PE giant Brookfield buys Watermark REIT for $3.8B

Signaling that portfolio hotel deals can be completed in the current business climate, Chicago-based non-traded REIT Watermark Lodging Trust has been acquired by Brookfield Real Estate Funds for US$3.8 billion (US$481,300/per key) in an all-cash transaction with four banks providing financing to the buyer. Among the assets in Watermark’s 25-hotel, 8,163-room portfolio are five Ritz-Carlton hotels and the Fairmont Sonoma Mission Inn & Spa in California.

Brookfield is acquiring the outstanding shares of Watermark’s common stock as well as outstanding debt and preferred equity at 13.5x 2019 Hotel EBITDA and 6% NOI cap rate (excluding corporate G&A). The purchase price represents a premium of over 7.5% from the most recently published Net Asset Values per share as of December 31, 2021, of US$6.29 per Class A share and US$6.22 per Class T share.

The Ritz-Carlton Key Biscayne in Miami, Florida

“We suspect the recent increase in interest rates and debt capital markets volatility had a modest impact on pricing and potentially affected buyer interest/depth (i.e., ability to close all-cash); importantly, these challenges did not prevent a large-scale deal from getting done,” wrote R.W. Baird analyst Michael Bellisario.

These luxury and upper upscale assets are in U.S. drive-to leisure destinations and gateway urban cities across 14 states with a high concentration in the Sun Belt region. The portfolio generated 2019 pro forma consolidated Hotel EBITDA and NOI of US$281 million and US$228 million, respectively; RevPAR was US$196.

“Hotels and resorts of this scale and quality are difficult to replicate,” said Lowell Baron, managing partner and chief investment officer in Brookfield’s Real Estate Group. “This portfolio is well positioned given its concentration in high barrier to entry coastal destinations, gateway cities and the sunbelt.”

After acquiring assets predominantly from 2013 to 2016, Watermark was formed in 2020 via the merger of non-traded REITs Carey Watermark 1 and Carey Watermark 2. Led by Chairman and CEO Michael Medzigian, the company obtained US$200 million of preferred equity financing in July 2020 from Ascendant Capital Partners and Oaktree Capital Management. At the end of last year, Watermark had US$2 billion of consolidated mortgage debt (every hotel was encumbered) and US$231 million of Series B preferred equity.

Brookfield is a global alternative asset manager with approximately US700 billion of assets under management across real estate, infrastructure, renewable power and transition, private equity, and credit.