Analyzing Gencom, GD Holdings deal for Chicago trophy

Editor's note: story updated Tuesday afternoon

CHICAGO – Despite some uneven local market fundamentals and the increasing cost of debt, Gencom seems to know a good deal when it sees one. The Miami-based developer, along with deal partner GD Holdings, have acquired the newly opened, 192-key St. Regis Chicago from Chicago-based Magellan Development Group, for an undisclosed price.

“We’re long-term investors,” Gencom’s Chief Investment Officer Alessandro Colantonio told Hotel Investment Today. “We look at the future of a market over the next five, 10, 20 years, and as we looked at this opportunity during the height of a pandemic, we saw a market that, yes, has been struggling. But at the end of the day, Chicago is a major international city from a tourism and business perspective, and we don’t see Chicago going anywhere. Yes, there’s some short-term politics at play, and growth and recovery that we need to see through, but the opportunity to enter this market when we did with a best-in-class asset made a lot of long-term sense for us.”

Magellan, who was the original developer of the 101-story project with China’s Dalian Wanda Group, will retain a meaningful ownership stake in the project, which also has 393 condominiums that are not part of this deal. Dalian Wanda sold its 90% stake in what has been estimated to be a $1 billion project when it was still called the Vista Tower in August 2020.

Negotiations for the deal actually started at the beginning of the pandemic when the asset was still under construction. Late in 2020, the new partners strategically arranged to close on the transaction once the hotel property was finally delivered, according to Colantonio. The hotel opened on May 15 of this year and the sale closed late that day.

“It was a forward purchase,” Colantonio said. “So, we’ve been on the peripheral involved in the process since we put it under a term sheet with Magellan.”

Alessandro Colantonio

Colantonio said that while he couldn’t disclose financial details about the transaction, Gencom and GD Holdings, who are 50-50 sponsors on the deal, did buy at a discount to what he thinks was Magallen’s cost basis on the project. “We were very happy with the entry point,” Colantonio said. “Another piece of this puzzle that got us excited was to get into a major market like Chicago with a best-in-class asset and a long-term view. It has all the right ingredients for what Gencom really looks for.”

Nonetheless, Colantonio did admit it was somewhat hard to stomach the cost of debt to close the deal, but they were comfortable with the cost going into the closing phase. “Our focus really shifted on finding the right strategic relationship lender and maximizing the basis they’d be willing to come in at,” he said.

After three institutional lenders competed for the loan, Varde Capital Partners was brought in as the senior lending partner, providing $76 million of acquisition financing, according to JLL.

“They [Varde] were a new relationship to both Gencom and GD Holdings and were incredible to deal with, represented by JLL,” Colantonio added. “It’s more expensive than anyone would like. But it’s the nature of where we are in the world today. Again, where we hung our hat was the basis that we were coming in at, and that allowed us to be a little bit more strategic on the financing.”

When the finance market settles, Colantonio said there should be an opportunity to recapitalize or refinance the property to get some better pricing. “But we are happy where we ended up,” he said.

Because of the cost of debt today, one might expect the partners would have had to ante up additional equity to close, but encouragingly that was not the case. “We ended up exactly where we were hoping to be on proceeds,” Colantonio said. “It ended up being just a tad more expensive than we had hoped on the margins, but not on proceeds… The fact that we had major institutional lenders willing to step in, believing in the story, believing in the basis, believing in the asset, that was validation for us on the opportunity that we had.”

With the right basis, the right structure and the capital partners coming in, we believe we’ll make a success out of this. And we’re very excited to see what’s next for us on the buy side.

Alessandro Colantonio

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The acquisition marks the first addition of a St. Regis brand to each of Gencom and GD’s growing hospitality portfolios. Today, Gencom’s portfolio is comprised of nearly $8 billion in assets under management and includes 23 owned assets in operation or under development with over 7,000 hotel rooms around the world. For Denver-based GD Holdings, this adds to its significant direct investments in distinct real estate, including luxury hotels such as Four Seasons Hotels & Resorts, The Ritz-Carlton and St. Regis, alongside other brands by Marriott and Hilton.

The deal also signifies the joint venture’s first entry into Chicago, a market which has been trailing during the recovery.

With the hotel just opening, Colantonio said he is very encouraged by the booking pace. “The strategy here is to come out as the rate leader in the market,” he said. “We hope to set a new bar for luxury. It is certainly too soon to tell, but we’re very encouraged that we will have the best product in Chicago, from a luxury standpoint, and from any segment for that matter.”

At the end of the day, Colantonio said Gencom is not afraid to go into markets that might have some short-term challenges, whether it’s urban full-service or urban luxury or luxury resorts. “This is just another example where Gencom and the GD Holdings teams were able to find an opportunity at the height of the pandemic in a very challenging environment,” he said. “With the right basis, the right structure and the capital partners coming in, we believe we’ll make a success out of this. And we’re very excited to see what’s next for us on the buy side."