The art of the deal was the topic at The School of Hospitality Business October 8-9, when it hosted the 26th annual Hilton Lecture Series.
The lecture series each year features an industry expert and an academic expert who are invited to address a single, trending topic. This year Matthew Sparks (BA ’94) spoke to undergraduates on the sale of the Waldorf Astoria New York in early 2015. Sparks is the senior vice president of luxury, lifestyle, and full-service development for Hilton Worldwide, leading the company’s corporate and luxury brand growth and development in North America. Hilton’s luxury brands include both the Waldorf Astoria Hotels & Resorts and Conrad Hotels & Resorts brands. The academic speaker was Dr. John O’Neill, professor and director of the Center for Hospitality Real Estate Strategy at Penn State University. He addressed graduate students, faculty, and staff, sharing a paper on the sale of hotels, exploring when and why investors sell.
Sparks, a member of The School’s Real Estate Investment Management Advisory Council and its Alumni Association Appointed Board of Directors, has been a frequent featured speaker at a number of industry events, including the NYU Hospitality Investment Conference, The Americas Lodging Investment Summit (ALIS), The Lodging Conference in Phoenix, and the Hotel Investment Conference Asia Pacific in Hong Kong and Singapore.
He shared some of the nuances of the negotiation leading to the sale of the Waldorf Astoria New York, the iconic luxury landmark in New York City that consistently recruits and hires students from The School. Several alumni are in management and executive positions, and for over a decade the hotel has been the site of The School’s Alumni Association Celebration of Leadership.
The Waldorf was sold last year to Anbang Insurance Group Co. Ltd. for $1.95 billion. The sale included a negotiated 100-year management contract with Hilton. In his talk, Sparks showed that the objectives of both the buyer and seller had to be met in order for negotiations to succeed. The buyer wanted a luxury U.S. hotel. Hilton wanted a fully-priced transaction and to continue to operate the Waldorf Astoria New York under a 100-year management agreement.
The Waldorf Astoria New York was famously called “The Greatest of the Them All” by Hilton Worldwide’s founder Conrad Hilton. The original Waldorf was built in 1893 and was combined with The Astoria in 1897. The Waldorf=Astoria opened at its present location on Park Avenue in 1931. Sparks indicated that the new buyer will undertake an extensive renovation of the property and will carry on the traditions that were established long ago. Waldorf Astoria New York is one of the largest hotels in New York City, with more than 1,400 guest rooms.
Dr. O’Neill, who previously served a five-year term as the director of Penn State’s School of Hospitality Management, has chaired multiple doctoral committees and served on the editorial boards of several Tier I hospitality academic journals. He is president of the local chapter of the Appraisal Institute and the chair of his local Planning Committee. Having written 100 academic articles, Dr. O’Neill was named one of the ten most prolific authors in the hospitality field, and has earned numerous awards for teaching and research.
In discussing why and when investors sell hotels, he explained that the amounts of money that have to be borrowed in order to purchase a hotel have changed dramatically over the past five years. The LTV (loan to value) was typically 50-60% in 2010. Today it is 70-75%. This means the owner has to put up less money, and by itself this could result in a higher valuation for the hotel.
Investors want to sell their hotels when the market values are high. But, Dr. O’Neill said, this determination is not a simple estimate. Automated valuation models are helpful, and are perhaps accurate within 10% of the final market value negotiated between the buyer and seller. John suggested that formal appraisals are accurate within 5%, but these take time and require more money.
Dr. O’Neill discussed the importance of the hotel sale transaction to the overall hotel investment. He also spoke about technical issues, including return on investment, return of investment, reversion value, and the discounted cash flow model. The graduate students were eager to learn more, asking and even answering questions.
Dr. Ray Schmidgall, Hilton Hotels Professor of Hospitality Business Financial Management and host of the Hilton Lecture Series, said afterward, “I consider this 26th Hilton Lecture Series to have been very successful. The students learned a great deal from the speakers, who were engaging and very knowledgeable. We thank both Mr. Sparks and Dr. O’Neill for their contributions to this event.