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Volatility alert for hospitality employees: Private equity pushes REITs aside as top hotel owner

The past decade, over which private equity buyouts went from mega-boom to bust, brought about a dramatic change in the ownership structure of the hospitality industry. Ten years ago, private equity firms accounted for 12% of hotel rooms among the 10 largest hotel owners, with Real Estate Investment Trusts (REITs) owning 67%. Private equity firms now own 59% of rooms among the top ten, with REITs at 33%, according to a recent study by Hotel News Now.

Private equity began to nudge out REITs as hotel owners over the course of the buyout boom which crashed along with everything else in 2007 (see Private equity buyouts in the hotel industry on the IUF's Private Equity Buyout Watch site for a 2007 pre-crash view).

Blackstone's 2007 buyout of Hilton Hotels Corporation (490,000 rooms worldwide) elevated it to the world's largest hotelier by number of rooms (620,000 rooms, 4,000 hotels, 80 countries). The USD 26 billion deal was financed with just 5.6 billion in equity, putting Hilton's finances on a knife-edge. The 2008 USD 30 billion LBO of Harrah's Entertainment (now Ceasar's) by Apollo and TPG swelled private equity's already considerable footprint on the gaming industry (see UNITE HERE's website on private equity for the ongoing fallout from this heavily leveraged deal http://www.pecloserlook.org/). And over the course of the boom, taking REITs private through leveraged buyouts also became a substantial area of private equity activity - taking the phenomenon into account for the top ten as well as wider hotel ownership, private equity's share with respect to REITs is possibly even greater than 59%.

REITs are corporations that own income-producing commercial property - hotels, offices, residences, warehouses, whatever - which are exempt from corporate income tax provided they distribute ca. 90% of their income to investors as dividends. As hotel companies began transforming themselves from owner-operators into branding operations, REITS became the preferred vehicle for hotel ownership. But the considerable ownership - and employment - volatility they introduced, particularly in the context of a real-estate bubble which shuffled hotel properties in and out of REITs, was mild in comparison with the impact of short-term private equity owners bent on "extracting value" through quick property sales.

In industry jargon this is described as an increase in "volume transaction". For workers, it means never being sure who will write the next paycheck, and who is the legal and/or real employer for collective bargaining. According to one hospitality industry executive quoted by Hotel News Now, "There are many more hotels today in the hands of traders versus holders. If you go back 20 years, hotels were in the hands of financial institutions that held forever, hotel companies, c-corps that held forever. Now there is more in the hands of institutional investors that trade and private equity firms that trade." He went on to observe that "Even real estate investment trusts-traditionally longer-term holders-trade hotel assets today more frequently than they did in the past because they're constantly trying to upgrade their portfolio."

Another industry figure put it more succinctly: "In the hotel business, you really make your money by opportunistic buying and selling."