Group reportedly was selected by Diageo to arrange the sale of the luxury Gleneagles Hotel in Perthshire, Scotland.
Aiding transactions is the fiscal policy of the Federal Reserve. “The interest-rate environment is still good, which has been extremely helpful,” said William Hodges, president & CEO of broker Hodges Ward Elliott. HWE’s recent deals include the sale of the Kurhaus Hotel in The Hague, the Netherlands.
In addition to one-off transactions, advisory firms are seeing an uptick in the number of portfolio deals. “Many of the players in the past year in search of such deals have been private equity firms that are looking to the lodging sector for significant appreciation,” said Louis Stervinou, managing director of Eastdil Secured.
Historically, the hold period for private equity firms has been five to seven years, Stervinou noted. “But that’s considered to be a long hold today. Some holds can be as short as 18 months-24 months,” he said.
Adler’s take on the hold period is a bit different. “Many buyers who bought in 2011 and 2012 are starting to recycle that capital. Others are starting to hold longer in light of the lodging cycle’s upward trend,” he said.
Peek, Mallory, Adler, Hodges and Stervinou spoke on the “View from the Transactions Leaders” panel, at the ALIS Conference.