Ares-Montage Deal a Sign of Ultra-Luxury Hotel Growth

What does Ares Management's recent announcement of its minority stake purchase in Montage Hotels & Resorts say about the investment opportunities in the ultra-luxury hotel sector?
Kasia Russell, HVS

Kasia Russell, HVS

Last week’s announcement that a real estate fund managed by Ares Management LP had made a strategic investment in luxury hospitality management company Montage Hotels & Resorts underscores the strength of the ultra-luxury hospitality segment, says a hotel industry expert.

As part of the deal, Ares will purchase a minority stake of up to 20 percent in Montage and will also provide up to $200 million in future growth capital to Montage, focusing on the continued expansion of its portfolio of Montage- and Pendry-branded hotels and resorts.

Montage’s founder, largest shareholder, CEO and chairman, Alan J. Fuerstman, will remain in those capacities, and all original investors in Montage Hotels & Resorts, including Ohana Real Estate Investors, also remain invested. Jay Glaubach, an Ares managing director and co-portfolio manager of Ares’ opportunistic real estate funds, is joining the Montage board.

“Montage continues to achieve superb financial results,” Glaubach said in a prepared statement. “We see tremendous growth opportunities for the company….”

This is the second Ares investment with Montage Hotels & Resorts. Funds managed by Ares made an investment in Pendry San Diego, the first property in Montage’s new luxury lifestyle brand, Pendry Hotels. The new hotel will debut in San Diego’s historic Gaslamp District next fall.

Montage’s portfolio includes Montage Laguna Beach, Montage Beverly Hills, Montage Deer Valley, Montage Kapalua Bay, Montage Palmetto Bluff and, opening in late 2017, Montage Los Cabos. The company also operates premiere golf courses, including Spanish Peaks Mountain Club in Big Sky, Mont., and The May River Golf Club in Bluffton, S.C.

Though perhaps not as well known, Montage operates among a stratospheric group of competitors and peers. These include Four Seasons, Aman Resorts, Peninsula Hotels, Ritz-Carlton, Fairmont Hotels & Resorts, Rosewood Hotels & Resorts, Mandarin Oriental, St. Regis, Shangri-La and Park Hyatt, Kasia Russell, MAI, managing director and senior partner in Consulting & Valuation at HVS, told CPE.

“The ultra-luxury travel segment has continued to do very well into 2015,” she continued, “with demand growth attributed to two major factors: emerging market travelers from regions including the Middle East and China and a general ‘return’ to the luxury market after the financial crisis. A resurgence of incentive travel (groups and meetings) has also contributed to the segment’s demand growth.”

However, Russell cautioned that “There is some floating concern here in the United States for 2016 about what impact the strength of the dollar will have on the luxury segment. Given the large percentage of travelers who originate from markets outside of the U.S., there may be some tempering.”

“Another important factor to consider for this segment is that the…barriers to entry for assets like these are quite high, as location and quality are of the utmost importance, and development costs are high.”

Russell remains positive overall about the segment,  saying, “In terms of average rate, this segment has been successful at increasing rates consistently since 2010, with the strongest growth patterns noted in 2014 and 2015. Barring any unforeseen events, 2016 and 2017 should continue to experience consistent average rate growth in this segment.”