SANTA MONICA, California—Already a multibillion-dollar presence in the hotel industry, Colony Capital has plans to become even bigger.
Hotel investments make up approximately US$16 billion of the firm’s total US$30 billion in assets under management. And with the industry fighting to rebound from the downturn, hotels fit nicely inside Colony’s philosophy of investing in out-of-favor sectors.
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Jonathan Grunzweig |
Given the number of distressed assets available in the hotel space, Colony is likely to stay active in looking for investments in hotels, executives said. “I think Colony’s mission is always to marry capital with inefficiencies, and the hospitality sector has always been one of the hardest places for all but the most contrarian capital to find a home,” said Jonathan Grunzweig, principal and chief investment officer. “It’s the first place institutions flee from when (revenue per available room) takes a dip and the last place they return.”
‘Massive deleveraging’ needed
Distressed opportunities will probably make up the lion’s share of the firm’s investment activities, he said. Still, Colony will remain selective in how it deploys capital. “I would be relatively surprised if non-distressed opportunities come to fruition in the near-term,” he added.
Case in point: Colony, in partnership with investment firm Cogsville Group, last week were victorious in bidding on US$1.85 billion of distressed commercial real estate loans auctioned by the Federal Deposit Insurance Corporation, according to The Wall Street Journal.
A day of reckoning is close at hand for the hotel asset class, Colony executives said. Real estate owners cannot hide from excess leverage given the current market conditions, Colony principal Todd Sammann said a few days before news of the FDIC deal.
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Todd Sammann |
“We think there needs to be massive deleveraging in most asset classes,” Grunzweig said, adding, “A lot of deals have been saved by low interest rates.” The pricing of assets does not meet the reality that the industry finds itself in, Sammann said.
“Seller expectations are generally inconsistent with market conditions, creating an unusually wide bid/ask spread,” he said. “We’re looking for more cushion around our entry point.”
Global reach
Colony, founded in 1991 and based in Santa Monica, California, has investments in North America, the Middle East/north Africa, Europe and Asia.
The firm gained media attention recently with French hotel company Accor going through its demerger process. Colony, a 29-percent stakeholder in Accor, was vocal in its push for a demerger of Accor Hospitality and its voucher services company. Accor’s shareholders approved the reorganization 29 June.
“(The demerger) allows markets to separately value and capitalize the two businesses,” Grunzweig said.
Also included in the company’s hotel investments is the performing mezzanine loan for 103 hotels, comprising 6,623 rooms, acquired in April. The firm has invested US$10.7 million and owns a 33.3-percent stake in the loan, according to filings with the Securities and Exchange Commission.
While Colony is a familiar face within the hotel industry, don’t look for the firm to become heavily involved in long-term holds of hotel assets.
“… Hotels are often better assets to trade than to own,” Grunzweig said.
Prospects for recovery
While acknowledging that the hotel sector seems to have improved somewhat, Grunzweig was cautious about predicting where the industry is going.
The leisure segment is “gradually recovering,” he said, while group and incentive travel have recovered the least.
In year-over-year measurements, the industry’s occupancy was up 7.1 percent to 58.9 percent in June, according to STR data. Average daily rate ended the month flat at US$97.50. RevPAR for the month increased 7.1 percent to finish at US$57.47.
- Read “STR: US results for May 2010.”
But even if some business is coming back, “that doesn’t mean there is infinite pricing power,” Grunzweig said.