Sayonara Means Goodbye

And hello. Japanese divestment of visitor industry properties and Mainland re-investment have led to an economic rebirth.

September, 2005

Last June, Japanese railway and hotel mogul Yoshiaki Tsutsumi pleaded guilty to charges of insider trading and falsifying financial records. Tsutsumi was chairman of Seibu Railway Co., a massive conglomerate of railroads, real estate, hotels and sports teams. Worth more than $20 billion at his wealthiest, Tsutsumi was named by Forbes magazine as the world’s richest man from 1987 to 1990. However, times have changed-drastically. Tsutsumi’s wealth has “dwindled” down to an estimated $3 billion as his company posted an $81 million loss in 2004.

At the time of his arrest earlier in this year, Tsutsumi was acknowledged as the last of the country’s great business shoguns, running his corporation as if it were his personal fiefdom. (According to the Washington Post, Tsutsumi hadn’t held a board meeting in seven years. Instead, he chose to run Seibu “by decree.”) His prosecution literally opened the books on legendary Japan Inc. and was the dramatic end of the old samurai-style of corporate governance.

The financial and symbolic importance of Tsutsumi’s stunning fall from grace is not lost on Hawaii commercial real estate professionals and analysts. Seibu Railway Co. owns the Hawaii Prince Hotel Waikiki and Golf Club, the Maui Prince Hotel and Golf Course and the Big Island’s Hapuna Beach Prince Hotel and Golf Course and the Mauna Kea Beach Hotel and Golf Course. Last year, Seibu was ranked No. 12 on Hawaii Business’ list of the Top 20 Wealthiest Landowners in the state, with its land and buildings valued at $520 million. Tsutsumi’s and his company’s legal and financial woes will almost certainly lead to the sale of these Hawaii holdings, some of the most valuable and revered properties in the Islands’ visitor plant.

“Everyone is expecting the Prince portfolio to go on the market, possibly by the end of the year,” says Joseph Toy, president of Hospitality Advisors, a visitor-industry research and consulting company. “I’ve had more than a dozen inquiries about the Prince myself this year, and I’ve heard that Seibu has been shopping around for someone to help broker a deal.”

According to Toy, the Prince Hawaii hotels and golf courses sold either separately or together will fetch a combined price of between $1 billion and $1.5 billion. The properties are the largest block of visitor-industry real estate bought during the bubble period that remains in Japanese hands.

The eventual sale of Prince properties will also carry a heavy symbolic value of its own, finally closing the book on Hawaii’s ’80s bubble period and signifying the fundamental shift in the way commercial real estate is bought and sold in Hawaii. According to Toy, during the ’80s and ’90s, an Asian approach to real estate investing was pervasive in the market, thanks to the flood of Japanese money. Really more philosophical than financial, the outlook held that land was finite and sacred, so value would appreciate continually and consistently. Coincidentally, it’s an outlook shared by the Native Hawaiian culture.

In the Western view, the value of land isn’t derived by its scarcity or sacredness but by the flow of its income streams. The here and now. In this approach properties are bought and sold like a commodity. Of late, the Hawaii commodity’s market has been hot.

The Rinse Cycle

Up and down Waikiki’s Kalakaua Avenue and throughout the Islands’ resort areas, Japanese money has been replaced with Mainland cash, which has been flowing more freely and quickly. The steady stream of funds is transforming the Islands’ visitor-industry plant. According to Kevin Aucello, senior vice president and director, CBRE Hotels, since the earlier ’90s, shortly after the bursting of the Japanese bubble economy, nearly $5 billion of Japanese-owned visitor-industry real estate has been sold (see chart on page 43). The list of properties includes many of the crown jewels of Hawaii’s visitor plant, many of which were built with Japanese money: For instance, the Kahala Hilton (now known as the Kahala Mandarin) was sold by the WKH Corp. for $53.8 million. Three years later, the Grand Wailea was sold in 1998 by TSA International for $263.5 million. In 2000, the Ihilani Hotel, Ilikai Hotel and Ritz Carlton Kapalua, among many others, were sold.

In the past two years, the pace of reinvestment has grown torrid, moving into a second cycle in which properties once owned by the Japanese were resold to Mainland investors for huge profits (see sidebar on Page 41). According to Toy, 19 major hotel properties were sold over 2003 and 2004. The transactions totaled $2.3 billion. With the Seibu’s Prince properties waiting in the wings, he expects the current cycle of transactions to continue well into 2005.

One of the end results of this torrent of capital is reinvestment and improvement of both the hotels’ hardware (the physical plant) and software (advertising and marketing). This renovation boom throughout the state has been one of the drivers of Hawaii’s current construction boom and has literally reshaped the tourist landscape, especially Waikiki.

“By the late ’90s, Hawaii’s visitor plant was tired and rundown and wasn’t much of a draw. You had a bad product that you had to sell at a deep discount. The problem was particularly acute in Waikiki,” says Aucello. “Japanese divestment and subsequent Mainland reinvestment has led to a rebirth of Hawaii tourism from the inside out.”

One indicator of this rejuvenation has been the significant rise in state hotel average daily room rates (ADR) and revenue per available room rates (RevPAR). In 1998, ADR stood at $129.91, which yielded a RevPAR of $92.25. By 2004, the ADR jumped to $150.86 and the RevPAR to $117.36, increases of 14 percent and 22 percent, respectively. Total room revenues that year checked in at $2.73 billion, another all-time high. By mid-2005, the industry’s ADR and RevPAR hit all-time highs, $161.51, a 6.8 percent increase over 2004, and $131.29, an 11.5 percent increase.

“Room rates have increased dramatically over the last several years,” says Aucello. “But many of the benefits of this reinvestment cycle are harder to quantify and won’t be felt until far in the future. Simply, we have a far superior product.”

Shogun or Buffoon?

It’s tough being a Japanese business person nowadays. Once hailed as masters of the universe, big-time Japanese businessmen and investors have had their reputations dragged through the mud, especially of late as Chinese money has started to seep out of the Middle Kingdom. With the announcement of Chinese plans to purchase IBM, Unocal and Maytag, many people are making the inevitable and unfair comparisons with the Japanese acquisitions of Rockefeller Center and Pebble Beach Golf Course in the high-flying ’80s. It’s strategic investing versus impulse buying for the Asian brethren. Market savvy versus vanity and hubris.

But hindsight might not be 20-20. Even though some of Hawaii’s hotel properties seemed to have been ill-conceived trophy purchases, it is unfair and inaccurate to paint the 1980s Japanese businessperson with a broad brush, either as a shogun or buffoon. According to UH Manoa economics professor and East-West Center senior fellow Sumner La Croix, if not for a few (and significant) historical events, the story could have turned out far differently.


The Biggest Japanese-Owned Hotel Sales Since 1993
Four Seasons Wailea 
Shimizu Construction
MSD Capital LP (Michael Dell)
Grand Wailea Resort 
TSA International
CSFB (International Hotel Acquisitions LLC)
Hyatt Regency Maui
Kokusai Motors
Princeville Resort
Suntory/Nippon Shinpan
Morgan Stanley/Jeff Stone
Ritz Carlton Kapalua
Nissho Iwai
Hawiian Regent Hotel 
Otaka LP
Marriott International Inc.
Kea Lani Hotel
Kea Lani LP
Trinity Investment Trust Mitsui Trust Bank
Maui Marriott
Azabu Building Co.
Marriott International Inc.

“Looking back, it’s not all that clear that the [Japanese] purchases were so terrible. Today, most of the hotels seem to have been awfully overpaid for,” says La Croix. “However, many of these investments were motivated by what everyone thought was going to be a continuing increase of Japanese tourism. Some of these investments would have looked much better if the Japanese economy had continued to grow at 3 percent to 4 percent. By 2000, it would have been 30 percent bigger and we would have seen a ton more tourists here.”

The heavy Japanese investment further transformed Hawaii into a mono-industrial state, which focused on a single market. And the sluggish pace of subsequent Japanese divestment helped extend Hawaii’s more than decade-long economic malaise. But La Croix, Toy and Aucello all believe that the exuberant investing of the ’80s had an overwhelmingly positive economic impact on the Islands. While much of the Japanese money was clearly misspent, much of it built the foundations of today’s tourism infrastructure, particularly on the Neighbor Islands. Because of outrageous land and construction costs, most of these properties could have never been built today, no matter how strong the market demand.

In addition, there are many Japanese success stories. Several Japanese-owned properties, such as the Halekulani, Four Seasons Hualalai and the Kyo-ya holdings to name a few, have weathered Hawaii tourism’s precipitous downturn and have become beacons for the industry.

“Japanese investors provided Hawaii with a tremendous benefit,” says Toy. “Basically, if they didn’t spend the way they did, we wouldn’t have Wailea.”

“Because some guys ignored market fundamentals and built anyway, we have the Four Seasons, Ko Olina, Waikoloa, the Grand Wailea and Kealani, among many others,” adds Aucello. “As a result, we have a much larger and better infrastructure than we could have ever afforded otherwise.”

For consumers, buying Japanese products has meant a good value. But for savvy investors, purchasing and reselling Japanese-owned Hawaii hotels have produced windfall profits. Here’s a short list of some of the most profitable of these transactions.

Hilton Waikoloa Hotel
• Sold by Mitsui Trust Bank for $54 million in November 1993 to Pan Global/Colony Capital
• Sold by Pan Global/Colony Capital for $158 
million in April 2002 to Hilton Hotels
• Pan Global/Colony Capital netted $104 million.

Orchid at Mauna Lani Bay
• Sold by Daiichi Kangyo Bank for $75 million in January 1996 to Colony Capital 
• Sold by Colony Capital for $140 million in October 2002 to Fairmont Hotels
• Colony Capital netted $65 million, an 87 percent profit.

Grand Wailea Resort
• Sold By TSA – Sekiguchi for $263 million in June 1998 to CS First Boston 
• Sold by CS First Boston for $375 million in November 1998 to KSL Recreation
• CSFB netted $112 million in five months for 43 percent more than they paid.

Kea Lani Hotel
• Sold by Mitsui Trust Bank to Trinity for $120 million in July 1998 from 
• Sold by Trinity to for $250 million in January 2001 to Fairmont
• Trinity netted $130 million or 110 percent more than they paid in just 2-1/2 years.

Hyatt Regency Maui
• Sold by Kokusai Motors to Blackstone Capital for $230 million in March 2001
• Sold by Blackstone Capital to Host Marriott for $321 million in October 2003
• Blackstone netted $89 million or 40 percent more than they paid.

Hawaiian Waikiki Beach Hotel
• Sold by Otaka to Leucadia for $28.5 million in July 2001
• Sold by Leucadia to Gaylord Entertainment for $107 million in June 2005
• Leucadia netted $78.5 million or more than three times what they paid.

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David K. Choo