Iconic Ritz Carlton Sells After Focus on Upgrades

SOUTH LAKE TAHOE, CA—Following a UK hotel portfolio sale in December for $54 million, Kennedy Wilson recently sold the Ritz-Carlton Lake Tahoe for $120 million to Braemer Hotels and Resorts Inc. A cash profit of $73 million to Kennedy Wilson was generated during the lifetime of the two investments.

Kennedy Wilson and its partner acquired the Ritz-Carlton Lake Tahoe’s 170 hotel rooms, 23 condominiums and 3.4-acre development parcel in 2012 for $74 million and have since solidified the resort as a high-end destination. The company also completed the sellout of all 23 condominium units at the Ritz-Carlton Residences in 2016 for a total gross sales price of approximately $50 million.

“We saw a tremendous opportunity to acquire this iconic luxury hotel property from a group of lenders at a significant discount to replacement cost in 2012 and with a focus on enhancing amenities and operational performance, we have repositioned the Ritz-Carlton Lake Tahoe as a leading resort in one of the country’s most popular tourist destinations,” said William J. McMorrow, chairman and CEO of Kennedy Wilson.

Specifically, since 2012, Kennedy Wilson grew the ADR by 63% and revenue per available room by 100% at the Ritz-Carlton Lake Tahoe through a series of capital and operational improvements including expanded culinary and wellness offerings, enhanced outdoor attractions, children’s activities and summer programming. In 2017, the company debuted Lake Club, a new multi-level dining and bar facility that helped transform the hotel from a primarily winter resort into a year-round destination. The Lake Club provides guests with access to the lake via an expansive lawn that extends to the water’s edge and a private boat pier offering summer recreational activities.

“Following the successful sell-out of the 23 condominiums and our efforts to increase ADR and revenue per available room significantly in the last six years, the timing was right for us to tap into the value we created and to continue recycling capital into other high-growth investment opportunities,” McMorrow tells GlobeSt.com. “Our experience with the Ritz-Carlton Lake Tahoe is a great example of our opportunistic and value-add investment strategies–buying where we see strength in the local market at a discount to replacement cost and with the potential to grow revenues through operational and capital improvements.”

In December, the company sold the remainder of a loan portfolio backed by six UK hotels totaling 864 rooms. Kennedy Wilson initially acquired the loans secured by eight hotels in 2015. With the help of a receivership structure, tenant surrender and asset management strategies, and a structured sales process, the company realized a 45% return on cost during the life of the investment.

In connection with the acquisition of the Ritz-Carlton Lake Tahoe, Ashford Inc. entered into an agreement with Braemar Hotels and Resorts Inc. for a new enhanced return funding program. Under the program, Ashford has agreed to provide up to $50 million to Braemar in connection with the acquisition of additional hotels by Braemar. Ashford will provide 10% of the purchase price of each hotel acquired by Braemar for up to $500 million in total acquisitions.

Ashford currently anticipates funding the program for the long term with approximately 50% cash on hand and 50% debt. The program will replace Ashford’s legacy key money concept and has the ability to be upsized to $100 million based upon mutual agreement. Consistent with the firm’s previous enhanced return funding program agreement with Ashford Hospitality Trust, the implementation of this program is subject to customary lender consents.

The program is expected to generate attractive returns on invested capital for Ashford via incremental base advisory fees, potential incentive fees, fees for various products and services offered, and tax savings with year one cash-on-cash returns estimated at 50% and five-year internal rates of return estimated at more than 35%. Ashford estimates that the enhanced return funding program investment made in connection with the Ritz-Carlton Lake Tahoe will add an estimated $0.55 to $0.65 to its adjusted net income per share in year one.

The program has the potential to improve the five year unleveraged internal rate of return for each new hotel acquisition at Braemar by 100 to 200 basis points as well as increase assets under management for Ashford. The company believes the program should improve Braemar’s estimated unleveraged internal rate of return on the acquisition from 10% to 12%, a 20% increase in returns.

“We are extremely pleased with the opportunity to utilize our enhanced return funding program to partner with Braemar on its acquisition of the Ritz-Carlton Lake Tahoe. This revolutionary program is one of the newest strategic initiatives at Ashford that should help create value for our shareholders and the shareholders of Braemar alike,” said Monty J. Bennett, Ashford’s chairman and chief executive officer.

While lodging demand for the entire US market is forecast to increase by 2.1% in 2019, the demand for accommodations in the 60 markets covered by CBRE is projected to grow by a strong 3.3%. This is significant because the majority of hotel investment activity occurs in the nation’s largest cities. Supply growth in the 60-market Hotel Horizons universe (3.6%) is forecast to be almost double that of the nation as a whole (1.9%).

Supply is expected to grow at a greater pace than demand in 65% of CBRE’s Horizons markets during 2019. However, despite the surge in new competition in these preferred markets, all 60 will enjoy an increase in ADR. In fact, CBRE is forecasting ADR increases greater than the projected 2.2% pace of inflation in 39 of its 60 markets. Jacksonville, FL, San Jose-Santa Cruz, San Francisco and Atlanta are all lodging markets that are projected to record 4.4% or higher ADR growth in 2019.