Real estate investment trust Colony Capital's agreement to sell six hotel property portfolios in a $2.8 billion deal marks the firm's shift from an industry staggered by the pandemic to technology holdings such as data centers and cell phone towers.
Highgate, hospitality management and real estate investment firm, plans to buy the six portfolios that consist of 22,676 rooms across 197 hotel properties. The properties weren't immediately disclosed. Executives of Colony Capital, based in Los Angeles, said the deal is expected to result in $67.5 million in gross proceeds for the company, as the buyer assumes $2.7 billion in consolidated investment-level debt.
“The sale of our legacy hospitality assets is a significant milestone in Colony’s digital transformation as we pivot to focus exclusively on our fast-growing digital businesses that generate superior returns for Colony shareholders,” Colony Capital CEO Marc Ganzi said in a statement.
The company disclosed in a May federal regulatory filing that $3.2 billion out of a total of $3.5 billion of its hotel holdings was in default, and it subsequently hired investment bank Moelis & Co. to evaluate alternatives for its hotel holdings, including a potential sale. The U.S. hotel market faces historically weak demand, spurred by a decline in travel because of the coronavirus, making it harder for owners looking to sell or refinance properties.
“Colony Capital had too much debt to withstand the downturn due to COVID-19, as is the case with a lot of other" commercial mortgage-backed security hotel loans, said Alan Reay, president of brokerage and research firm Atlas Hospitality Group, in an interview.
Reay expects this will be the largest announced hotel portfolio sale of 2020, but it is priced well below the 2016 deal in which China’s Anbang Insurance Group acquired a portfolio of hotels from private equity giant Blackstone Group for $6.5 billion.
Company officials said Colony will transfer five of the six portfolios in its hospitality segment to Highgate, and about 55% of Colony’s THL Portfolio held in a separate segment. Another hotel portfolio, known as Colony’s Inland Portfolio, is under receivership and excluded from the transaction.
Hotel conditions have gradually improved in the past six months, but business remains down sharply from pre-pandemic levels. According to the latest data from travel research firm STR, a CoStar Group company, U.S. hotel occupancy was 48.6% for the week of Sept. 13-19, down 31.9% from the same time last year.
Average daily room rates were down nearly 29% and revenue per available room dropped more than 51% from the comparable year-earlier period, STR reported.
The Colony deal seems to reflect a willingness to take the long view on the industry for Highgate, the owner of $10 billion in hotel assets, with more than 160 hotels and 45,000 rooms in markets including New York, San Francisco, Boston, Miami and Waikiki, Hawaii. The company said it's expanding in the Caribbean and Latin America.
“Despite the unprecedented disruption in hospitality over the past six months, we remain bullish on the long-term secular trends in our industry, and look forward to partnering with the many employees, franchisors, lenders, and other important stakeholders across these portfolios as we work towards a successful recovery,” said Mahmood Khimji, co-founder and managing principal of New York-based Highgate, in Thursday’s statement announcing the deal.
Its portfolio includes independent hotels as well as luxury brands such as the Knickerbocker, full-service brands such as Double Tree and limited service brands such as Hilton Garden Inn, according to its website.
The deal with Colony is expected to close in the first quarter of next year.
Colony and Highgate officials did not immediately respond to CoStar News’ requests for additional comment on the deal.