Not too many details have been released about this transaction – including the cost of the transaction – but both companies claim that Starwood will contribute both capital and deals to Hersha Hospitality Management.

Starwood’s purchase of just less than a controlling interest gives them easy access to a great hotel management company – enabling them to not have to staff up and create the SH Group as a leading management company from scratch, it also provides Hersha, a private company, with some capital as well as great management opportunities that Starwood Capital is privy to due to its own investments.

HHM specializes in select-services brands – as that makes up almost 75% of their portfolio – although in the press release its stated that HHM and Starwood will look for both select and full-service contracts. It’s interesting to note that Barry Sternlicht has said in the past that the opportunities in lodging at this point are more in the mid-scale/select services vs high-end luxury. Most of HHM’s properties are branded by the majors – IHG, Marriott, Hilton and Starwood, but lately they have been managing more independent boutique hotels, especially in New York City.

It’s hard to say exactly what this transaction means for Starwood Capital’s own SH Group, 1 Hotels & Baccarat Hotel brands, but its obvious that this will benefit both Starwood & HHM by providing each party with a service that they need. One change I can see this transaction enabling HHM to do is cast a wider net increasing their geographic service area – currently HMM manages properties encompassed within the triangle which goes from Boston, MA, to Virgina to Pennsylvania.

Today was the first day of the Annual NYU International Hospitality Industry Investment Conference, so this could be the first of a few good deals that are announced, and hopefully more details will be provided.

andrew@alconic-inc.com

Over the last few years Dubai has been the center of all construction activity in the world, the city-state has come from being a barren desert to a major city with high rises, luxury shops, apartments, and offices at every turn. Everytime I came across a boom-time story about Dubai, I become even more skeptical about the longterm prospects of the area.

How is it possible that an area of that size can sustain that much development in such a short amount of time. How can they fill so much office space, hotel rooms, condos, vacation homes, luxury retail stores, etc. Where will the people come from? Do you actually expect millions of people will get up and move to Dubai in such a short amount of time? It seems the only legitimate “industry” that Dubai has was based on the expectation that the area would continue to grow and prosper; the question always remained (and continues to do so today) is: What would be the economic impetus that would enable it continue to grow and prosper.

Dubai has a population of 1.4 million people, from stats I’ve read – 90% of those people are there for construction jobs of one type or another. Even countries such as China – which has a population of over 1.3 BILLION (over a much larger area of course) is not on a building boom like Dubai. What were Dubai’s rulers thinking? How did they expect to sustain all of this? What were the foreign developers thinking?

If you look at most developed countries and the large cities within them – they exist based on a certain unique industries. The cities and countries have slowly grown and developed based upon those industries over centuries and decades. Dubai wasn’t even on the map 10 years ago. Most American people have never even heard of Dubai until the last few years.

Sure, Dubai has oil – but all the oil fields are owned by the Government. Tourism is there, yes, the weather is always beautiful and beaches are nice – but the heat is at times unbearable which ends up putting a limit on the tourism potential. Who is going to go on vacation to Dubai – a 12 hour plane trip from NYC – to sit on the beach in 100% humidity and 120 degree desert temperatures? Not very many people.

Could the rapid development of Dubai end up being one of histories largest mistakes? In 10-20 years, will Dubai become a barren, abandoned waste land?

Money may buy buildings, it may buy roads, but after awhile Economics 101 kicks in and reality hits.

andrew@alconic-inc.com

Originally when the project was halted last August, it was expected to be started up again within 9 to 12 months, but that time has come and gone and the economy as a whole hasnt seen too much of an upturn – especially in the Vegas market where MGM’s City Center is opening later this year to a glut of unsold condos and very inexpensive hotel rooms for a brand new, top of the line hotel development.

Echelon Place was to be Boyd’s first very high-end development, and first development on the Vegas Strip – most of their other developments are smaller casinos in Downtown or right outside of Vegas. Boyd’s single development in Atlantic City – the Borgata, is 50/50 owned by MGM Mirage, but Boyd does the day-to-day operations of the Borgata.

We’ve all seen how the world is a different place today than it was a year ago – and especially different from even two years ago, so I find it hard to believe that the project will start-up again in 3 years looking like it does today. I think it will be significantly re-designed or perhaps even broken up. It is a prime piece of Vegas Strip property though – so I cant see it going to waste forever.

I have to say though, Boyd has done so well over the years with the smaller developments – and now their attempt at purchasing some casinos from bankrupt Station Casinos is more up their alley – but they still look at the Echelon Place property as essential to their business going into the future.

andrew@alconic-inc.com

MGM Mirage is cutting the price of the condos at its $8.5 billion City Center development by 30% due to the economic downturn..

…MGM Mirage had hoped to sell its condos at top-of-the-market prices, which would have brought in $2.6 billion. However, it ended up getting deposits on only a portion of the inventory. If all of those deposits were to result in sales, it would mean $1.6 billion in revenue.

For such a high profile condo project publically announcing that they have lowered the prices of their condos by 30% demonstrates that even top of the line properties, in the center of the Las Vegas strip, properties that you’d expect would be in high demand, are having to take drastic steps to ensure that those who have placed deposits can close – and hopefully encouraging those who are on the sidelines to jump in.

MGM Mirage’s decision will weigh heavily on the Cosmopolitan, a project whose development started before City Center, and will definitely end after City Center is up and running. Hopefully for all those who have placed deposits at the Cosmopolitan, they will be relieved to hear that price reductions will be coming down the line – if that ends up not occurring, the Cosmopolitan developers will have a much more difficult time closing than they ever expected.

I’m really glad that MGM Mirage  has taken this step – it will help soothe the nerves of those who are looking to close, but are unable to because of financing, and hopefully put a little bit of a jump start into the economy.

I wonder how long it will take to see more of these deals come down the line.

andrew@alconic-inc.com

Today’s big story (in my mind at least) is a Wall Street Journal article today that brought to light Starwood Capital’s new found interest in the Extended Stay bankruptcy battle. (I’m writing this directly from my blackberry so I can’t get a direct link).

In a nutshell – it states that Starwood Cap is joining a group of investors (mainly those involved with the first mortgage of the deal) in putting down funding to take the deal out of bankruptcy court.

This deal does have some pretty hefty requirements – 10% down, within 10 days of closing – in cash, but nothing too unmanageable.

This sounds like it could be one of the first major deals that Starwood’s new REIT is getting involved in, as it fits directly in line with their intentions when they launched the IPO.

The question I have is what is Starwoods intentions – is this simply a deal which they are getting involved in due to the potential upside, or is this a deal they want to get involved in to expand their hotel portfolio? About a year or two ago I expected Starwood to purchase Extended Stay Hotels, since at the time, it would have fit in with their hotel expansion strategy.. Although now, with the different outlook on the lodging industry that’s a different story.

I’m glad to see that Starwood is getting involved, as it does add some legitimacy to the process, plus they also seem to have the backing of all the other mortgage holders and even the federal government who holds a portion of the mortgage through their takeover of Bear Sterns last year.

Andrew@alconic-inc.com

Now it looks as though Starwood is looking to sell each property individually – as that would provide a higher total sale price than a portfolio sale of 9 hotels would.

Unfortunately, Starwood’s sale of each individual hotel within the Societe Du Louvre portfolio goes against Starwoods original intentions of the hotels – keep them together and even expand the Crillon brand name with 6 star hotels throughout the world. In fact, in the press release when the deal was first announced the then-Chairwoman of Groupe Taittinger (which owned Societe Du Louvre) said:

It is of great importance to my family and myself that Barry and his team will bring a unique expertise and a full commitment to further developing the group our family has built over more than a half century,

Barry Sternlicht even chimed in by stating

We look forward to building on the company’s proud heritage by growing its economy hotel business in France and into new markets, particularly Eastern Europe, investing in the renovation and restoration of several of its existing jewel properties and working to extend their famous brands to new assets around the world.

It’s very possible that Starwood might only be selling the real estate and fully intend to keep the management contracts as well as ownership of the brands itself upon the close of the sales – but until that’s confirmed it’s anyone’s guess.

It’s a completely different economic environment now vs 2005 when the purchase of Groupe Taittinger was first announced and optimism was still abundant that the economic boom would continue unabated. That optimism called for Starwood to launch not only a Crillon hotel brand, but also a Baccarat (also purchased from Groupe Taittinger) and 1Hotels & Residences brand. As we know now – there is only one 1Hotel location actively being built (Washington DC) and two Baccarat Residences locations  – both overseas, and no expectation that a Crillon hotel brand may ever see the light of day.

The loss of income from those properties that have not been built/open yet is putting the pressure on Starwood to continue to pay their high returns to their investors – it’s commonly known that Starwood guarantees a 20% return on investment for the investors – making Starwood resort to selling the assets individually to ensure that those returns can be met, as well as ensure an ample supply of new investment money will be available.

I know we haven’t seen the end of Starwood Capital’s investment into the hotel/lodging industry – but the book may soon close on Starwood’s ownership of some of the most elite properties in the world – all in the name of saving face. Its an admirable move from an admirable company – instead of being so consumed with owning the best and having that title, they are showing their true colors by staying true to their reason for being – the clients who provide the money to invest.

andrew@alconic-inc.com

Amazing what 8 months can do in this economy. In January, Hilton Hotels looked to be the next darling of the hotel industry – not only was it owned by a cash rich parent – The Blackstone Group – who seemed to be willing to do whatever it would take to invest in the brand and make it #1, and was just about to launch two new brands – Home2Suites and Denizen. Hilton’s re-invigoration was going smoothly, Blackstone really seemed to be making an effort to ensure the viability of the company into a long term asset.

Then suddenly a few months later Hilton was essentially forced to cancel Denizen – due to the lawsuit from Starwood hotels. Putting Hilton even further back on their ability to compete with Starwood’s W Hotels, and now, today, come reports from the Financial Times & the London Independent that Blackstone is looking to divest of the Hilton Corporation. (Interesting to note that two UK based newspapers reported this prior to any US based news outlets).

From those reports any divestiture is in very early stages and will probably not be carried out until next year or so, but the options on the table are a public offering of some of the company assets along geographic lines, or sale of some of the company assets to competing companies.

Details haven’t really been spelled out – but any of those options can be extremely detrimental to the future viability of the Hilton brand. If Blackstone is intending to split the company by geographic lines – that would be the equivalent of putting Hilton into the past when it was two companies Hilton Corporation and Hilton International, which would limit Hilton’s ability to keep the brand experience the same throughout the world. If you recall, the main reason that both companies were merged was to ensure just that. Why would Blackstone want to go back to something that never worked that great in the past even.

The other option of selling assets to competing companies can also spell major trouble for the Hilton brands future if they are referring to selling what is now a Hilton hotel to a company like Starwood or Marriott, but it also could be selling those hotels to  hotel management firm – such as Host, or Interstate, etc.

Maybe I’m going about this all wrong, but it sounds like Blackstone is willing to completely destroy the Hilton brand – all in the name of cash; you gotta do what you gotta do, but Blackstone was originally planning on the Hilton purchase to be a long term holding, now it seems as though they may do to Hilton what they’ve done to all the other hotel brands and some private companies they’ve bought – break them up and sell them separately to the highest purchaser.

One thing that makes Hotel brands so valuable is having quantity – quantity in the number of rooms, locations and brands, with the goal of having something for everyone – every price point, ever amenity required at every location that person would want to visit.

I hate to say it, but I hope that this doesn’t spell the beginning of the demise of the Hilton brand.

andrew@alconic-inc.com

Yes, that’s correct, and that’s the same thing that Sillerman stated – although I didn’t make it sound as bad as he did.

I came across this story in the NYPost where Sillerman stated:

I think I have shown conclusively that I am not knowledgeable enough about the real estate business..

That’s not to say that he had bad ideas – one idea, which consisted of building a huge Elvis themed resort on land his company owned on the Las Vegas Strip – directly across from MGM’s CityCenter sounded like a slam dunk.. I mean what else would be better in Vegas than a high quality Elvis themed resort from the person who owns Graceland and the rights to Elvis Memorabilia?

His second project was a resort to be built in Anguilla; this is how I first learned of Sillerman and Flag Luxury as the project was initially going to be a St Regis Resort, then a Baccarat Resort. Now the project is all but dead – construction has not started, and the golf course which was to be the centerpiece of the resort destroyed because Sillerman decided to stop spending $200,000 a month to water the course. Not only that but he claims he has put over $200 million of his own money into the project – much more than the original $15 million he had agreed upon.

I give Sillerman alot of credit for having the guts to stand up and admit defeat, something that’s very hard to do especially in such high profile developments such as these.

There is no word on what Sillerman will do next, but it sounds as though his entire investment in the Anguilla property and the Las Vegas Strip property will be lost. The strip property was foreclosed upon a few months ago and the Anguilla property is going through the same property.

Most likely the strip property will be purchased very inexpensively by an investor and held onto for a number of years until the Las Vegas economy picks up – then the next biggest thing will be built. As for the Anguilla property, it sounds like that will go the same route.

andrew@alconic-inc.com

It’s interesting to note that the properties that are involved in the default are “company-owned” yet are completely separate legal entities from the Red Roof Inn franchise company, so franchised hotels are not in anyway affected by this news, except just the public’s perception of Red Roof Inns.

News like this has the tendency to cause unease to the travelling public – now all Red Roof Inn’s will get the moniker of “bankruptcy” or “mortgage default” even though bankruptcy is not even on the table and 2/3rds of the Red Roof Inn properties that are in operation are not even involved in this loan default.

Besides the usual culprits – the slowing economy, declining room occupancy (50% vs 60% a year ago), one of the reasons Red Roof claims they defaulted was the

“$20 million cost of Red Roof’s new reservation system, installed in April”

Is it me or is that one of the most ridiculous reasons to claim is a reason for a mortgage default?

Normally companies would have budgets and reserves for debt service, they know how much the service will cost and they plan for it. Now if room revenues don’t cover the expected costs, that’s one thing – but a mandate from the franchise owner (essentially, itself) should never be a reason for default because the franchise owner will never do anything that will so severely hurt their brand, or the individual owner/operators. It would be crazy for Red Roof Franchising to mandate a new reservations system throughout their properties if their company owned properties can’t even manage the cost of installing the new system! If the company owned properties cant even cover the costs – the franchised properties probably couldn’t either which would encourage them to leave the Red Roof system. A lose-lose for all.

I think Red Roof Inn’s intention is to make this situation look worse than it is so that they can get better refinancing rates from their lenders. I wouldn’t be surprised to see if Red Roof Inns purposely planned to default for that reason.

andrew@alconic-inc.com