Investors see shifting dynamics to global capital flow
 
Investors see shifting dynamics to global capital flow
21 APRIL 2017 7:44 AM

During an event in Los Angeles, hotel investors debated the longevity of the current cycle, what’s influencing the current environment, as well as a move to more capital flowing from China.

LOS ANGELES—Hotel investors speaking at the recent Boutique Design West conference remain bullish about the industry’s long-term prospects but admit the window of opportunity might be closing.

“It’s market-driven, certain markets that make sense still,” said Thomas Prins, principal, TQP Investments. “But gosh, some of the primary markets … there’s a huge supply (increase). I don’t know why we forget each cycle what happens. It’s going to repeat itself unfortunately.”

Nick Chini, managing partner for Bainbridge Investments, agreed.

“The recession’s coming, or the down cycle is coming, and as occurred in the previous two down cycles you saw, there was usually some X factor that helped push it over into the negative territory,” he said, adding that merger-and-acquisition activity is slowing in many industries, hiring for corporate projects is declining and development is down.

“So yeah, we’re already planning a distress fund. We’re planning a redevelopment fund,” Chini said. “We’re looking for those projects to be in our pipeline a year and a half, two years from now. So, has the X factor for this next down cycle come to push things over? No, it hasn’t, but maybe it’s the Trump bump.”

Bernie Siegel, partner with KSL Capital Partners, said it’s important to take a big-picture view of the current and potential current conditions regardless of the prevailing environment, which he said includes a confusing political landscape.

“In short, it’s hard to feel bearish when things are so good, but Nick has a point that is worth talking about,” he said. “We’re all feeling good despite the uncertainty in the White House. I don’t know how the markets are defying gravity given the uncertainty from the White House.”

Siegel said that as a Republican, he is concerned President Donald Trump’s approach to governing is the black swan event that could push the economy over the edge—and the hotel industry will go with it if it happens. But at the moment he remains bullish.

“We are a barometer of macroeconomic activity, because we sign leases every night, and every night that we don’t sign a lease for a hotel room is lost revenue permanently,” he said. “It’s hard for this room right now mentally to think that anything should be in the bearish category because (earnings before interest, taxes, depreciation and amortization) is at a profit level we’ve never seen, flow-through same thing. Revenues are at record highs. Occupancy is at 65%. In the U.S., we’ve never seen that. We’ve never sold this many hotel rooms in this continent before. So it’s really hard to think that things will be bad or are bad.”

David McCaslin, EVP at Hersha Hospitality Management, said the combination of massive supply growth and external black swan events spurred the last two downturns—and the industry might be better equipped to handle it should it happen again.

“What I think is different this time … the very fact that people are actually worried and concerned I actually think serves as a bit of a checkpoint in terms of the type of irrational exuberance,” he said. “My hypothesis is what you may see here and haven’t seen before, instead of this massive uptick taken by this massive downturn, you may see an extended period where it sort of runs in the zone that’s longer and more stable than what it has before until there is some type of external shock.

“The caveat to that in my mind, and where I am bearish because people can’t control themselves in some cases, is if I hear another (private equity) firm say, ‘Our investment strategy is the top 25 MSAs in an urban market in a high barrier-to-entry market’ – well, shockingly, when you look at what markets are crashing like Miami and New York, Houston’s oil related, they’re all driven by too many people going into the same markets.”

Jeff Ning, SVP at Dalian Wanda Group, said the same problem occurs in China, where the hotel market is suffering from oversupply. The company owns 100 hotels in 72 cities in China.

“In China there is a trend when something is very hot everybody will invest the same as a general phenomenon,” he said through an interpreter.

Asian capital comes to the US
Ning said the reason the company invested in a project in Los Angeles is because of the slowdown in China.

“We are looking for more channels to invest and to globalize is one of our channels,” he said. “Also China Bank, as you know, we have a lot of foreign reserve, high exchange reserve, so China Bank they are also seeking for investment opportunities. So, they also encourage the China developer to seek overseas investment opportunities.”

Chini is heavily involved in Asian capital, the flow of which started with Korean institutional investors and now includes significant Chinese capital mostly from state-owned enterprises, he said. One of Bainbridge’s limited partners in China (he declined to say which one) acquired more hotels by itself in 2016 than all of the combined transactions in the United States. More of that capital will reach the United States sooner than later, he said.

“It’s just the tipping point of what will be major capital coming, and it’s a different kind of capital,” Chini said. “We’re all financial investors that are basically buying hotels for retired teachers and firemen, and retirees’ endowments, pensions and life insurance companies. That is a different kind of capital completely than what is coming over the next 10 years from Korea, Singapore and China. It’s going to be more similar to the capital that came from the Middle East. … We’re at a fundamental shift because of the nature of global capital now coming here and changing valuations.”

Barry Nidiffer, EVP of development management for The Chartres Lodging Group, said the changing profile of buyers is one big reason why it’s been difficult for companies such as Chartres to compete for deals.

When asked how companies are reacting to that trend, he said, “We sell our bigger assets to the people that are bringing the bigger long-term capital and focus on the operations side, and then joint venture and partner. That’s really where a lot of us are starting to wake up and understand, and start joint venturing and working with groups that have that long-term vision, that we can be their sponsor here in this country to help them move that capital into the United States or other areas.”

Siegel agreed the capital influx from China and ensuing change of expectations “is a long-term significant trend. It is a game-changer.”

“Our first series of funds up to fund three (were) primarily those investors that Nick described: large, North American pension accounts, both U.S. and Canadian,” Siegel said. “That changed for us in fund four, and we have substantially larger, state-owned Asia/Pacific investors, and that’s new for us.”

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