Fortress Buying Kyushu Resort from Game Maker as Japan Hotel Deals Continue

New York-based fund manager Fortress Investment Group is acquiring a resort complex in the southwestern Japanese city of Miyazaki, as an inbound tourism boom helped push acquisitions of hospitality assets to a record JPY 500 billion in 2023, according to CBRE.

The alternatives specialist is picking up the Phoenix Seagaia Resort, which includes the 743-key Sheraton Grande Ocean Resort and two smaller hospitality properties, from TSE-listed video game maker Sega Sammy Holdings for an undisclosed amount.

“Even after the Phoenix’s achievement to profitability, we have been considering various measures to further increase its corporate value, and have decided that the best way to maximise corporate value of Phoenix is to bring in Fortress, who has extensive experience and knowledge in the hotel and resort business, as a strategic partner, transfer our Phoenix shares to them, and have Fortress take the lead in Phoenix’s operations,” Sega Sammy said in an announcement on Friday.

For Fortress, which has a penchant for acquisitions which combine real estate with operating businesses, the deal adds to the company’s 176 hotels across Japan, including the Hotel New Akao which it purchased in the ocean resort town of Atami outside Tokyo in 2022, and a 32-property portfolio it picked up from Japan Post in 2021.

Conventions, Golf and Hot Springs

Situated on the east coast of Kyushu island, the resort comprises the Sheraton Grande Ocean Resort, a 142-unit serviced apartment property and a 72-room cottage complex. The resort also features a convention centre, a Banyan Tree-branded spa, hot springs, and two golf courses, one of which was designed by links legend Tom Watson.

Under the terms of the deal, Sega Sammy will transfer all common shares of Phoenix Resort Co Ltd to a unit of Fortress on 31 May, and will acquire newly issued class shares that will give Sega Sammy 20 percent of the voting rights in the company holding the resort following the disposal.

While a selling price for the property was not disclosed, the game maker said it expects to book a gain of approximately JPY 8.5 billion on the sale, after Sega had acquired the resort for JPY 5.8 billion in 2012.

In the fiscal year ended March 2023 the resort achieved profitability for the first time since Sega Sammy acquired the asset in 2012. For the fiscal year ended March 2024, the resort recorded sales of JPY 11.6 billion and net profit of JPY 80.6 million, marking its highest revenue since the acquisition and its second consecutive year of profitability.

The resort was opened in 1993 by a joint venture between the local government and private investors at a cost of around $2 billion. Having never achieved profitability, the resort’s operator filed for bankruptcy in 2001 after amassing debts of $2.7 billion and cumulative losses of nearly $1 billion. Since that time different owners have struggled to turn the destination into a profitable business.

Fortress Expands

Last years surge in Japanese hotel acquisitions surpassed the previous record set in 2019 by 4 percent, with foreign investors accounting for 46 percent of that capital –  the highest proportion since 2017, per CBRE figures.

Demand for hospitality assets has been driven by a post-pandemic influx of tourists, with the Japanese government estimating that international visitor levels will reach 33 million this year, surpassing the previous record set in 2019. That upswing is helping to boost returns for investors in the sector.

“We see a strong RevPAR (revenue per available room) recovery after Covid-19 and it has already surpassed pre-Covid highest level,” Kusumine Enami, head of Japan for private equity firm AB Capital told Mingtiandi. “We expect the growth momentum to continue supported by increasing inbound tourists, cheap JPY, and steady economic growth, accompanied by moderate inflation in Japan.”

Even before Japan’s recent tourism boom Fortress had been favouring the country’s hospitality sector, having amassed a portfolio spanning 27,457 hotels rooms in the country since 2011.

“For Fortress, the rebound in tourism and ADRs (average daily rates) no doubt makes a compelling investment thesis, especially with repeat visitors increasingly wanting to explore beyond the traditional tourist destinations,” said Andy Hurfurt, managing director for institutional investment consulting with property consultancy Savills in Japan.

Hurfurt also pointed out that Fortress had acquired Accordia Golf, Japan’s largest golf course operator in 2021, with the Phoenix Seagaia Resort buy providing a potential expansion of that platform. Fortress had spent JPY 400 billion to acquire Accordia from Korea’s MBK Partners.

Japan Hotels Shine

Fortress is making its resort buy after KKR last year joined forces with Hong Kong’s Gaw Capital for the $409.3 million acquisition of the Hyatt Regency Tokyo in a deal backed in part by South Korea’s MDM Asset Management.

Also during last year, BentallGreenOak acquired the Rihga Royal Hotel Osaka in a deal which MSCI Real Assets valued at $403 million, and a consortium of SC Capital Partners, Goldman Sachs Asset Management and the Abu Dhabi Investment Authority agreed to buy 27 resort hotels from Daiwa House for $900 million in July.

Fortress managed $48 billion of assets globally as of December, including $7.7 billion within its real estate strategies. The fund manager’s executive team last year teamed up with Abu Dhabi sovereign fund Mubadala to buy out Softbank’s 90.09 percent stake in Fortress in a deal that would see Fortress’ management owning a 30 percent stake upon completion, but the transaction faced US regulators’ scrutiny amid concerns over the United Arab Emirates’ ties to China.

The buyout has now been approved by the Committee on Foreign Investment in the United States (CFIUS), according to a Financial Times report on Friday citing people familiar with the matter, after Mubadala agreed to let Fortress commit to keeping data and technology inside the US, on top of an earlier pledge to waive day-to-day control over the investment firm.