The rebound of U.S. hotels and resorts is drawing in buyers who stepped back from the industry prior to the recession, as the hospitality sector once again promises high returns.
Among those now marshalling billions of dollars to acquire hotels is KSL Capital Partners LLC, the former hospitality investing arm of KKR Financial Holdings LLC led by Vail Resorts Inc. veterans. KSL is expected to disclose Wednesday that it has finished raising a $2.1 billion fund targeting distressed resorts. The fund already has purchased two properties.
Others include real-estate investor Paul Kazilionis's Westbrook Partners, which mostly abstained from buying hotels from 2004 to 2009. Since then, Westbrook has bought hotel mortgages at a discount and thus seized control of eight high-end hotels, including the Fairfax Embassy Row hotel and a St. Regis, both in Washington, and the Westin San Francisco.
Also in the fray are heavyweight buyers that trade in and out of hotels regardless of the cycle, such as Starwood Capital Group and Blackstone Group LP.
Returning buyers like KSL are betting that hotels and resorts still have more upside, even though they already have bounced back strongly from the recession. Revenue per room at U.S. resorts is up 5.9% in the past two years but still remains 16.4% below its 2007 peak, according to Smith Travel Research. In comparison, revenue per room for the entire U.S. hotel industry now is just 9.8% below its 2007 peak.
But the hotel market is getting tricky, with the values of some property types—like luxury hotels catering to business travelers in top cities—rebounding faster than others. KSL is betting that now is the time to buy struggling resorts and bolster their operations for a tidy investment gain. "We think resorts tend to be laggards in the recovery cycle," says Eric Resnick, a KSL managing director. "The first to recover are the urban hotels that benefit from corporate demand. It takes a while longer before insurance companies and banks plan group events at destination resorts."
What is more, even with the rises in occupancy and revenue, many trophy hotels and resorts still are laden with large, maturing mortgages incurred during the boom that now exceed the properties' current value. That has created a ripe scenario for opportunists to buy those mortgages, often on the cheap, and foreclose on the hotel pledged as collateral.
Westbrook, with $20 billion of assets under management, made an opportunistic move last year, paying roughly $125 million to buy the Fairfax Embassy Row and two Sheratons from aMorgan Stanley fund for slightly more than the debt on the hotels, people familiar with the matter say. Last month, Westbrook paid Barclays PLC's Barclays Capital $100 million for its mortgage on the St. Regis in Washington, D.C., and used the delinquent loan to take over the resort from an Irish investor.
KSL did the same last year in paying roughly $120 million for Citigroup Inc.'s $380 million mortgage on the La Costa Resort & Spa and using the loan to seize the Carlsbad, Calif., resort.
However, those now buying hotels and resorts haven't always delivered home runs. Westbrook forfeited the Fairmont Orchid in Hawaii to its lender, Barclays, in 2009, losing about $20 million in equity.
KSL, based in Denver, was founded in 1992 as KSL Recreation Corp. by Michael Shannon, a former chief executive of Vail, and others to direct buyout firm KKR's investments in the hospitality and recreation industries. Mr. Resnick joined in 2001 after a term at Vail, a major ski-resort developer and operator, as a vice president and treasurer.
By 2005, KSL had sold all of its hotel holdings and opted to split from KKR. The fund that KSL just finalized is its second as an independent firm, attracting repeat investors from KSL's earlier funds, including Washington State Investment Board. The pension fund has reported gains of 10.9% to 26.5% on its previous investments with KSL.
KSL made three investments with the fund as early money came in. In April, KSL bought the historic, 409-room Royal Palm hotel near Miami for $130 million, converted it to the James brand and now plans to complete a $42.6 million renovation by next year. Last month, KSL paid $115 million to buy the 293-room InterContinental Montelucia Resort & Spa in Scottsdale, Ariz., from the resorts' lenders, who had foreclosed on it two years earlier. In the third, KSL has pledged to finance resort deals in partnership with East West Partners, a resort developer based in Avon, Colo.
"This is the beginning of what we believe is several years of a slow but steady recovery [for resorts], accelerating as income levels get higher," said Mr. Shannon, KSL's founder. KSL now manages more than $3.5 billion of equity.