Behind Trinity’s Deal to Buy The Diplomat Resort for $835M

Enter Trinity Investments. The Honolulu-based hotel operator began negotiations to purchase the property in 2022. A year later, the deal closed; the price tag: $835 million — the largest hotel deals since the pandemic hit. It’s an acquisition that took many by surprise, given rising interest rates and constant discussion of a looming recession. 

Commercial Observer caught up with Sean Hehir, president and CEO of Trinity, to discuss how exactly he managed to close such a gargantuan deal in a difficult environment.

The following has been edited for length and clarity.

Commercial Observer: How did The Diplomat hotel get on your radar?

Sean Hehir: At Trinity, we have 35 people today between Honolulu and Beverly Hills. We specifically focus on brand-managed hotels — so Hilton, Marriott, Hyatt — that are 300 rooms and larger. We also focus on the smile states: Florida, Texas, Arizona, California, Hawaii. We go in and we reposition, renovate the asset. We make them appeal to multiple market segments. So it’s not just a group box, like The Diplomat is known for, but you also attract the leisure and the business traveler. 

And then when you can buy irreplaceable real estate, that’s the holy grail. The Diplomat checks all of those boxes. 

I heard a lot of rumblings about Trinity being under contract to buy The Diplomat for over $800 million, but I was skeptical you would close the deal because of the state of the debt market. Why — and how — did you buy The Diplomat? 

Again, you’re buying 1,000 keys on the beach. And we’ve got 10 acres on the Atlantic, plus 10 acres on the Intercoastal that’s connected by a sky bridge to a 400,000-square-foot convention center. You can’t replace it. 

But, of course, people were skeptical with good reason that the deal would close. There had been a few restarts before, not by us, by Brookfield. They’d been under contract twice before us. 

We negotiated the contract at the beginning of last year, but then the debt markets all blew up. We sort of just let the contract sit. We weren’t under contract. But as I spent the summer thinking and talking to my partners here at Trinity, we came to the conclusion that this is exactly what we do. “We’ve got to make every effort to buy this hotel.”

We found a great partner in Credit Suisse Asset Management, got the loan assumption done and got Hilton in there. It was a great team effort getting it done. Brookfield was phenomenal. They were the sellers. They just stuck with and helped us work through any issues that popped up.

Still, you closed such a large deal despite pretty drastic interest rate hikes.

The way we’ve positioned ourselves is that we’re the operating partner and general partner of choice to large private equity firms. And when you look at our roster of joint venture partners across our deals, we’ve got Oaktree, Ares, Goldman. We are the sector-specific experts. So we handle everything in-house. We handle the deal sourcing, the acquisition, the repositioning, the project management, the asset management, the investment reporting. So when you look at a group like Partners Group or Elliott Management, who have a handful of real estate professionals in the U.S. They rely on us for all of that work.

When we saw the opportunity, we created the business plan, which was bringing Hilton back in as a Signia brand. We knew that there was an opportunity to pursue the existing CMBS debt. We went to Credit Suisse Asset Management and said, “Look, this is a tremendous opportunity for you.” 

We as well have a GP fund, as opposed to a normal operating partner, which was us in the old days. We would scramble to put together our 5 percent of the equity and bring in a partner at 95 percent. We came to Brookfield and said, “Look, we don’t have a partner yet, but we believe in this. We’re going to sign the contract and go hard.” So we put up $20 million nonrefundable on the Trinity side. Simultaneously, we were negotiating with Credit Suisse Asset Management. They came on board. We said, “Look, we have so much conviction in this transaction that we’re going to be 30 percent of the equity.” So we wrote a check for $78 million on the Trinity side. That spoke volumes for Credit Suisse.

Now we have that debt. We have the runway to refinance it, which we will do in due course. At the same time, we have a fairly good idea as to what we’re going to do by way of renovation, given that we have probably $500 million worth of renovation work going on across our portfolio. And last year we rolled off another $500 million of work to be completed. So our team is very astute at casting and logistics and all of that stuff. 

So now we’re at the point on The Diplomat that we were finalizing that plan. The guest rooms are in good shape, so we don’t need to do much there. We’re rethinking the public areas and the beach. Will there be a beach or not? We’re making all of those decisions right now. We spend typically the first year planning all of our stuff out, finalizing it, getting sign-off from our partners and from the brand. That’ll be teed up well for when we start thinking about refinancing the existing debt. 

That’s how we got it done.

What’s going with your partnership with Credit Suisse, given the UBS takeover?

So it’s Credit Suisse Asset Management. It’s not Credit Suisse money. It’s a discretionary fund, just like Blackstone or Ares raising a fund. They also raised some money from their private bank lines. 

I don’t think any of us know how UBS is going to approach the merger, whether they remain two separate teams or one team. But for us, it’s business as usual. I was just with [a Credit Suisse executive] a couple of weeks ago in Hollywood, going through business plans and things like that. 

You’re expanding the property to add condos. You were talking to a few developers. So why did you pick Related and BH Group?

We’re very good at renovating but we’re not developers. Who am I sitting in Honolulu or Beverly Hills to try and figure out a development deal and entitlements and all of that stuff in Hollywood, Florida? They have the local knowledge, and that’s what you need. I mean, real estate is a local business at the end of the day and they have a reputation of getting stuff done. 

Do you have plans to buy other properties here in Florida?

I plan on spending a lot of time in Florida. I think the business community is really vibrant in South Florida. Things are getting expensive, though.

But I’ll say this: Hotels, in general, have actually proven very well going through this high interest rate environment. We have the benefit of leasing up on a daily basis when compared to offices or retail, which have longer-term leases. We’ve been able to dynamically price and for the most part, stay ahead of inflation. So hotels in the right markets are looked at very favorably. 

The other thing is hotels generally had wider cap rates and other asset classes like multifamily and industrial. So when you get into a higher interest rate environment, we were able to absorb those higher rates more easily than other asset classes and didn’t have the same level of negative leverage if you’re buying a multifamily portfolio with a 4 percent cap rate and your debt service is 7 percent. But we’re maybe buying at a 6 cap and borrowing at a 7 cap, slightly negative. If you have a value-add business plan that’s going to ride you through.

We’re looking at opportunities in Tennessee, Florida, Texas and California. So we’re very active.

Can you be more specific about the properties you’re eyeing in Florida?

So we’re looking at everything in between from a 300-room property to a large one from $100 million to close to a billion dollars, if they’re not brand managed. 

The Florida legislature passed a bill that’s going to make it a lot harder to hire undocumented workers. That’s a workforce that the hospitality industry has long relied on. Are you worried about this law?

The hotel industry, in general, as have other service industries, have struggled since COVID. A lot of people were laid off, and they found other jobs that are not as tough as working in a hotel. It’s long hours. The legislation is something that we watch very closely with our partners like Hilton. In the case of The Diplomat, the employees have a union. I think it’d be hard for us to be hiring undocumented workers. So there’s a lot of checks and balances. 

I’m from Botswana. So I’m the beneficiary of the immigration process and I owe my life [to] this country. So I’m a big believer in immigration. But you’ve got to follow the rules, right? I had to. 

Julia Echikson can be reached at jechikson@commercialobserver.com.