Hotel and lending executives at the 2018 Lodging Conference spoke about the growing difficulty in finding good hotel deals in the U.S. and what kind of deals they expect in the future.
PHOENIX—The hotel cycle continues on with 102 consecutive months of growth in revenue per available room and solid fundamentals, giving room for hoteliers to still make some deals.
A panel of hotel and lending executives during the “Let’s talk deals, M&A and development” general session on the second day of the 2018 Lodging Conference discussed what’s going on in the deals market and how the industry is handling this extended recovery.
Getting deals done
Blackstone has had a hard time finding good deals to buy this year, said Scott Trebilco, principal of real estate at Blackstone, as there’s not much inventory being marketed. The company has sold off a couple billion worth of properties in the hotel space across select service and full service, he said. It’s not the end of growth, he said, as it has different fund lives and needs to constantly recycle capital.
“I think this year we’ve bought $3 billion to $4 billion in hotels and we’re going to sell maybe $2 billion, so we’re sort of a net buyer, and I want to be a bigger net buyer if I’m doing my job right, but we just haven’t seen the opportunities or in some cases we’re being trumped by others who come in on top of us.”
There’s a lot of demand right now broadly for real estate and particularly in the hotel space, Trebilco said, because people view the world a bit like Blackstone does. While the industry is 102 months into its cycle, there’s nothing to suggest it’s even close to the end, he said. The industry is in an environment it hasn’t experienced before in terms of this type of recovery, he said.
Blackstone is taking the approach of until the data tells it something different, it will continue to do what it’s been doing, which is seeing growth and underwriting it until it stops. Twelve months ago, the industry had a more pessimistic view of the outlook, he said, but now deals are more expensive and financing is deep right now.
That’s why there’s new construction growth, said Chip Ohlsson, EVP and chief development officer at Wyndham Hotels & Resorts. Trying to find a good deal is like trying to untie a balloon knot, he said. Sixteen percent of Wyndham’s global pipeline is new construction, he said, domestic construction portfolio is up 22% this year because the deals are not out there.
“We would rather go out to the marketplace and build a new product,” he said.
Good deals are hard to find, said David Pepper, chief development officer at Choice Hotels International. The brokers will say a good select-service hotel that goes up for sale will get snapped up, he said. Choice transacts all of its existing assets, he said, and it is flat right now on its relicensing while last year was a record year, he said. It’s flat now because people are holding onto their assets, he said.
Primary, secondary and tertiary markets
Secondary and tertiary markets have been Wyndham’s bread and butter, Ohlsson said, so it has seen a proliferation of development in those markets.
“We love that space,” he said. “We think it is underrepresented in most cities.”
There’s so much opportunity in these markets if hoteliers can find a good partner in the cities and towns, he said. The number of travelers coming to the U.S. is expected to reach 600 million by 2025, he said, and while many of them will be headed to primary markets, there will be overflow to the secondary and tertiary markets because not everyone can afford to spend $600 a night. The secondary markets become a great opportunity for brands, he said.
InterContinental Hotels Group launched its Avid Hotels brand in 2017 with the intention of pushing it in secondary and tertiary markets, said Chris Drazba, VP of core brands and Mexico development at IHG, as the airport, secondary and tertiary markets are the sweet spots. However, some owners and franchisees have asked for them in primary markets, he said, so it has pursued a few deals in those markets.
“We didn’t think it was necessarily right down the center line for the brand, we’ve had some great opportunities in great cities as well,” he said.
Over the last 12 months, Blackstone has focused its investments in the top 50 markets, Trebilco said, and the exact market depends on the vehicle funding the investment. The fund has been investing in Hawaii, California, Arizona, parts of Florida and Texas, he said, and the thesis is a finite-life investment looking at the next five to seven years to achieve the most outsized growth relevant to what’s happening in the U.S.
In Hawaii, the company has invested $2 billion this year across four deals that are achieving 10% to 15% RevPAR growth consistently, he said. The company has been targeting domestic U.S. and Canadian travelers instead of international travelers, he said, and it has been catering a lot to the West Coast, where people working in technology and innovation have wanted to spend their money on traveling to Hawaii.
“The fundamentals there are exceptional, similar to California,” he said.
In another vehicle, Blackstone is focused on the markets with the greatest trends over a 20- to 30-year period, Trebilco said. For an example, Salt Lake City, Utah, and Reno, Nevada, have a lot of innovation and corporation relocation and expansion because they are great place to live with a low cost of living.
“We sort of look across the landscape and sort of have a view around the immediate-term, more seeing real time because we have the benefit of owning a lot of stuff and seeing a lot of deals, so we can see what is happening and use that to kind of feedback into our business thesis,” he said. “We’re also thinking about where is the wealth shifting, where do people want to live, where do people want to create jobs, where is innovation happening and what are the knowledge markets.”
IHG had a record year for new signings in 2018, Drazba said, and the pathway to get to the total numbers unfolded in an interesting way. Along with the record signings, the company added a new brand and “is up to its eyeballs in renovations,” he said, which gives the company a chance to have its owners sharpen their properties.
Looking into 2019, IHG sees another good year coming into the fold, he said, adding that he expects it to look similar to 2018.
“We’re looking at similar levels in volume,” he said.
Next year should be another strong year, Trebilco said. Blackstone will look to find ways to put out more capital in 2019, he said. There are a lot of challenges now in supply, labor costs, alternative accommodations and pricing, he said, but demand is at record highs.
“For us, the challenge is finding deals and scale where we have that conviction and the ability to stand behind it and trying to find a way to backfill for the $5 billion that we missed out putting to work in the LaSalle deal,” he said. “It’s challenging because there’s just not that many big scale opportunities that exist.”
The average term of Access Point Financial’s loans is five years, said Jon Wright, chairman and CEO of Access Point, which is different than the amortization which goes up to 25 to 30 years. The average life of its loans and bridge loans over the last 20 years has been 20 to 22 months before it is refinanced out, he said, but that number jumped to 29 months recently.
He said that “indicates community bank buckets are getting full for exposure for hotels going into their fourth quarter.”
The company wants to be taken out around 20 to 21 months, he said, but the increasing average life shows community and local banks are slowing down. When seeking renovation loans, if bankers are saying they’re at capacity for hotels, he recommended they classify the loans as a commercial industrial (CMI) loans.