Last week, former Los Angeles Lakers basketball star and minority owner Earvin "Magic" Johnson celebrated as the team, which was trounced by the Boston Celtics in the NBA Championship Series two years ago, beat their East Coast rivals for the 2010 title. Now, Johnson is hoping for a similar comeback for the beleaguered U.S. hotel industry.
Johnson, 50, has made extensive real estate investments since retiring from the Lakers in 1991 (he made a brief comeback five years later), including shopping centers, movie theaters and Starbucks coffee shops in urban, largely minority-populated areas. And he has stepped up his investments in hotels over the past few years as a way to both make money and to create jobs and services in communities underserved by real estate investment.
Targeting Densely Populated, Ethnically Diverse Areas
Late last month, the 45-year-old Washington Hilton completed a $150 million renovation funded primarily by Canyon-Johnson Urban Funds, which is led by Johnson and Managing Partner Bobby Turner. The fund's 2007 acquisition and ensuing upgrades of the hotel's 1,070 rooms, lobbies and Washington, D.C.'s largest ballroom, "goes to the very heart of what Canyon-Johnson is all about -- investing in urban communities and serving as a catalyst for more redevelopment," Johnson said at a news conference announcing the completion of the renovations. Canyon-Johnson and partner Lowe Enterprises spent a total of about $500 million on the project, according to Turner.
The Washington Hilton represents a hotel sector that's a relatively recent focus for Johnson, which formed the urban fund with Turner in 2001 to target real estate opportunities in densely populated, ethnically diverse areas. The fund's nearly three-dozen real estate investments total almost $2 billion and include the Los Angeles Transamerica Center office property and the Houston Marq*E Center retail complex.
Canyon-Johnson, along with partner Applied Development, built the $150 million, 225-room W Hoboken, before selling its stake after the hotel was completed last year. The fund is also working with Stratus Properties at developing the $300 million Block 21 project in Austin, Texas, which will include a 250-room W Hotel, 159 condominiums and a 2,500-seat music venue that will be the future home of Austin City Limits performances. That project will open by early next year.
"Distrustful of Institutional Investors"
Such hotel investments are consistent with the fund's goals of getting returns on investment while generating or protecting jobs in urban areas such as Washington, D.C., whose population is 60% black, and South Los Angeles, where Johnson opened the first Magic Johnson Theatre 15 years ago.
"These communities are very distrustful of institutional investors, because they think we're just there to make money," says Turner, noting that Johnson helps give the fund credibility. As a real estate investor, Turner adds that Johnson as an investor "has an insatiable desire to learn."
Still, it's a risky sector of real estate, even for Johnson and Turner, whose partnership dates back to 1998. With the economic downturn cutting travel both within the U.S. and from abroad, revenue per available room at U.S. hotels plunged 23% between September 2008 and February 2010, Smith Travel Research's STR affiliate said earlier this week.
Meanwhile, the Los Angeles Marriott Downtown was purchased out of foreclosure earlier this year, while other large properties such as San Francisco's venerable Sir Francis Drake and Mark Hopkins hotels have either been put up for sale or have defaulted on their loans, according to Irvine, Calif.-based Atlas Hospitality Group.
That said, Canyon-Johnson may have picked wisely, at least with the Washington Hilton. That city's 13% decline from peak to trough in revenue per available room was the smallest drop of the 26 largest U.S. hotel markets, according to STR.
Additionally, the fund may benefit more quickly from an economic recovery with its hotels -- either through more cash flow or higher property valuation -- because room rates can be adjusted upward more rapidly than office or retail leases, according to Atlas Hospitality President Alan Reay. U.S. hotel occupancy rates will increase about 4 percentage points this year, while the average daily room rate, which will be little changed this year, will increase 4% in 2011, STR said earlier this month.
"That segment has been depressed for some time," says Reay. "Because of its daily nature, hotels are the first to go down in a recession, but they're also the first to bounce back."
Magic Johnson knows a few things about bounces.
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