After building a long track record in office, retail, industrial, multi-family and real estate debt, Brookfield Asset Management is embarking on a new frontier – hospitality. The Toronto-based alternative asset manager acquired Thayer Lodging Group for an undisclosed amount late last month, marking its first dedicated foray into the sector.
Thayer, which will now be known as Thayer Lodging Group, a Brookfield Company, was founded in 1991 by former Marriott executives Frederic Malek and Leland Pillsbury. Since its inception, the Annapolis, Maryland-based firm has completed 43 hotel investments at a total cost of approximately $2.5 billion.
“I think the strategic nature to the transaction for [Brookfield] is that they didn’t have the ability to underwrite hotels before,” said Bruce Wiles, Thayer president and chief operating officer. “Hotels, in their nature, require a very operational-driven strategy.” Indeed, Brookfield’s prior investments in hospitality were very limited and primarily came from acquiring debt positions during the global financial crisis.
In the transaction, Brookfield acquired Thayer’s investment, asset and property management businesses, bringing on its 20 employees and $1 billion in assets under management. Brookfield’s latest fund, Brookfield Strategic Real Estate Partners, has become a major contributor to Thayer Hotel Investors VI, which buys value-added hotels in major markets.
Due to tax structuring issues, Brookfield was unable to invest directly into Fund VI, so the two parties signed an agreement to invest side-by-side in the fund’s current and future assets. Fund VI held a final close on approximately $160 million in commitments on May 15, nearly two years after its first close. With Brookfield’s investment, the vehicle has approximately $320 million of total equity.
Desi Co, managing partner at The Accord Group, worked as a placement agent on Fund VI. He noted that the long fundraising period was a testament to how hotels, in general, are not “the flavor of the week.”
However, the Brookfield acquisition shows that the tide is turning.
“The sector is gaining momentum, and I credit Brookfield for recognizing that ahead of other investors,” Co said. “They have a lot of foresight.”
Currently, Thayer has made two investments on behalf of Fund VI: the Ritz Carlton San Francisco and the Hilton Los Cabos Beach & Golf Resort. Wiles noted that Thayer has a robust pipeline for future investments, including five deals currently under contract or in due diligence.
Thayer is finding the greatest value in assets ranging from $125 million and up, where there are fewer active buyers for sub-optimal properties. However, given the size of its fund, the firm previously had to seek co-investments for its deals. “Now, we can do a large volume of transactions because Brookfield affords us instant access to a standby co-investment,” said Wiles. “We’ll be able to move a lot faster than we have in the past.”
According to JLL’s Hotel Investment Outlook for 2014, Brookfield’s acquisition comes at an opportune time.
The property services firm predicts increased investor confidence in the sector and expects global deal volume to hit $50 billion this year, marking a 5 percent to 10 percent increase from 2013.
“It is really a great strategic fit for the companies,” said Wiles. “It opens up avenues for greater investment opportunities for Brookfield and, from our perspective, it provides us with a continuing source of capital from which to pursue larger high-yielding assets.”