GI Allocates $500 Million for Troubled Hotels

Buyout specialist GI Partners plans to use up to one-quarter of its new $2 billion fund to acquire distressed hotels and hotel mortgages - its first foray into the sector.

The Menlo Park, Calif., shop has told investors it will primarily target high-end hotels and resorts in the U.S. It could also buy hotel companies. With leverage, the roughly $500 million equity allocation would provide up to $1.25 billion of investment power.

GI began marketing the vehicle, GI Partners Fund 3, in 2007. It is expected to hold a final close next month, bringing the total equity to about $2 billion.

The fund, which seeks a 20%-plus return, has already plowed about 20% of its equity into three investments. It took a stake in Ladder Capital, a startup finance company in New York headed by former UBS real estate chief Brian Harris. It acquired Care Aspirations, a healthcare company in London. And it bought a 75% stake in FlatIron Crossing Mall in Broomfield, Colo., from Macerich Co., as well as options to buy 1.25 million shares in the Los Angeles REIT.

While real estate has been a focus for GI since its formation in 2001, the buyout firm also invests in other sectors. In 2001, it formed a $526 million joint venture backed by Calpers and CB Richard Ellis Investors that invested heavily in vacant properties that had been built for companies burned by the dot-com implosion. GI managed the entity, dubbed GI Partners Fund, but didn't hold an equity stake. GI followed that up in 2006 with the $1.45 billion GI Partners Fund 2, a commingled vehicle that invested in real estate, healthcare, media, technology and other companies.

The new fund will also invest in multiple sectors, with an emphasis on real estate. GI is turning its attention to hotels because of widespread distress in the sector. U.S. hotels had an average occupancy rate of 54.6% in the first half, down from 61.3% a year earlier, according to Smith Travel Research. Room rates dropped almost $10 on average, to $98.66, while revenue per room dropped almost 19%, to $53.87. Smith Travel predicts performance will flatten out for most segments next year, although luxury properties will likely continue their slide.

Just seven hotels traded hands in the first half of the year, for a total of $636.1 million, according to Real Estate Alert's Deal Database, which tracks transactions of $25 million and up. But activity has picked up some in the second half, as more hotels have moved into foreclosure. In July and August, the sale of another eight properties closed, totaling $412.8 million. Still, activity is way off the peak, in 2007, when sales totaled $19.9 billion.

Although GI Partners has not been a hotel player, founder Rick Magnuson worked on hotel-company deals while at Nomura from 1994 to 2001. He was involved in the acquisitions of Westin Hotels and Le Meridien Hotels.

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