Brookfield says Diplomat Hotel sale was a business plan executed

Brookfield Asset Management fund earlier this month completed the sale of The Diplomat Beach Resort in Hollywood, Florida, to Credit Suisse Asset Management and Trinity Investments, on behalf of its first global opportunity fund, Brookfield Strategic Real Estate Partners I.

The exit marked the end of a long hold period for the large hotel (pictured). According to a senior Brookfield executive, it also signaled that it is possible to complete high-profile transactions despite a challenging interest rate environment.

The $835 million transaction, the third largest-ever single-asset hospitality property sale, raised two important questions for the market: why was Brookfield selling a performing hotel property at a time when the US hospitality market has seen greater strength in drive-to leisure resorts? And would the sale offer greater pricing visibility?

On the timing of the sale: the investment was at the end of its life cycle, Shai Zelering, managing partner and head of hospitality investments at Brookfield, told PERE. “We don’t fall in love with the assets. We don’t do this for the sake of just saying we own a trophy or collecting fees,” Zelering said. “We executed the business plan. We went in, did what we needed to do and were able to provide opportunistic returns to our investors.”

The Diplomat was one of the first properties that started Brookfield’s hotel investment platform, acquired after Zelering’s former company Thayer Lodging was absorbed by Brookfield in 2014. Brookfield bought the property for $460 million via Brookfield Strategic Real Estate Partners I, which is today close to being fully harvested.

Still, Zelering said he and his team deliberated over whether to keep the asset. In 2016, Brookfield began a three-year, $100 million renovation that included a flag change, dropping the original Westin for Hilton’s upmarket Curio brand, and a name change from the Diplomat Resort & Spa. “You couldn’t tell from the name that it was on the beach,” Zelering said.

As part of its business plan, the firm reimagined the common areas, adding more food and beverage options, and spruced up the lobby and the central atrium as a way to help keep group travel guests on the premises. Zelering said groups were arriving and then heading out to the restaurants and other nightlife around the property and the upgrades helped create a “mousetrap” and drive higher average daily rates, increasing income from multiple channels.

But ultimately, the firm still made the sale given the life cycle of the property. Zelering said he looked at Brookfield’s underwriting from June 2014 and that it was “pretty much on the mark.” It deviated slightly as cashflow was a little better than expected but cap rates widened because of the unpredictable market turmoil, he added. The job, in other words, was complete.

Price visibility

The sale comes after hotel sales volumes have slowed. Data from global property services firm CBRE found 2022 Q4 US hotel investment volume fell 12.3 percent year-over-year to $11.9 billion. Single-asset sales like the Diplomat fell 32.2 percent in the same period, to $7.2 billion. In South Florida specifically, hotel investment volume dropped more than 25 percent in the whole of 2022, to $2.1 billion.

Despite lower comparable transactions, at an equivalent price of $835,000 a key, there is a consensus in the market that the price Brookfield achieved for the asset was fair. One manager with a significant hotel portfolio, including some resort hotels, said “It’s a positive for the market as an overall matter.”

But for those seeking deals to signal where pricing is heading, this sale is not going to shed too much light because the hotel’s size and scale make comparisons difficult, PERE was told.

“I think it’s hard to extrapolate very far with this acquisition,” another participant with an extensive hotel background, said. “You’re kind of buying an aircraft carrier. It’s a big, very multi-dimensional property. I don’t know that you could say that is now a proxy for smaller group-focused properties in Indianapolis or Kansas City.”

Another reason the property is difficult to compare is because of Credit Suisse Asset Management and Trinity’s ability to assume in-place commercial mortgage-backed securities debt. Brookfield refinanced the property post-renovation in 2019, taking out a $460 million, non-recourse first-lien mortgage CMBS loan co-originated by Morgan Stanley, JPMorgan Chase and Wells Fargo. The in-place financing helped the deal get done in a transaction market stalled by the challenging interest rate environment, Zelering said.

Nonetheless, there was also a view that without the volatility being seen today, Brookfield could have garnered up to $1 billion for the asset, one source said. That was in line with a 2019 report by Bloomberg that suggested a similar price for the asset if market conditions lined up.

The two main reasons for the lower price relate to market uncertainties connected to the covid pandemic and the current uncertainty. Early bids on the asset in 2020 – two failed bids from Miami-based hospitality developer Fontainebleau Development – were for around $800 million. The $835 million paid by Credit Suisse and Trinity represents a modest uptick from there.

A reason that the price did not rise further is because of the financing market’s current and perceived future malaise. While in-place financing helped get the deal across the line, the firms that purchased it will still have to refinance next October when the loan matures. A lack of visibility on where interest rates will be by then and what liquidity will look like played a factor, Zelering said.

Nonethless, Brookfield says it did what it promised investors. “For us, we were able to provide these opportunistic returns to our investors,” Zelering said. “Especially after they withstood the steepest crisis in the convention hotel business during covid.”