• Danube deal brings MSREF exit nearer

The Eu450m sale of a portfolio of seven hotels to Lebanese businessman Toufic Aboukhater, who has previously owned hotels including The Dorchester, marks a further step on the exit for Morgan Stanley Real Estate Funds hotel adventure.

The deal, for the so-called Danube portfolio of Intercontinental hotels, is reportedly close to completion. Official confirmation is still awaited.

There is thought to be around Eu450m of debt secured against the total portfolio, lent by a consortium led by Barclays Capital. The portfolio was acquired for Eu634m in 2006 at the top of the market, a 15 times multiple on 2005 EBITDA.

The seven hotels, located in Amsterdam, Budapest, Cannes, Rome, Frankfurt, Madrid and Vienna, range in size from 79 to 770 rooms, making a total of 2,537 rooms.

Given the surfacing of reports of the deal on April Fool's Day, there were fears that the story was a hoax, to raise false hopes that portfolio deals were making a return in Europe. However, past midday on the 1st April, observers can now assess the transaction to see who has been the fool.

MSREF's deal in 2006 saw it pay around Eu80m above the net book value of Eu550m, with plans to invest an additional Eu60m on the properties. InterContinental Hotels Group secured 30-year management contracts with two 10-year renewals at the time, although it is not known whether the group will continue to operate the sites under Aboukhater, although it is thought likely that it will.

MSREF funded the deal through its MSREF VI fund, which raised $8.8bn in the year of the deal. The write-off of this equity follows last year's surrendering of a portfolio of 10 European Hiltons which it acquired in 2007, also to Barclays Capital. Westmont Hospitality Group struck a deal to take control and is now selling the sites off.

The Morgan Stanley fund's disposal strategy is not limited to assets in Europe, it has also put its 59% stake in Shanghai Motel Management on the market, with the other shareholders also agreeing to sell their stakes.

The group is expected to sell for around $1bn. According to Reuters, so far bids have come from China Lodging Group, 7 Days Group Holdings and Home Inns & Hotels Management, backed by a series of private equity groups including Carlyle Group and Warburg Pincus, eager to build their holdings in a key development market for the hotel sector.

The fund made its first investment in Shanghai Motel Management in 2006, acquiring a 20% stake for $20m and making two further deals to take it to 59% for undisclosed sums. However, despite the unknown cost of investment, it is thought that the sale will turn a significant profit for the fund.

In 2006, when MSREF did the initial deal with IHG, the pair signed a preliminary agreement to convert an additional 1,000 rooms to InterContinental brands in the future, with the operator commenting that Morgan Stanley was "a fantastic and highly respected real estate investor, and they will be a very strong business partner … as we look ahead to the role of managing and franchising, rather than owning".

For IHG, the deal was part of its strategy to move towards brand-led asset-light growth, which now sees it down to 13 sites, with the InterContinental New York Barclay currently on the market following the sale of the InterContinental Buckhead Atlanta last month. 

Since 2003, IHG has released $5.6bn of capital through the sale of 185 owned hotels and the divestment of equity stakes, and over the same period returned almost $6bn to shareholders.

MSREF has built up its holding in the sector to a level which rivalled players such as Blackstone Group, with the group's 2007 $2.4bn agreement to buy 13 hotels owned by All Nippon Airways touted at the time as the largest real estate transaction ever in Japan.


HA Perspective: Buy low, sell high has long been the mantra for making money in hotels. Doing the opposite is also a good way to lose money. MSREF has clearly done the latter with both the InterContinental and Hilton portfolios.

Trying to call the cycle is a mug's game and you will eventually be caught out. MSREF must have had some longer term strategic vision for the InterContinental and Hilton deals but it is far from clear it what it was and it has certainly failed to implement it.

Private equity investment in the hotel business in the first half of the last decade was driven by the arbitrage between what investors in the public equity market were prepared to accept as leverage (low) and what private owners could obtain as leverage (high). This play stopped with the credit crunch.

Going forward, the hotel business remains attractive for private equity but only in the trickier restructuring plays and for backing new ventures. Shanghai Motel Management is a good example of success with the latter.

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