Hotel executives at the 2018 Lodging Conference spoke about how their companies are operating and their predictions given the continuing strength in the industry.
PHOENIX—The hotel industry’s fundamentals and the overall U.S. economy remain strong, and they should continue to be strong for the foreseeable future, said hotel executives at the 2018 Lodging Conference.
Speaking on the “Power players: Owners and operators” panel, hotel company executives discussed what the ongoing strength and length of the cycle means for the industry.
Thoughts on M&A activity
Doug Kessler, president and CEO of Ashford Hospitality Trust, said he was surprised there weren’t more large-scale deals this year with so much capital sitting on the sidelines looking to invest in the hotel industry. The Pebblebrook Hotel Trust and LaSalle Hotel Properties deal after the RLJ Lodging Trust and FelCor Lodging Trust deal shows the pace of consolidation among real estate investment trusts is more acceptable, he said.
There is about $160 billion in private equity investable capital out there, he said, and about 10% to 15% of that is targeted for hotels.
“On an unlevered basis, that’s a fair amount of money,” he said.
The deal pipeline this year has been better than 2017, he said, but it’s still not as much as one would expect given all the capital on the sidelines. That doesn’t mean deals haven’t been pursued, but they just might not have come to fruition yet.
Looking ahead to 2019, Kessler said he believes there will be more transaction volume. There is a sufficient amount of capital available, he said, and the debt and capital markets are still liquid and attractively priced. The current cycle has been defined as one more of length than of excessive strength, and there are few key economic indicators suggesting a near-term end to the economic cycle. When underwriting greater predictability, there is a greater access to capital because the underwriting is viewed to be more reliable, he said.
“With all the other factors, the cash available and the future growth of where we’re headed in the industry, that lends itself to greater interest in doing transactions,” he said.
What surprised Arash Azarbarzin, president of SH Group, about 2018 was what the larger mergers have done for the smaller hotel operators, he said. With the bigger brands such as Marriott International and AccorHotels buying other brands, it has driven some owners to seek out more nimble operators, he said.
“They can have a conversation with the CEO, the president and other decision makers,” he said. “Instead of being one of 10,000, they want to be one of 50 or 100.”
As a result, his company has signed 13 new projects, he said. For a company with five brands, that’s “pretty great.”
“I just think it is an opportunity for smaller hotel companies to take advantage of the merger and acquisitions before they figure it out and give us more properties under our belt,” he said.
SH Group officials heard over and over again from owners who liked working with another brand company, he said, but once it grew, it became too difficult to work on a management, development or a technical service agreement.
“The big boxes and the big corporations are a little less flexible than we are,” he said.
In 2019, Azarbarzin said he expects more mergers and acquisitions. More of the smaller hotel companies will be bought out because of all the capital out there, he said.
“The big hotel companies, they’re sitting on lots of cash, and they need to monetize,” he said. “You will see the smaller companies will get bought by the bigger hotel groups.”
There isn’t any single data point of concern when looking at the economy, Kessler said. Ashford looks at many different data points, such as consumer confidence, wage levels, employment levels, corporate profits, movements by the Federal Reserve and growth domestic product growth, he said.
“You look at all the data points, it’s very difficult to highlight something right now that is flashing red,” he said. “Flipping that over to the lodging side, we’re at peak, and the peak continues to rise.”
That has happened with every prior cycle, he said, and the peak is always higher than the previous peak. There is a good set up for the continued progression of this long recovery, he said. Ashford is tracking a lot of data points, he said, and what it sees gives reason to be optimistic. Looking at the past, there has rarely been an end to a cycle because of a single data point, he said. Instead, it’s usually an unexpected event, and those are hard to predict in this industry.
Interstate Hotels & Resorts is active in the M&A space as it has been buying smaller management companies, said Leslie Ng, chief investment officer at Interstate. The macroeconomic events don’t drive what the company does as much as the company’s own growth objectives, he said.
“Probably the biggest thing that drives it for us is something people really don’t want to talk about is the synergies,” he said.
Thinking about where the industry is right now, he said, many third-party management companies came of age during the 1990s and 2000s. The founders of those companies have gotten older, and they don’t always have kids who want to go into the business or the infrastructure in place to pass on the management, he said. Those could be logical targets for his company, he said.
F&B as differentiator
The industry is evolving in its F&B offerings, said Naveen Kakarla, president and CEO of HHM Hospitality, saying the hotel industry has made a big leap in the past decade. Industry vendors and partners have much better technology to produce higher-end food even at a “3-star-level,”he said.
It’s more interesting is to have an experience around food, he said, not just décor and ingredients, but a different approach to service and how the food is presented. He believes there is now more whimsy and openness.
Hotel F&B outlets are competing with efficient fast casual concepts, he said, and his company is looking at more fast-service models for some of its hotels. It’s avoided running from restaurants and bars, and it’s embracing concepting in a hotel.
“We want that to be a primary venue,” he said.
Kakarla said his hotels finds beverages do better than food in urban markets because of the other F&B options around the hotels, particularly in Manhattan.
“If you look at who we’re competing with in a three-block radius, I can compete more effectively with beverage than with food,” he said.
HHM has started bringing in operations of more of its restaurants and bars in-house, he said, because it wants more control over the guest experience.
The trend of the named chef in the hotel world isn’t going away, Azarbarzin said, but it is getting reduced. There are more good foods, healthy foods and farm-to-table concepts prepared right with the right ambiance compared to the named chef, he said. His company has used these concepts are three locations and partnered with great operators and social influencers to spread the word, he said.
“You see hotels like Dream Hotels having huge success partnering with some best-in-class food and beverage operators to be able to deliver their hotels and great locations and do millions and gazillions in revenue, but you don’t see any big named chefs in any of those locations,” he said.
When he stays in a hotel, Ng said he uses Uber Eats.
“Why does anyone need room service except for breakfast menus?” he asked. “You got to get the brands to play along with the game, but there are things that are part of life now you don’t need the hotel for now.”