NEW YORK CITY—Company executives dissected and provided the inside scoop on two of the U.S. hotel industry’s signature deals that were completed during the current economic cycle.
The bottom line? It pays to be patient.
Art Adler, managing director and CEO of the Americas of Jones Lang LaSalle’s Hotels & Hospitality Group, moderated the panel and drilled deep into the deals during the “Anatomy of a transaction” general session at the recent NYU International Hospitality Industry Investment Conference.
Tyler Henritze, senior managing director and co-head of U.S. acquisitions at Blackstone, and William Rahm, senior managing director at Centerbridge Partners, provided the details on their companies’ decisions to pursue the acquisitions. The transactions discussed were Blackstone’s 2014 acquisition of The Cosmopolitan of Las Vegas and Centerbridge Partners’ acquisition of Great Wolf Resorts, which closed in May 2015.
Blackstone acquires The Cosmopolitan of Las Vegas
In May 2014, Deutsche Bank AG agreed to sell The Cosmopolitan of Las Vegas hotel and casino to Blackstone Group LP for $1.7 billion in cash. At the time of the sale, The Cosmopolitan—once built for $4.3 billion—was a 2,995-room, two-tower complex that sat on two acres. Deutsche Bank, which is Germany’s largest lender, foreclosed on the property after developer Ian Bruce Eichner defaulted on a construction loan in January 2008.
“It was widely known that that the lender would sell the asset,” Henritze said. “We were tracking it for several years. It was built to condo (specifications) and sits on the 50-yard line of the Strip. The quality of the real estate was exceptional.”
The opportunity: Henritze said the location and the physical bones of the asset are its best attributes: “But clearly it needed from an operations aspect to be turned around and improved.”
The results: In 2014, The Cosmopolitan achieved approximately $100 million in trailing 12-month earnings before interest, taxes, depreciation and amortization—double what it did in 2013, according to Henritze: “The margins were around 16%, 17% (prior to the acquisitions)—considerably below competing properties.”
The upgrades: The complex had some untapped potential, Henritze said. Blackstone converted a group of maid closets into 46 guestrooms that generate about $4 million in EBITDA annually, he said. In addition, Blackstone is building in the resort 21 high-end suites and a private gaming room on the top four floors of the east tower that were left unfinished by Deutsche Bank.
The soft brand: The Cosmopolitan is part of Marriott International’s Autograph Collection—something the Blackstone executive team spent a lot of time studying the value, Henritze said: “It allows the Cosmo to maintain its unique and independent brand. The back-end distribution, particularly from (the) group side … it delivered its worth in roomnights.”
- Exit strategy: “We underwrote selling it at a significant discount in relation to what it would cost to build it,” Henritze said, adding that the expense and challenges involved in developing in Las Vegas maximize the exit sales price.
Centerbridge acquires Great Wolf Resorts
Centerbridge Partners closed the deal to acquire Great Wolf Resorts on 12 May 2015. The company operated 11 resorts across the U.S. at the time of the deal after the first Great Wolf Lodge resort opened in 1997 in Wisconsin Dells, Wisconsin.
Great Wolf now has 13 resorts with two under construction—one in Colorado Springs, Colorado, and the other in Atlanta—and the company recently acquired 50 acres near Disney World in Orlando, Florida, to build a resort there. The properties generally feature between 300 and 600 suites along with an indoor waterpark.
Centerbridge used all of Great Wolf’s real estate as collateral for the commercial mortgage-backed securities loan it secured for the acquisition, Rahm said.
“It was a public company taken private (by Apollo Global Management) in 2012, but we continued to follow it,” Rahm said. “A couple of years ago it became clear they were trying to take it public. We were starting to see some volatility in markets. … We approached them.”
The attraction: Great Wolf’s non-traditional hotel experience was a big appeal for Centerbridge executives, Rahm said, who added waterpark resorts are more resilient through cycles than theme parks or hotels: “There is tremendous loyalty among its customers. We had a great business we thought we could acquire at a great price.”
The opportunity: Centerbridge viewed the Great Wolf acquisition as a chance to expand the concept beyond the U.S., and a substantial barrier to entry—the company’s Southern California property cost $250 million to build—keeps competitors at bay, Rahm said: “One of the barriers to (additional) supply is the big capital costs to build one. There’s a long lead time to enter these markets. We continue to look for other markets.”
The model: Centerbridge wants to own “the vast majority” of Great Wolf properties, but Rahm said the company will continue to look for partners. While conversion opportunities are possible, Centerbridge has made deals work with aggressive municipal incentives and EB-5 financing. “Internationally we’re much more likely to look for partners,” Rahm said.
- Exit strategy: Great Wolf Resorts has grown large enough and distinctive enough that it can garner interest from the public market, Rahm said: “The nice thing is that the business, as we grow it ... there will be opportunities to sell it. We have a lot of exit options, which is one of the things we like about it.”