Los Angeles Business Journal
05/16/16

Making Room
SBE’s Sam Nazarian welcomes Morgans’ boutique hotel trio to hospitality empire
By Daina Beth Solomon

http://www.labusinessjournal.com/news/2016/may/16/making-room/

Hotel mogul Sam Nazarian is buying a boutique hotel group in a deal that could bolster his reputation as king of chic nightlife.

Nazarian’s SBE Entertainment Group, based in Mid-Wilshire, has agreed to pick up New York-based Morgans Hotel Group for $82 million, plus the assumption of about $700 million in debt and preferred securities.

Nazarian, 40, said he saw the acquisition as a chance to take on celebrated hotel brands, including Mondrian and Delano, and inject expertise from SBE’s dining and drinking destinations.

“It is not often you find a platform that fits yours so well, especially a platform that fits the same ethos and DNA,” Nazarian said. “The opportunity we see is not necessarily fixing anything, but telling the story as we move forward.”

The deal had been in the works for more than a year, stalled by disagreements among Morgans’ investors. The terms priced the stock at $2.25 a share.

Nazarian, who began selling off hotel properties last year, said the acquisition supports his long-term goal of managing, rather than owning, the bulk of his portfolio.

“The plan has not changed. Our pipeline of managed assets is unbelievably strong,” he said.

He will pick up just three properties in the deal – the Delano Hotel in Miami’s South Beach, the Hudson Hotel in New York, and the Clift Hotel in San Francisco – and plans to hang on to them for their key locations. Meanwhile, SBE plans to flag 19 new hotels through 2019. In the past, Nazarian has slowly sold properties only after getting them firmly established.

Alan Reay, president of Irvine’s Atlas Hospitality Group, said management is the way to go for a company such as SBE.

“There’s a very big opportunity to manage these boutique hotels for third-party owners,” he said. “You can expand much quicker in that direction than by buying real estate.”

Nazarian traces it all back to Morgans’ founder Ian Schrager, who pioneered the boutique hotel concept in the mid-1980s and developed the high-end Edition and Public hotel brands.

“Guys like me got into the hotel business because of this amazing integration between hotel development, restaurants, design, and real estate,” Nazarian said. “I give him (Schrager) credit publicly and personally. He was the person who sparked my interest.”

New brand, same plan

SBE already runs the SLS, Hyde, and Redbury hotel brands, along with restaurants including the Bazaar by Jose Andres, Katsuya, and Umami Burger. Morgans’ portfolio would add 13 owned, operated, or licensed hotels in Los Angeles, San Francisco, Las Vegas, Miami, New York, London, and Istanbul.

The deal, slated to close by the end of the year, would add billionaire investor Ron Burkle to SBE’s board of directors.

“It’s obviously a smart acquisition for Sam, because it expands his portfolio dramatically and into markets that he needed to be in, like Miami and New York,” said Reay.

But it could be a tough time to enter those cities, despite their reputations as vacation hot spots. New York has burst with new hotel inventory while suffering from Airbnb competition; Miami’s historically high level of Latin American tourism has declined recently. And after six years of record revenue growth in the hotel industry nationwide people are predicting it’s going to start to flatten out, Reay said.

Finally, SBE will have to contend with a high level of debt.

Burkle backing

Nazarian said SBE’s balance sheet is strong, with enough capital to improve the new hotel holdings, although he has no specific plans yet. He is also counting on input from Burkle, who Nazarian said he has known and admired for years.

Burkle’s West Hollywood-based Yucaipa Cos. had a $75 million stake Morgans, which will convert to a 25 percent stake in SBE. The deal also expands Burkle’s footing in Vegas, where he has a stake in Light Group, owner of 22 restaurants in the market. SBE operates three restaurants there.

“The ability to work with him is a longtime wish of mine,” said Nazarian. “He’s indicated to us that he’s going to get very, very involved.”

It was not clear just how Burkle, a billionaire whose fortune was made in the supermarket industry, might shape the company. Yucaipa’s hospitality holdings include private club Soho House and hotel company Sydell Group.

“I’ll let his career speak for itself,” Nazarian said. “Ron has always brought amazing value through his ideas, his relationships, his creativity, and his perspective in any business he’s been involved with.”

Cain Hoy Enterprises, a New York-based real estate investment firm, is helping finance the transaction, which will give its chief executive, Jonathan Goldstein, a seat on SBE’s board. The financing cost was not disclosed.

Nazarian, SBE’s chief executive, will retain majority ownership.