Hospitality Sector Update 11/1/2015

While it may seem counter-intuitive to purchase a property in a country with a sinking economy that is in danger of defaulting on its immense $72 billion debt, others see this as an opportunity to add a very inexpensive property with lucrative potential to their portfolio. Hedge-fund manager John Paulson is one such thinker as he recently acquired the San Juan Beach Hotel for $9.5 million. Because the property was in bankruptcy, he was able to buy it at a very low price. Sources close to Paulson claim he will invest in the renovation of the hotel to convert it into a luxury hotel. Hospitality investors on the island have frequently converted old or low-rent hotels in order to attract a wealthier clientele. Due to the debt crisis, several Puerto Rican investors, including Blackstone Group LP, have been sellers on the island. Despite the struggling economy in Puerto Rico, tourism has actually increased due to Puerto Rico’s portrayal as an ideal beach destination, and thus so have hotel revenues. The ultimate task in Puerto Rico, as with any other struggling economy, is evaluating the potential risks, which include increased crime and potential riots, versus the potential reward – lucrative profits.

Much like Uber has done to the taxi industry, Airbnb, an online marketplace for people to list and book places to stay, has come into direct competition with the hospitality industry. The main problem the hospitality industry is facing from Airbnb is decreased pricing power during popular one-time events such as the Pope’s U.S. tour or annual events such as the Kentucky Derby and Ultra Music Festival. In addition, hotels are losing clients to Airbnb who pay their own way to events, as they seem to have a preference for Airbnb’s cheaper rates. Other members of the hospitality industry, however, claim Airbnb is not actually in direct competition with hotels because they serve another type of clientele entirely. This distinct clientele is made up of consumers that are particularly price sensitive because, unlike business travelers, they do not have someone else to fund their trips. In addition, one Morgan Stanley lodging analyst noted that since 2009, the number of hotels achieving a 95% or higher occupancy level has increased. Furthermore, the premium room rate hotels can charge during the season and during special events has not changed significantly since the emergence of Airbnb. In short, there seems to be a market for both hotels and Airbnb, whether they overlap with each other remains a point of contention.

Sam Nazarian, an Iranian-American billionaire entrepreneur, recently agreed to sell his 10% stake in the SLS Las Vegas to Stockbridge Capital Partners. SBE, the brand Nazarian founded, will no longer be able to collect management fees from the hotel, but they will still receive licensing fees for the brand. Stockbridge’s executive manager Terry Francher praises the deal because by converting SBE’s management agreement into a license agreement, Stockbridge will be able to introduce new brands or restaurants to the hotel. Nazarian first partnered with Stockbridge to renovate the Sahara hotel for $415 million and later reopened it as the SLS Las Vegas. After downsizing the staff size, Nazarian also brought in Scott Keeger, a veteran of the industry, to be the new president of the property. Even after these moves, the owners reported a net loss of around $84 million during the first six months of 2015. Despite the hotel’s lack of success, Nazarian and SBE still own two nightclubs in Las Vegas and many more properties across the country, making him a considerable force in the hospitality industry.