Now is the right time to develop or acquire, according to speakers on a recent panel at The Lodging Conference, and more private equity firms and institutional investors are realizing the strong returns from hotels.
PHOENIX—There’s a lot of opportunity for deals and development right now, but there’s been a shift in the type of investors entering the cycle, most notably from private equity firms and institutional capital.
On a panel titled, “Let’s talk deals, development and M&A” at the recent Lodging Conference, Matt Wehling, SVP of development, U.S. and Canada at Hilton, said there’s opportunities in every segment. The way lending is now, he said, there’s definitely money available. However, he noted some lenders, such as institutions and private equity, have a bit more constraints on which projects they’re funding given the slowdown in revenue-per-available-room growth.
“I think it’s a little bit of cautious money at this point, but I think it’s good for the industry,” he said.
Where the opportunities are
Wehling said of the 56,000 rooms Hilton opened in 2018, 34,000 were in the U.S. and Canada, and the company is looking to grow that by about 6.5% in 2019. In Hilton’s focused-service segment, Home2 Suites is leading the way in the industry with 400 hotels in the pipeline. Tru and Hampton are fourth and fifth in the industry, respectively, each with more than 300 hotels in the pipeline, he said.
“Those brands are certainly taking off extremely well,” he said.
David Pepper, chief development officer at Choice Hotels International, said he’s finding great value in Choice’s extended-stay brand, WoodSpring Suites. It’s a great prototype and model and it’s got “a proven exit,” he said.
At RLH Corporation, EVP and President of Global Development Paul Sacco said his company is really focused on hotel conversions. He sees a tremendous amount of opportunity in larger renovations and up-branding existing hotels, and RLHC’s brands really lend themselves to that, he said. For example, in the economy segment, RLHC’s Signature Inn brand might take a really well-situated property that’s older, but has good bones, and reinvent it.
When looking at deals, especially at times when the economy could be a bit slower, Sacco said it’s best to be more mindful of location and whether a market is oversaturated.
“I think there’s still plenty of equity and plenty of debt for the right deals,” he said. “Interest rates are low; perhaps there’s a little bit of equity requirement going forward, but I think for the right deal it’s still available and people will continue to develop when things are a bit slower.”
New capital entering the market
Pepper said there’s plenty of new people coming into the business today, and many are single-asset developers looking to diversify their capital as they see strong returns in the hotel business. The other is institutional capital, and a lot of institutional capital is coming into WoodSpring, he said.
“You would think an economy hotel would mostly be a mom-and-pop (business)—no, what you see is a lot of institutional capital. They see what those returns look like … it’s 54% GOP levels, these are really strong hotels,” he said.
Seeing new capital come into a new market has been a lot of fun, Pepper added.
Dilip Petigara, CEO of Access Point Financial, said this trend doesn’t change the way he approaches his job. From his perspective as a lender, he focuses on who’s managing the property, who’s going to be mining the tailwinds and who’s going to be counting out the cents, because that’s important in terms of delivering GOP and the return on investment.
RLHC has a little bit of institutional capital, Sacco said, but his company is largely owners and operators who are “raising money through family funds.” With the competition on core broker assets, some of the private equity firms are now having to think about new ways to invest, such as investing in different segments, he said.
“It’s become … a little bit of a crowded space in certain areas,” he said. “With the proliferation of brands, there’s a lot more opportunity out there. What we’ve seen is some of the more institutional investors look at new ways to deploy capital.”
Wehling said some of the new private equity firms or institutional investors aren’t “necessarily new,” but they might be starting another company. He’s seeing a lot of that and they’re bringing that experience with them.
“Since we’ve had a couple cycles … a lot of those folks are using friends and family,” he said. “They understand where the growth cycles are and I do think that the institutions and PE firms are getting smarter.”
Steve Haggerty, managing partner at Trinity Investments, said sellers are expecting a little bit more firepower from debt that’s being applied to deals. Among buyers, a lot of cash-flow oriented investors, such as hedge funds, are entering the hotel space.
“There’s a bit of a standoff, a real gap between seller expectations … and buyers,” he said. “From a financing point of view, I think this uncertainty is going to persist for another two years or so.”
Speakers were asked for their final thoughts and takeaways about the industry:
- Haggerty: “The business that we’re in has got a lot of change forthcoming. Super exciting and I think, as an investor, watching it play out creates optionality for us; we should be looking forward to what’s going to happen and how this industry responds to all the background dramas and not be running from it.”
- Pepper: “It’s still a strong industry, strong profits, there are still opportunities that are out there. You can see the headwinds; there’s a lot of them. But, I think the brands have done a very good job with their scale.”
- Petigara: “I think the change in the uncertainty creates opportunity, depending on the market that you’re looking at and the type of development that you want to do or (the) acquisition. I think now’s a good time to do that, even if we are at some point in time thinking we are coming into a soft landing.”
- Sacco: “There’s been two major—in my mind—changes in the industry over the past 10 or 20 years. One, is the way that people book travel … secondly, I think from a buyer perspective, there was a lot of excitement back in ’05 and ’06 about (securing) the deal … winning the acquisition. I think more people are now more mindful of the exit.”