Big Spenders

Global investors shake up Hawaii's list of wealthiest landowners

November, 2007

Last July, The Blackstone Group (NYSE: BX), a New York-based private equity firm, announced its $26 billion acquisition of Hilton Hotels Corp. Deemed one of the largest buyouts in hotel history, the deal combined Hilton, operator of 2,800 hotels worldwide, with Blackstone, manager of $92 billion in assets. The transaction is scheduled to close before the end of this year.

As a result of the Hilton buyout, Blackstone for the first time becomes one of the most powerful landowners in Hawaii, ranking No. 3, right behind No. 2 landowner Queen Liliuokalani Trust, according to this year’s list of Wealthiest Landowners.

Hilton owns half-a-dozen hotels in Waikiki, on Kauai and on Maui plus the Hilton Hawaiian Village Beach Resort & Spa on Oahu and the Hilton Waikoloa Village on the Big Island. Prior to the acquisition, Blackstone already owned two Marriott properties on the Big Island and on Maui. The combined portfolio gives Blackstone 240 acres of land and buildings valued at more than $1.2 billion.

When Hawaii Business first introduced its “Wealthiest Landowners” feature in 2001, the annual list read like a who’s who of Japanese conglomerates, legacy lands and kamaaina families. The usual suspects, if you will. But as large institutional investors, hotel chains and brokers from the U.S. Mainland began buying property in the Islands, new names appeared on the list, such as Chicago-based General Growth Properties Inc. (NYSE:GGP), Massachusetts-based HRPT Properties (NYSE:HRP) and Morgan Stanley (NYSE: MS), whose global headquarters is in New York.

That’s no surprise to Mike Hamasu, director of consulting and research for Colliers Monroe Friedlander, whose firm keeps track of real estate investments in Hawaii. He says that in 2001, the commercial sector saw a total of $850 million in retail, hotel and industrial transactions. By the end of 2005, that amount quadrupled to $4.3 billion. The reasons were simple: high hotel occupancy, solid visitor arrivals, low interest rates and a strong demand for office space.

This infusion of global capital isn’t surprising to Joseph Toy of Hospitality Advisors, which publishes reports on Hawaii visitor trends. This recent surge of investments is the third cycle, he says. First, the Japanese came and bought land in the 1980s and early 1990s. A few years later, U.S. investors purchased the Japan-owned properties at distressed prices. After repositioning their assets, the same U.S. investors in the mid-2000s sold them to other U.S. investors at much higher prices. We now are in that cycle. “What’s good is that a lot of the landowners have a more methodical approach to understanding the value of their assets,” Toy says. “At one time, they might have been more risk-averse, but now their fiduciary duties are to continue to move their assets along with the rising tide of values.”

Says Hamasu, “We now have all of this institutional money that can afford to buy $200 million to $300 million in properties, and that has funneled a lot of these people to Hawaii in terms of interest.”

NEW SOPHISTICATION

One of those interested parties, Morgan Stanley Real Estate, also appears for the first time on this year’s list of Wealthiest Landowners. Morgan Stanley, which ranks No. 11, owns 10,819 acres of Hawaii land and buildings valued at $870 million. The company does not have a local office but operates from San Francisco and partners with local investors. Its primary focus is industrial and office real estate on Oahu, and resort- and second-home communities on the Neighbor Islands.
Hawaii, in particular, the resort market, is strategically important for Morgan Stanley. “In the next five to 10 years, Hawaii will benefit from strong demand from Asian markets, particularly China and Japan,” says Amy Price, executive director of Morgan Stanley in San Francisco. “We think the luxury resorts as a whole will benefit from baby-boomer growth, and that the weak U.S. dollar benefits U.S. hotels and resort communities in large markets.”
Last year, Morgan Stanley acquired $36.1 billion in global assets, and in the past 20 months bought and sold the following in Hawaii:

  • In February 2007, Morgan Stanley, in a partnership with local investor Everett Dowling, bought the Makena Resort on Maui for $575 million, from Japan-based Seibu Holdings Inc. The purchase included two golf courses and the Maui Prince Hotel. Morgan Stanley was the majority equity investor in the deal.
  • In August 2006, the company sold the Pearl Highlands Center to Boston company AEW Capital Management for more than $130 million, just 18 months after it purchased the shopping center from Chicago-based La Salle Investment Management Inc.
  • In September 2007, it purchased four office properties worth $98 million from Arroyo Realty Partners. The deal included the Haseko Center and Ocean View Center in downtown Honolulu, the Airport Center and the Hawaii Agricultural Research Center.
  • In March 2005, Morgan Stanley, in a partnership with local investor Jeff Stone, acquired the Princeville Resort on Maui for more than $161 million. The 9,000-acre property includes a golf course and shopping centers. Morgan Stanley was the majority equity investor in the deal.
  • In April 2007, the company purchased Florida-based CNL Hotels & Resorts Inc. for $6 billion, which included the Grand Wailea Resort Hotel & Spa on Maui.

What’s interesting about the Grand Wailea is that both its landowner, Morgan Stanley, and management company, Blackstone Group, are among Hawaii’s wealthiest landowners. In February 2006, Hilton Corp. acquired the Grand Wailea’s management contract and added the resort to Hilton’s elite Waldorf-Astoria Collection. “We don’t think the purchase of Hilton by Blackstone will have an effect on our day-to-day operations,” says Matthew M. Bailey, managing director of the Grand Wailea. “Since [the Waldorf’s rebranding], we’ve rebuilt the management team and retrained them to raise service levels.”
The Wailea’s efforts to bring Waldorf-Astoria to Hawaii is symbolic of the investment surge. When buyers reposition their newly acquired properties, millions of new dollars Ð and an added level of sophistication Ð pour into the Islands. “Clearly, Hawaii’s product is strengthening,” Toy says. “Hawaii’s market is also looking at different types of products like fractionals, timeshares and resort towns. The sophisticated investors are doing that.”

ASIAN CAPITAL

As U.S. investors join the ranks of Hawaii’s wealthiest landowners, you can’t help but wonder: What about the Japanese?

They’re definitely still on the list. Kokusai Kogyo Co. Ltd. ranks No. 10 this year, with $941 million in assets. It owns Sheraton properties in Hawaii and operates taxi and bus services in Japan. The other Japanese landowner, Seibu Railway Co. Ltd., ranks No. 19, with land and buildings valued at $344 million. Seibu owns Prince hotels in Hawaii, minus the Maui Prince, which it sold last February to Morgan Stanley and Dowling.

About three years ago, Seibu and Kokusai Kogyo had financial problems in Japan. Both companies were bailed out by Cerberus Group, a New York-based private-equity company known for taking over distressed portfolios. Cerberus (named after the mythical, three-headed guard dog that protects the gates of Hades) now owns a 65 percent interest in Kokusai Kogyo and a 30 percent interest in Seibu.

“Seibu and Kokusai Kogyo were huge, iconic organizations,” says Steve Somberero, President of Chaney Brooks, a Honolulu based commercial real estate firm that does business in Hawaii, Asia and the Pacific. “Dynastic families such as theTsutsumi’s of the Seibu group, the Osano’s of the Kokusai Kogyo Group and the Nakauchi’s of the Daiei Group were considered sacred “untouchables” that can do no wrong. However, these companies overextended themselves and were caught in the major crashes that took place in Japan. They ended up holding notes that were nonperforming.” His company, Chaney Brooks, last September oversaw the $45 million purchase of land on Kaheka Street by Japan-based Don Quijote (Don Quijote took over Daiei stores in Hawaii). Sombrero believes that given time, the dynastic families may once again come out of the ashes to buy back the notes from Cerberus as soon as the portfolios are cleaned up and made whole again.

Japanese companies have plenty of room to grow in Hawaii, despite what happened to Seibu and Kokusai Kogyo, Sombrero says. The key difference this time around is in the type of investor. Unlike the huge, iconic conglomerates of the past, the new Japanese buyer made its wealth in highly specialized industries, and not necessarily in real estate. For example, Japan-based Sasada International LLC, which bought the Park Shore Waikiki from Blackstone last July for $57 million, has its roots in apartment rentals, telephone marketing and sports clubs. The Hilo Hawaiian Hotel’s new owner, Hilo Hawaiian Associates, is affiliated with Tokyo-based Capital Medica Co. Ltd., which invests in the healthcare market.

It may not be too long before Hawaii properties are bought by “J-REITS,” or Japanese Real Estate Investment Trusts. This year, the Japanese government lifted regulations to allow J-REITS to invest in foreign property for the first time as early as next year. J-REITS are relatively new and were created in 2001 by the Japanese government to jumpstart the country’s lagging economy. Since then, the number of J-REITS has climbed to 40, with a market cap of more than $45 billion.

Some Hawaii-based analysts say Japanese buyers paved the way for other wealthy Asian investors, including South Koreans and Chinese. “When you want to protect your next eggs, you diversify [investments] out of your country,” Sombero says.

Last June, Seoul-based Sam House Development and SamKoo Development purchased $42 billion worth of land along Kapiolani Boulevard for commercial and residential use. Others say it’s only a matter of time before governments lift red tape and approve visa waivers to allow more business between the U.S. and other Asian investors.

Non-local investors get high marks from Kirk Belsby, vice president of endowment of Kamehameha Schools. “It’s healthy to still have investments coming from Asia, as well as the Mainland,” says the trust’s chief investment officer. “It wouldn’t surprise me to see more capital coming from [places such as] Europe. From a capital perspective, it’s good to be diversified.”

STILL THE TOPS

Belsby is familiar with diversification. Since joining Kamehameha Schools from Arthur Anderson in 2003, the trust added more people to manage its new portfolio, comprised of hedge funds, international equities and venture capital. Since Belsby joined the trust, real estate holdings have gone from 30 percent to less than 27 percent. Kamehameha Schoools still remains No. 1 on the Wealthiest Landowners list, with land and buildings valued at nearly $4 billion. On Oahu, Kamehameha Schools owns major parcels in Moiliili, Kakaako, the North Shore and Kapalama.

Recently, the trust invested $115 million to renovate its most valuable piece of property, the Royal Hawaiian Shopping Center in Waikiki. The exterior of the building is scheduled to be finished before the end of this year, and new tenants will be announced throughout 2008.

Belsby and his team are not caught up in being the largest landowner in Hawaii, and they don’t worry about who might replace Kamehameha School’s No. 1 spot in the future. What concerns them, however, is the way in which land in Hawaii is used. “Are these landowners committed to the community?” Belsby asks. “[We hope] they share a common set of values and look at lands in relation to the broader community. If they’re just looking to mine economic opportunities, that’s unfortunate.”

 

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