Strategies shift among owners late in cycle
Strategies shift among owners late in cycle
13 JUNE 2017 8:25 AM

Executives from ownership groups, including private equity and real estate investment trusts, expect more competition for transactions, but they noted more companies have different outlooks on the hotel industry than at other points of the lodging cycle.

NEW YORK—Suril Shah, managing director at Starwood Capital Group, believes this is an interesting time to be in the hotel ownership game.

Speaking on the “Know when to hold ‘em, know when to fold ‘em” panel at the 39th annual NYU International Hospitality Industry Investment Conference, Shah said this is especially true because so many of the publicly traded real estate investment trusts have started to articulate very different strategies and views on the industry.

“The few vignettes you get into the REIT world come through the earnings calls, and I think for the first time we’re seeing very different attitudes towards the market right now,” Suril Shah said. “If you look at the transcripts of CEOs over the past five years, you’d see everyone pretty much looking at the same data and drawing the same conclusions. Now, I think we’re at the point where we’re seeing the same data, and we’re seeing a different view of hotels.”

He said the prolonged cycle seems to be having an impact on owners’ psyches.

“We’re at a point where maybe people are just scared,” Shah said. “But I think it’s interesting that you’re getting two different stories.”

Mark Brugger, president and CEO of DiamondRock Hospitality, agreed that REITs are diverging on their strategies but they are “broadly net buyers.”

“A lot of companies are sitting on a lot of cash,” he said. “I imagine some of that cash will get deployed. There will be net sellers because everyone is sitting in a different balance sheet position and everyone has different needs.”

Panelists were split between whether each of their companies would be net buyers or sellers through the course of the year, but the private equity companies represented on stage—KSL Capital Partners and Starwood Capital Group—both noted they’ll be buyers for the year, as did Watermark Capital Partners, which oversees two nontraded REITs.

Michael Medzigian, chairman and managing director of Watermark Capital Partners, said he’s seeing a clear change in activity level in the markets, driven by public REITs.

“It’s been nice for us over the past few years when the public REITs were not competing,” he said. “There were a few exceptions … but a lot of the REITs just weren’t active at all. I agree that some are active and some are not, but we are seeing them in almost everything we look at today.”

Neil Shah, president and COO of Hersha Hospitality Trust, said his company will likely be “modest net sellers” for 2017 after a period of somewhat contrarian activity in the markets. He agreed with Medzigian that REITs in general have been more eager to bid on properties, which makes for fewer opportunities to hunt for bargains. He said there are also fewer “REIT quality assets” to find that are affordable at many REITs’ current share prices, which explains why some REITs aren’t as eager to buy as others.

“So you have to believe you’re going to be able to drive (earnings before interest, taxes, depreciation and amortization) so significantly that you’re buying this hotel today and over time it will stabilize at a higher value,” Neil Shah said. “I think it’s harder for everyone to believe that math today, but it’s great that there’s some diversity of opinion, among REITs, at least. There are those who are active and aggressive acquirers, and there are those who are not, and there are a couple of us who are in the middle.”

In the private equity space, KSL Capital Partners CEO Eric Resnick said there’s plenty of “dry powder.”

“The reality is when there’s that much money out there and debt capital is so plentiful, I think you’ll see the (private equity) funds continue to be active,” he said. “I don’t know if that’s greater or less than 2016, but I think you’ll continue to see the PE funds be quite active for the foreseeable future.”

A shift in capital markets
Once again, the decreasing cost of capital became a point of discussion for owners at the conference, and Suril Shah said it behooves any owner to take a look at their debt, right now, noting his company is “looking to refinance almost everything we have.”

“I think one thing everyone should do is run to go look at every piece of debt they have in their portfolio and see where they can create value,” he said. “We just closed a $580-million loan on a portfolio of select-service assets, and the debt terms we received are not because of our size. Three deals have gotten done over $500 million in the debt markets over the last 45 days for kind of your standard select-service product. And the terms that you’re getting are phenomenal.”

Resnick agreed.

“If you’re not trying to extend your maturities right now, then you’re just not thinking about it,” he said.

Medzigian noted the favorable debt climate seems to be driven by more lenders chasing deals.

“It’s changed dramatically,” he said. “There are just so many debt funds. … Six months ago or nine months ago, we’d see two or three bids for the debt on the assets we were buying. Today, it’s three or four times that. By definition, pricing is going to continue to come down.”

Brugger said debt markets “are as wide open as I’ve ever seen.”

“It’s a fantastic time to think about your balance sheet,” he said. “No one knows where rates are going to go. It feels like they’ve kind of stabilized a little bit, but clearly that’s what makes it such an interesting time to think about acquisitions.”

Neil Shah said the affordability of debt is more helpful to private equity than the REITs.

“The debt markets are just phenomenal right (now) for private buyers,” he said. “As a REIT, we really don’t take advantage of it as much, but it must really be whetting their appetite for deals right now.”

Resnick said he would expect to see the transactions market pull back if debt markets get less favorable.

“If the debt markets retrench, that might cause a brief pause,” he said, noting it will be interesting to see how hotel values hold up during the next economic downturn.

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