Starwood deploys $200m from hotel fund

Starwood Capital Group has invested roughly $200 million of equity in the hospitality sector over the past year as the firm starts ramping up its acquisition activity in the US and internationally.

The Greenwich, Connecticut-based firm said today it had deployed around 20 percent of its $965 million Starwood Capital Hospitality Fund II, with three-quarters of the equity being invested in debt deals.

Speaking at New York University’s International Hospitality Investment Conference, managing director Rich Gomel said around 40 percent of that equity had been invested internationally through deals such as the acquisition last summer of Golden Tulip’s franchise and JV business.

Interest in the US hospitality sector has grown significantly over the past few months

However, he added, attention was now focused on the US. “There’s certainly anticipation that there is going to be more distressed deals coming,” Gomel said, although he noted transactions volumes had yet to rise significantly from the trough seen in 2009.

The hospitality debt space was currently one of the most attractive investment opportunities, Gomel continued. “In the last year or so we have deployed 20 percent of our roughly $1 billion hotel fund [Starwood Capital Hospitality Fund II]. Of that, 75 percent is dedicated to debt.”

As well as working with borrowers on recapitalisations, Starwood said it was also looking at entity-level investments, such as its 49.9 percent stake in private hotel investment firm Hersha Hospitality Management last week, and lending through its own REIT, Starwood Property Trust. “Our REIT has been aggressive on the lending side in hospitality,” Gomel said.

Interest in the US hospitality sector has grown significantly over the past few months amid expectations average daily rates (ADR) in the sector will start to grow again by the end of 2010. The US is currently the only region globally not to have witnessed a year-on-year increase in ADR, as of the end of April this year, according to research firm Smith Travel Research.

Rob Harper, managing director of The Blackstone Group, said there was a “lot of money” eyeing the US hospitality sector at present owing to the “perceived distress” of the sector. However, “if other opportunities out there are perceived to be relatively better [than hospitality, they] will move to that.”

Blackstone largely stood on the real estate sidelines for two years, Harper said, but that six months ago the New York-based firm “started to see the cracks. Transaction velocity has and will pick up,” he said, adding: “There are old assets out there waiting for a new home.”

Last month, Blackstone saw off competition from Starwood to clinch the bankrupt hotel chain Extended Stay
in partnership with Centerbridge Partners and Paulson and Co. The trio bid $3.92 billion cash for the 680-property hotel chain, which filed for bankruptcy in June 2009 with $7.1 billion in assets and $7.6 billion in debt.
Blackstone will invest in the deal, which remains subject to bankruptcy court approval, through its $10.9 billion real estate fund, Blackstone Real Estate Partners VI.