Brookfield Asset Management (NYSE: BAM) is nearing a deal with private, non-traded REIT, or real estate investment trust, Hospitality Investors Trust that would give it control of the hotel owner. The prepackaged bankruptcy would see Brookfield inject additional liquidity into the company as part of a deal to convert its preferred equity into a 43% common equity interest in the REIT. It would give Brookfield control over roughly 100 hotels managed by top brands, mainly in markets in the Southeast.
A tough time for hotels
The pandemic hit the hospitality sector hard. Travel restrictions and reduced business travel has weighed on hotel occupancy over the past year. That's caused most hotels to burn through cash.
Many large publicly traded hospitality REITs weathered this storm by tapping into their availability liquidity to stay afloat, while lenders have relaxed some of their debt covenants. However, it's been harder for smaller hotel owners to navigate the current rough patch. Several individual hotels have filed for bankruptcy, as has Singapore-listed hospitality REIT Eagle Hospitality Trust, which ended up selling 15 of its 18 hotels after filing for bankruptcy earlier this year.
Hospitality Investors Trust has been trying to avoid that fate. It didn't pay Brookfield's preferred dividend in cash last December to preserve its liquidity, opting to issue more preferred equity instead. However, it's running out of money. This means it's struggling to address its roughly $1 billion of liabilities, including a mezzanine term loan that's under forbearance until the end of July. With Brookfield the only source of additional liquidity, the company has no choice but to work with its largest investor to address its financial woes.
Making a contrarian bet on hotels
Brookfield Asset Management is a renowned value investor that often buys assets during market downturns, making a contrarian bet on a future recovery. It recently made one of its signature deals, agreeing to privatize its public real estate affiliates, Brookfield Property Partners (NASDAQ: BPY) and Brookfield Property REIT (NASDAQ: BPYU), for $6.5 billion. Those entities have been under pressure due to the impact the pandemic has had on the office and retail sectors, which makes up about 85% of their core holdings.
Brookfield is also no stranger to the hospitality sector. It owns and actively manages 16 full-service hotels and 140 extended-stay hotels with a combined 31,000 rooms within its real estate private equity funds. It often acquires these properties from distressed sellers, enabling it to get them at great prices. For example, in 2014, it bought the Diplomat Beach Resort in Hollywood, Florida, from a distressed seller. Meanwhile, last year it reorganized its interest in the Atlantis resort in The Bahamas, increasing its stake from 33% to 41.5%.
This transaction fits in with Brookfield's strategy of acquiring assets from distressed sellers or at the low point of the real estate cycle. In this case, Hospitality Investors Trust is in distress because of the current downturn in the hospitality market. Thus, if Brookfield can improve the REIT's financial situation and the hotel market recovers from the pandemic, the company could earn a spectacular return from its investment in the beleaguered hotel owner.
Scooping up hotels at the bottom of the cycle
Brookfield Asset Management appears poised to add to its hotel collection, most of which it has acquired from distressed sellers or during a real estate rough patch. That enabled the company to get properties at great values, allowing it to earn higher returns when it improves the underlying company or property's operations or the real estate market recovers. With its latest deal coming from a distressed seller near the bottom of the market, it could earn a monster return for its investors if it can turn this REIT around and the hospitality sector recovers in a post-pandemic world.