Service Industry Specialist: Sean Hehir Explains Hospitality Investing

Sean Hehir, the CEO, president and managing partner of Trinity Investments, knows hotels. His private real estate investment firm works with the largest players in private equity to buy hospitality assets, oversee their renovation, improve struggling business plans, and rightsize underwater capital stacks. The firm has $5.4 billion in assets under management and has invested in hotels holding a collective 14,000 keys since 1998. 

His team of 46 investment professionals have been busy in the last year, as they have led the way on some of the largest deals in U.S. hospitality. These include partnering with Credit Suisse on an $835 million deal to acquire the Diplomat Beach Resort in Hollywood, Fla.; arranging a $750 million joint venture to refinance the Grand Lakes Orlando Resort; and teaming with Oaktree Capital Management to refinance The Westin Maui Resort & Spa in Hawaii for $515 million.  

Commercial Observer sat down with Hehir to explore his hospitality investment strategy. 

This conversation has been edited for length and clarity

Commercial Observer: You’ve been at Trinity Investments for 26 years and have been running the firm since 2009. What makes the firm unique in the investment landscape? 

Sean Hehir: Trinity was always set up as an operating partner. And what I mean by that is we tend to be the general partner in each given deal, we find the opportunities, we underwrite the business, and we bring in the right capital partners on a deal-by-deal basis. 

Since I took over the firm, I’ve really reoriented the focus of Trinity. Today, we’re a pure play hospitality investor. We have 46 professionals between our offices in L.A., Honolulu, Miami and London, and we’re the operating partner of choice for large private equity firms. Those include Apollo, Ares Management, Elliot Management, Oaktree Capital, Partners Group, UBS, etc. So these are firms that don’t have the in-house expertise to make hospitality investments, and they rely on us. 

During COVID, we raised our first commingled discretionary fund, primarily through Citibank Private Bank. It’s a $520 million general partner fund, and that fund is now, on average, a 30 percent investor in each [hospitality] deal, and we partner with these joint-venture partners. We focus on predominantly brand-managed hotels — Hilton, Marriott, Hyatt -— we focus on destination markets like Florida, Texas, California, Hawaii, and these properties are all 400 rooms or larger, they are full-service hotels with meeting spaces, pools, golf courses. And, as you can imagine, it’s a very hands-on, nuanced asset class. We have firms that source opportunities that create business plans and drive the business plans for the types of results we seek. 

Where do you typically fall in the capital stacks on these deals? Do you like  equity or debt?

Predominantly, we’re in the equity. For the most part we find these opportunities, we buy the assets, we bring in joint-venture partners, we put acquisition financing on each deal in the 60 percent to 65 percent range, but we’re in the equity. That said, we are seeing situations with the pre-COVID-funded capital stacks, where there’s great real estate, great sponsors or owners, but you have broken capital stacks. What’s happened there is the lenders don’t have any more runway, the loans are six or seven years in term, if the sponsor needs any type of extension, then the lender needs to pay down. So the hotel brands, when COVID hit, allowed the owners to have a lot of runway to dip into reserves to pay debt service and payroll, but they are now saying, “You need to invest in property, we need to protect the brand status.” So we at Trinity are seeing an opportunity to be a friendly, transitional source of capital, coming in with preferred equity, where there’s a current pay component, there’s a pit component, and there’s a profit participation component. So we get overall good returns, but we’re really working with the existing sponsors and lenders to help them transition from Point A to Point B. So that’s different from our nuts and bolts equity business we do every day.

Do you prefer the old way when you simply invest equity and watch a talented sponsor manage a hotel? Or do you prefer this new world of hotel investing where you’re trying to rightsize capital stacks?

It’s really both. At the end of the day, we are stewards of capital to our investors, generating the best returns we can for them. If we’re able to invest in deals, and we have a very robust pipeline with our traditional nuts and bolts strategy of “fix, hold, sell,” and then the other side is a transitional source for pre-COVID funded owners and capital stacks, and generating similar type of returns, I think it’s really interesting for us and our investors [to do both]. 

Walk me through your market strategy. What determines which markets you invest in? 

Given the type of assets we invest in, more destination-oriented, larger properties, it tends to be smile states: Florida, Texas, Arizona, California, and within those markets. We’re in South Florida, Miami, Hollywood, Orlando, Dallas, and Greenwich, Conn. We’re in Scottsdale and Phoenix, and now we’re starting the firm in Hawaii, so we’re acutely familiar with the Hawaii market. But we’re looking more and more at the dollarized markets in Mexico. When you look at Cabo, Cancun, Puerto Vallarta, Riviera Maya, its the same traveler as the smile states in the U.S., it’s often the same brands, and we’re able to buy [these properties] in dollars, finance [them] in dollars, sell [them] in dollars. You earn your revenues in dollars and pay peso expenses, so we’re very bullish about that market as well, but it’s mainly destination markets. 

How do you make sure your firm is successful in the private equity space? What is it like investing with the biggest players on the block? 

I tell our team every day, it’s all about relationships. Relationships are the cornerstone of this industry. We’ve been doing business with firms on repeated business for many years and there’s nothing like a downturn to understand who your counterparty is and who you’re in the trenches with. I can tell you about our partners at Oaktree, Elliot, UBS, Satatrus, etc . They’ve all been phenomenal partners over the years, and that also translates into who your lender is  — we’ve been very focused on who our lenders are. We’re probably one of the largest hospitality groups in the U.S. in terms of financings and refinancing. We’ve executed over $2.7 billion in that space, but it’s all driven by relationships. These firms know us, they know our team, they know we perform according to business plans, and they know our capital or renovation projects are run on time and on budget. Obviously, you do have misses with investments, but for the most part we either meet or exceed underwriting. And that’s a reputation our entire team has built over time. But the 46 professionals at Trinity Investments live, eat, breathe and sleep hospitality. We’re not distracted by other asset classes. It’s who we are: We’re hospitably investors and we’re here to be operating partners to these large private equity firms.

You took over as leader 15 years ago during the GFC. What was it like in terms of commanding the ship back then, and how did you change the direction of the firm?

I learned a valuable lesson in the 2008 financial crisis. I came in very young, very fresh. And the three men who founded Trinity were very successful in previous careers, so when they formed Trinity they wanted to keep it a lean organization, they didn’t want a cumbersome organization, and they were highly entrepreneurial. So we did everything from buying distressed debt in Hawaii and going through deed-in-lieus to buying a bank in Thailand to buying a European-based hotel company, and we were one of the first foreign-controlled J-REITs [Japanese real estate investment trusts] on the Tokyo exchange. So we were highly entrepreneurial. What I learned in 2008, when we were hit with a global financial crisis, is that you have to make decisions in times of crisis. With a very small team — and I think there were eight of us — the question became: Do you protect assets you have or take advantage of opportunities that are out there? We made the right decision to protect the assets we had, and that took all of our attention in 2008 and 2009. But at the same time, we missed, probably, one of the best buying opportunities of my career.

And so coming out of that, we had the matra, “Let’s build the right team, and the capital will come.” But at the same time, we saw there was a shift happening in the investment market, where unless you’re the size of Blackstone (BX), Starwood Capital or Brookfield (BN), it’s very hard to be a generalist when it comes to raising money. My passion was always in hospitality, so we reoriented the firm to be pure-play hospitality, in addition to building a team around it. 

What type of impact did the COVID crisis have on your business?

When you fast-forward to the next crisis, which was when COVID hit in 2020, we had 20 professionals at Trinity and it was devastating at first, because we had to close every single asset. These hotels, 500-room, 1,000-room properties, were not meant to be closed at any point. They’re supposed to stay open all the time. But we not only had a team that could go in and protect our portfolio and rightsize our ship, for lack of a better term, but we also had a team that went out and raised our first commingled fund during COVID and became one of the largest acquirers of single hotels in the U.S. We had a team that could do both and we’ve more than doubled the team from 20 to 46 people. And to be good stewards of capital, you need a robust team that can handle both bookends when you go through these market upticks and downticks. 

Let’s talk about the $520 million commingled fund. How did you raise that fund, and where have you deployed it? 

We raised that during COVID. Citi Private Bank anchored that, they raised about 70 percent of the fund, and we brought in institutional investors around it. It’s set up as a GP fund, so that fund is about 20 percent to 30 percent invested in each deal, and then we continue to partner with those large institutions that I have mentioned. Through that fund, we’ve made 10 investments. We have a few more on the horizon. Through the fund we own the W hotel in L.A.; we own the Omni San Diego Hotel; we own the Grant Hyatt Regency Indian Wells in Palm Desert; we own the Ritz-Carlton Dallas, Las Colinas; we own the Hyatt Regency Greenwich here in Connecticut; we own the Diplomat Beach Resort in Hollywood, Fla.; we own the East Hotel in Miami. So those are some examples of the assets that the fund owns. And then about a year ago we opened an office in London, at the behest of our institutional partners, who said, “No one is doing what Trinity is doing in Europe,” so we completed our first acquisition there: We bought the Park Hyatt in Zurich. and we’re under contract to buy another asset that we’ll disclose soon. 

How do you make deals happen at a time of high interest rates and a lot of capital on the sidelines?

If we learned anything during COVID, through this time of high interest rates and high inflation, the type of assets that we own have really performed well. Not only is experiential travel robust, at the upscale and upper upscale level, but by nature these hotels lease up every night. It’s not like an office building that signs a five-year or 10-year lease. We lease up every night, and what that means is we can dynamically reprice on a nightly basis and stay ahead of inflation. Another thing I’ll add is hotels typically trade at wider cap rates than other asset classes. So if we’re trading at a 7 percent cap rate, on average, and the interest rate rises to 8 percent, we can absorb that because we’re value-add investors and we work our way to positive leverage. Moreover, I often joke that people spent the first year of COVID shopping on Amazon, and then after that started shopping for experiences. And that’s continued. Leisure travel is strong, group travel is strong. People have got a few years to catch up when they couldn’t travel during COVID, and our hotels are in the right markets where people want to be. 

Last question: What do you like to do in your free time?

I’m a huge family person. I have three siblings, my wife has three siblings, and we have two sons. I love spending time with my family and traveling as a family. And I love working out. I’m an avid runner, running five to six miles a day. But three miles per day is actually the right distance. I read a few years ago: You don’t run to get strong and fit; you have to get strong and fit to run. That’s the big mistake a lot of us make, and that’s why I run constantly now. 

Brian Pascus can be reached at bpascus@commercialobserver.com