Everything You Need to Know About REITs and Hotels Right Now
Tom Acitelli April 13, 2011, 6:01 p.m.
With the record tourism in the Big Apple last year, coupled with the improvements in the hospitality industry, one of the most favored asset classes for investment is a New York City hotel. While many hotels are owned by local independent investors, one of the most active investors in this asset class is real estate investment trusts (REITs) and private-equity funds.
If you want to be an active player in the REIT or the private-equity marketplace, one thing is certain: Forget the price of admission and take the leap to become a member of the team of owners in the New York hospitality marketplace.
The newest entrant is Felcor Lodging Trust, a REIT. Felcor owns interests in 83 hotels and resorts in 22 states and Canada, including two in the Garden State: the 274-room Embassy Suites in Parsippany, and the 261 room Embassy Suites at the Meadowlands in Secaucus. On April 4, Felcor announced it had entered into a binding purchase and sale agreement to acquire from Morgan’s Hotel Group the Royalton and Morgan hotels for a total of $140 million, or $496,453 per key. Morgan’s Hotel Group will continue to manage the properties under a long-term management agreement.
The Royalton, at West 44th Street between Fifth and Sixth avenues, has a total of 168 guest rooms. In 2007, the hotel underwent a $20.2 million renovation, or approximately $120,000 per guest room. The Morgan, at Madison Avenue between 37th and 38th streets, has a total of 114 guest rooms. In 2008, the hotel underwent a renovation for $10.3 million, or approximately $90,000 per guest groom.
Host Hotels & Resorts, an S&P 500 and Fortune 500 company, is the largest lodging REIT and one of the largest owners of luxury and upper-upscale hotels. It currently owns 106 properties in the U.S. and 16 international properties, totaling 65,000 rooms altogether. At the end of March, the REIT closed on the purchase of the 775-room New York Helmsley, paying $570 million, or $735,483 per key.
Host plans to spend additional capital for significant property improvements, including complete guest-room renovations, as well as upgrades to the meeting space. The Westin brand will be added to the hotel upon the completion of the property improvement, which is projected for the middle of 2012.
Starwood Capital Group, a privately held global investment firm, has been very active in the hospitality industry. Last month, Starwood Capital and New York-based Tribeca Associates agreed to purchase the site of the former Donnell Library on West 53rd Street. The buyers plan to build a $400 million hotel-condominium-library across from the Museum of Modern Art.
Starwood Property Trust, a commercial real estate finance company and REIT focused primarily on originating, investing in, financing and managing commercial mortgage loans and other commercial real estate debt investment, announced last month that it originated a $30 million mezzanine loan on a luxury hotel located in the heart of the Upper East Side. It was used to refinance a 188-room luxury boutique hotel, and matures in February 2014. It has a loan to value ratio of approximately 53 percent and an expected levered returned in excess of 10.5 percent.
DiamondRock Hospitality Company is a self-advised REIT that owns 233 premium hotels with more than 10,700 rooms. Last September, the company acquired the 169-room Hilton Garden Inn Chelsea for approximately $69 million, or $408,284 per key. The hotel was opened during the fourth quarter of 2007.
In January, the company entered into a purchase and sale agreement to acquire, upon completion (expected in 2013), a new hotel on West 42nd Street in Times Square. Upon completion by the third-party developer, the hotel is expected to contain approximately 250 to 300 guest rooms. The contractual purchase price will range from approximately $112.5 million to $135 million, depending upon the final number of rooms, or approximately $450,000 per room. The contract is for a fixed price (which varies only by the total rooms and the completion date), and the company is not assuming any construction risk, including not assuming the risk of construction cost overruns.
The new hotel in Times Square is being developed by an affiliate of Chicago-based private-equity fund Walton Street Capital and Highgate Holdings, one of the partners of the DoubleTree Metropolitan Hotel that was sold to the RLJ Companies. As I reported earlier in the year, Highgate and Walton plan to offer for sale the 597-room Paramount Hotel in Times Square.
LaSalle Hotel Properties in October 2010 acquired the leasehold interest in Hotel Roger Williams for $90 million, plus approximately $4.5 million of additional cost for the 193-room hotel located at the corner of Madison and 31st Street, or $489,637 per key, InterContinental Hotels Group (IHG) is the world’s largest hotel group with a total of 647,161 hotel rooms in 4,337 hotels. The company is listed on the London and New York stock exchanges and operates hotels in over 100 countries and territories.
IHG owns and manages 15 properties in New York City. In February, the company announced that it was planning to sell the Barclay New York, the 686-room hotel at 111 East 48th Street, just a block from the Waldorf Astoria. London-based Financial Mail believes that the hotel will attract bidders from around the world, including Qatar and Abu Dhabi as well as China. Hospitality industry insiders believe that the hotel may be sold to a REIT. Based upon the latest comparable sales, the property should fetch at least $600,000 per key.
Hersha Hospitality Trust is a REIT that owns interest in 76 hotels totaling 10,071 rooms, primarily located in the Northeast corridor. The company owns 11 hotels in Manhattan and one in Brooklyn. Over the past 12 months, the company acquired three newly developed hotels in Times Square for $165 million, or approximately $284,000 per key: the Hampton Inn Times Square South, Holiday Inn Express Times Square and Candlewood Suites Times Square. The company also purchased the Holiday Inn Wall Street for $34.8 million, or approximately $308,000 per key.
Sunstone Hotel Investors is a California-based REIT with a total of 33 hotels. The company entered the New York City market in January 2006, when it acquired the 444 room Hilton Times Square hotel on 42nd Street for $242.5 million, or $546,171 per key.
In January, the company acquired the outside 62 percent interest in the 43-story, 460-room, all-suite Doubletree Guest Suites Times Square joint venture for approximately $37.5 million. The hotel is located in the crux of Times Square at 47th Street and Broadway. The company previously acquired a $30 million mezzanine loan secured by the equity in the hotel for a net purchase price of approximately $3.5 million. As a result, Sunstone’s net economic purchase price equates to approximately $286 million, or $622,000 per key. The company estimates that the hotel’s value includes about $100,000 per key associated with the revenues generated by the hotel’s Times Square signage.
Don’t be surprised to see Dallas-based Ashford Hospitality Trust enter the New York City market, even though last month it completed the sale of the Hilton Rye Town in Rye Brook, Westchester County. The REIT sold the hotel to Lodging Capital Partners for $35.5 million; it has had a busy winter.
In March, a joint venture of Ashford Hospitality Trust closed on a $1.277 billion acquisition of the 28-hotel portfolio of 8,094 rooms of Highland Hospitality. The REIT, along with institutional partner Prudential Real Estate Investors, paid $158,000 per key for the portfolio of mostly higher-end, East Coast hotels. The acquisition included three hotels in Washington, D.C., Maryland and Boston.
IN ADDITION TO the REITs interest in the New York City hospitality market, private-equity funds have been very active investors as well.
Earlier this month, Blackstone Real Estate Debt Strategies, the real estate debt investment business of the Blackstone Group, announced its final closing of its Blackstone Real Estate Situation Fund with total commitments of $3.5 billion. The fund announced that it provided a mezzanine loan to RLJ Development’s acquisition of the Doubletree Metropolitan Hotel. In December, Robert Johnson, founder of BET and principal of RLJ Development, closed on the purchase of the Doubletree Metropolitan Hotel, paying $335 million for the 755-room Lexington Avenue hotel. RLJ paid $135 million in cash and put $200 million of new debt on the property, the $125 million of mezzanine debt on it coming from the Blackstone Real Estate Situation Fund.
Dune Capital Management is a privately owned hedge fund sponsor and also manages a real estate opportunity fund that is a joint venture partner with GFI Capital in the Ace Hotel as well as in the Standard New York in the meatpacking district. Last month, Dune Real Estate Partners agreed to pay about $190 million to Anglo Irish Bank for a note with a face value of about $300 million for the 150-room Mark Hotel on the northwest corner of Madison Avenue and 77th Street.
Industry leaders expect either a REIT or a private-equity fund to purchase the three boutique hotels owned by Ark Investment Partners: the 50-room Franklin Hotel at 164 East 87th Street between Lexington and Third avenues; the 126-room Mansfield Hotel at 12 West 44th Street on the Club Row Street near Grand Central; and the 178-room Shoreham Hotel at 33 West 55th Street. Industry leaders expect the hotels to each fetch close to $500,000 per key.
With billions of dollars of domestic and foreign capital seeking investment opportunities in the United States and especially in New York City, expect REITs, private-equity funds, sovereign wealth funds and local investors to continue their exuberance for the New York City hospitality market.
firstname.lastname@example.org Michael Stoler is a managing director at Madison Realty Capital and president of New York Real Estate TV LLC.
Michael Stoler is a managing director at Madison Realty Capital and president of New York Real Estate TV LLC.