Executives from Highgate discussed how their recent deals with Colony Capital and Trust Hospitality came to fruition as well as their long-term hospitality outlook.
NEW YORK—In a time when some investors might be questioning the long-term viability of hotels as a real estate asset class, Highgate is firmly planting its flag in hospitality with two recent deals.
In September, Highgate agreed to a $2.8-billion deal with Colony Capital to acquire six hotel portfolios with a total of 22,676 rooms across 197 properties. Then, in early October, Highgate announced it would acquire Trust Hospitality and its 22-hotel portfolio with approximately 3,100 rooms in lifestyle and resort properties in the U.S., Caribbean and Latin America.
Highgate Principal Zach Berger said both deals came together through Highgate’s relationships with both Colony Capital and Trust Hospitality, spurred on by Highgate’s overall positive outlook on the hotel industry, despite its current lows.
“First and foremost, these transactions speak to our bullishness around the prospects for lodging fundamentals over the long term,” he said. “Obviously, this has been an incredibly disrupted period for the industry. And there's a very active debate about what the recovery will look like. From our perspective, it's a matter of when lodging fundamentals recover, not if they do.”
The recovery will take a different shape across markets and asset types, but he said Highgate will be active in searching for the right deals.
“We are viewing the world through an active and opportunistic lens,” he said. “And, as we see opportunities come across our desk, given that level of conviction in the recovery, and probably more importantly, our level of conviction in the Highgate team's capabilities to execute on business plans, we expect to be very active in the coming months and years.”
The hotels Highgate will acquire from Colony Capital are primarily in the select-service and extended-stay segments, Berger said.
Highgate Principal Rich Russo said the Trust deal expands Highgate’s Caribbean footprint.
“The Trust portfolio allowed us to instantaneously scale in multiple countries throughout the Caribbean, which is a market that broadly has similar demand characteristics to markets in which Highgate has been successful,” Russo said via email. “We will look to rapidly expand our presence in the region in the coming years.”
With COVID-19 travel restrictions currently limiting Caribbean demand, he said those markets will rebound in time. Hotels will be the foremost lodging option in the Caribbean as cruises take longer to recover.
“In the short term, we believe Caribbean hotels will disproportionately benefit in the recovery given they were competing with the cruise industry, which I believe will have a longer ramp back to recovery,” Russo said via email. “That delayed recovery in the cruise industry will cause a large supply/demand imbalance that will benefit Caribbean hotels.”
Pace of hotel deals
When asked about the state of hotel transactions, Berger said hotel owners and investors seem to be prioritizing capital restructuring instead of quickly exiting via sales.
“A lot of folks that have gone out to raise some form of ‘rescue capital,’ such as mezzanine debt, preferred equity with some level of equity participation, or sourcing a new equity partner at a recapitalized basis,” Berger said. “And we expect that the opportunity set will continue to grow over the next handful of months. So far throughout the crisis, lenders in general have been relatively accommodating, meaning they've stepped in where necessary in terms of loosening covenants, providing maturity relief, debt service referrals, etc., in order to allow borrowers to play through the other side.
“Part of the question around what the opportunity set will look like is largely going to be a function of how lenders approach these situations in the coming months.”
Lessons from the pandemic
The Highgate team has proven its resiliency in the last few months despite the COVID-19 pandemic, Berger said.
“One thing that the pandemic has really re-instilled in us is our confidence in the Highgate team’s capabilities,” he said. “The entire team was thrown obstacles over the last seven months that none of us expected to see in our lifetimes. At the outset of the crisis we saw hotels going from 90% occupancy to effectively zero in a matter of a few weeks.
“We've never been more confident in our team as we are today coming out of that experience, seeing how they all reacted to those challenges with dedication, ingenuity and composure. So, in hindsight through that experience, and really over the last few years, we were as well-positioned as we could have been coming into this crisis.”
Highgate’s scale has also been a cushion against the low-demand environment caused by the virus.
“Given we are one of largest management companies in the country, we always had the benefit of scale; however, the pandemic has really put those benefits into the spotlight,” Russo said via email. “Our growth strategy has and will continue to be to enter high-demand markets and quickly grow share in those markets. That concentrated growth provides a great tool to recruit and retain the best people in these locales and also provides the ability for complexing across properties, which drives down costs. Combining that localized approach with our international presence is a formula that significantly benefited us through COVID.”
Highgate is looking for partners that match Highgate’s mindset to weather the remainder of the pandemic and come out ahead.
“We are reminded of how our company got started; as a very nimble, entrepreneurial organization that saw dislocation in certain markets and was able to buy and operate in a differentiated manner that created substantial real estate value,” Russo said via email. “As we come out of COVID, we will continue to iterate on our approach and look to partner with like-minded owners and operators.”