A New England private investment firm is quickly becoming the biggest vulture feasting on New York City’s distressed hotels.
Magna Hospitality Group is acquiring two Manhattan hotels with more than 460 rooms between them, as the owners walk away from the struggling properties, sources familiar with the transactions told The Real Deal.
Those deals follow Magna’s recent acquisition of the 310-room Embassy Suites at 60 West 37th Street for $115 million — a 41 percent discount from what seller Ashford Hospitality Trust paid for the property 18 months earlier.
In just a few weeks, Magna has added 800 rooms to its portfolio at a time when the hospitality sector is experiencing what many believe is its worst crisis ever.
A representative for Magna, headquartered in Rhode Island, declined to comment.
In the first deal, Magna is buying a $56 million loan on the 239-room Fairfield Inn & Suites at 325 West 33rd Street from lender Wells Fargo, sources said. The deal is being structured as a deed-in-lieu-of-foreclosure, where the owner, a subsidiary of the Hawaii-based investor Shidler Group, is handing back the keys in exchange for being able to walk away from the debt.
In the second deal, Magna is buying a $52 million loan on the 224-room Courtyard by Marriott at 307 West 37th Street from Barings, an investment-management arm of the life insurance company MassMutual. The transaction is structured similarly, according to sources, with borrower Watermark Capital handing over the deed.
Pricing details of both deals weren’t immediately available, but sources said Magna is buying the properties at significant discounts. In both transactions, the sellers are providing Magna with big acquisition loans. Newmark Knight Frank marketed both loans.
Magna is emerging as one of the most active contrarian investors in New York hotels, which were decimated by the pandemic and face an uncertain road to recovery.
The company, founded in 1998 by a trio of former executives from Grand Heritage Hotels, gained a toehold in New York in 2006 when it opened the 125-room Holiday Inn Express at 15 West 45th Street. Soon after, it opened a Holiday Inn Express in Park Slope and later teamed up with prolific hotel developer Sam Chang to convert a former office building at 373 Fifth Avenue into a 70-room boutique hotel.
According to its website, Magna owns or operates more than 20 hotels with over 4,500 rooms.
The company made well-timed profits on some of its early investments by selling properties in 2014 just as the hotel market peaked. A wave of new hotels flooded the city with supply that began a years-long period of declining per-room revenue.
“They bet big early last cycle and killed it, and they feel like this is an even bigger opportunity because there is more distress,” explained one hotel expert who is familiar with Magna’s strategy but not connected to do the deals.
There is one caveat: The lenders selling Magna the distressed mortgages on the properties are providing Magna with big loans to finance its acquisitions.
“They are buying these deals with a lot of leverage, so you could argue that they are lottery tickets,” the expert said.
Many New York City hotels have shuttered since the pandemic shut the spigot on travel. But despite the buildup of distressed hotels that experts believe is bubbling under the surface, few properties have actually traded hands to give buyers and sellers an indication of how to value them.
Many hotels that have had their securitized loans sent to special servicing recently received new appraisals. On average, they are coming in 29 percent lower than their pre-pandemic figures, according to Trepp.
While appraisals don’t always match up with market pricing, they serve as a benchmark for investors desperate for information.
Highgate Hotels recently struck an agreement to buy a portfolio of 197 properties from Colony Capital for $2.8 billion. Investors, though, have had trouble using the deal as a benchmark. Highgate is putting just $67.5 million into the multi-billion-dollar deal and assuming Colony’s debt. Experts said valuing the properties is difficult without knowing the terms, if any, that Highgate negotiated to modify that large debt.