The Covid-19 pandemic has had a significant impact on the financial wellbeing of hotels around the world, especially in regions that have experienced prolonged lockdowns and reduced travel. Real estate investment funds and managers, such as Apollo, KSL Capital, and Tristan Capital Partners, have taken advantage of the growing amount of opportunities to purchase distressed hotel assets. These firms have the capital to spend and the resources to hold onto the properties and wait for a return in travel. They have a long-term optimistic outlook that with the vaccination rollout, the necessity for business to be conducted in-person, and consumers’ insatiable appetite for travel and new experiences, hotels will continue to serve as high-yield investments. The distressed hotels are not able to make their debt payments with the reduction in cash flow and owners are not able to refinance or gain further investment.
It is important to note that while this article focuses on the predicament of hotel owners, the management companies equally face an uphill battle. IHG and Marriott have lost hundreds of management contracts with hotel owners over the past year owing to their inability to make contractual payments and consequently leading to default. Service Properties Trust (SVC) owns 310 hotels with a total of 142 different brands throughout the United States. When IHG and Marriott defaulted on payments to SVC, their contracts were annulled and Sonesta International Hotels Corporation took over the management of hundreds of properties, rebranding flagship buildings with Royal Sonesta, Sonesta ES and Sonesta Hotel Collection. Sonesta has taken advantage of the opportunities that the pandemic has created for growth and expansion, while competitors decline and withdraw from key sub-markets.
Kock Real Estate Investment, Koch Industries’ real estate arm led by Charles Koch, invested in a stalled Las Vegas casino development that has remained incomplete since the 2008 financial crisis. The investment was made in early 2021, despite only the early stage of the vaccination rollout, depressed travel numbers, and a slow to recover Las Vegas market. While many gaming and hospitality companies including Las Vegas Sands Corp. and Caesars Entertainment pivot their attention and money to Asian markets, Charles Koch has found the distressed casino-hotel asset an opportunity to invest in a property with huge upside if the city returns to pre-pandemic activity. Koch will be able to refinance the property after a few years of successful operation once the casino-hotel appreciates in value, alleviating some of the large cash deposit in the development while maintaining equity share. This same refinance strategy may be applied to many of the distressed hotel assets that funds and investors are choosing to bet on based on the idea that the properties will appreciate in value as pre-pandemic travel activity returns over the course of next decade.
Numerous investment firms, including Tristan Capital Partners, take an active role in the investments, acting as investors and asset managers. Tristan Capital’s investment team will make the acquisition while the asset management team puts into place the refurbishment plan and operations team. The real impact is made with the refurbishment as the real estate becomes the item of value in drawing guests to the property. It will be exciting to see how many hotel properties change ownership and improve in their quality and service offering as they become infused with cash and new visions.
This blog post was awarded Third Place in the Spring 2021 HFTP/MS Global Hospitality Business Graduate Student Blog Competition presented by the HFTP Foundation. Participants are students earning their HFTP-UH Global Masters Certificate, a program with candidates of the Master of Science in Global Hospitality Business. This program is a partnership between the CN Hilton College at the University of Houston, the School of Hotel and Tourism Management at Hong Kong Polytechnic University and EHL. The three blog posts that received the top scores have been published on HFTP Connect. (Read the first place blog post here and second place blog post here.)
Kristopher Swanson is a master’s student from California pursuing the Master of Science in Global Hospitality Business program, which is in partnership of three schools: EHL, the Hong Kong Polytechnic University, and University of Houston.