Pragmatic IREFAC shares upbeat outlook
30 JANUARY 2014 10:08 AM
While displaying their usual optimism and direct responses, members of IREFAC told ALIS attendees there is plenty to be happy about, but changes are coming.
LOS ANGELES—A bevy of optimism coupled with a cautious eye to the future and predictions of corporate lineup changes highlighted the Industry Real Estate Finance Advisory Council closing general session during the final day Wednesday of the Americas Lodging Investment Summit.
The timing of the early morning session didn’t dampen enthusiasm for the industry’s position as the five panelists and two moderators from IREFAC sounded upbeat about the state of the hotel industry as 2014 unfolds.
“There will come a time when we’re overheated, but now the fundamentals of the business are so sound,” said Mark Elliott, senior managing director of brokerage Hodges Ward Elliott, which sold $4 billion of hotel assets in 2013. “The consensus of the industry is that this is a long cycle … barring any unforeseen geopolitical events. We have quite a ways to run.”
Jackson Hsieh, vice chairman of Morgan Stanley, said unlike other asset classes, the hotel sector’s price per square foot has not reached 2007 levels.
A debate over the future roster of publicly traded companies and privately held companies in the hotel space—and what their acquisition and disposition strategies would be—weaved its way throughout the conversation.
“The debt market will evolve in a way that going private will become an option,” said Stephen Plavin, CEO of Blackstone Mortgage Trust. “A lot of the activity in terms of acquisitions will be on the private side.”
“Later this year, if the pace continues, (going private is) an opportunity, definitely,” Hsieh said.
Monty Bennett, chairman and CEO of Ashford Hospitality Trust, said public companies turning private typically occurs later in the economic cycle.
“We’re at about the halfway point,” Bennett said. “(But) it’s getting less difficult to put together huge debt deals, which is what it takes to take these private.”
Neil Shah, president and COO of Hersha Hospitality Trust, said there are intermediate steps that will occur before a public company turns private, the first one being the sale of assets.
“I don’t think the public companies will be buyers of big portfolios,” Hsieh said.
Meanwhile, privately held companies are able to get their hands on more affordable debt, the panelists said.
“Public markets have had cheaper capital the last four or five years; we’ve now shifted,” Elliott said. “Private now has a slight advantage. But there’s not enough of an arbitrage there that you can do it unless the management and the board really want to go private.”
Hsieh and Elliott said another factor that could expedite public companies going private instead of merging with other companies is the age of the chief executives. Those top executives aren’t ready to cash out and they don’t want to take a diminished role with a combined company, so taking it private is a way to avoid that.
An interesting thing to watch
The panelists said an interesting thing to watch in the hotel space is which ownership company makes the move to be No. 2 behind a dominant Host Hotels & Resorts, which according to its website owns 99 properties in the United States and 15 properties globally totaling approximately 60,000 rooms in its portfolio. That play could involve a merger of smaller companies, Elliott said.
“There is some play to be that No. 2,” he said.
“There is an opportunity to either have mergers among the existing companies to get larger or there are large privates that can do it,” Hsieh said, noting that private REITs could step in and fill the slot at No. 2. “There’s going to be a lot of moving of assets.”
The talk of private versus public led co-moderator Laurence Geller, chairman of Geller Investment Company and former leader of a hotel REIT himself, question why REITs even exist in today’s economic landscape.
Plavin said REITs create an asset class opportunity for a lot of investors that otherwise wouldn’t exist.
“REITs provide permanent equity,” Shah said. “You’re not forced to sell you assets as long as you can roll your debt.”
“There’s a place for REITs because assets by definition are much less liquid than stock,” Elliott said. “It’s a great service to the overall industry.”
And of course there’s the supply question
Co-moderator Michael Murphy, head of lodging & leisure capital for First Fidelity Companies, said people are downplaying the issue that supply growth is not an issue. The panelists replied that they indeed are not concerned about overbuilding—at least for the foreseeable future.
“At this conference you are seeing more developers and more excitement from lenders considering loans in markets like New York and other major gateway markets,” Shah said. “It takes time to build the hotels and finance the hotels. There’s still two or three years before it becomes a concern.”
Elliott downplayed the overbuilding scenario, pointing out the rush by millennials to live and work in urban markets rather than suburbs.
“Forget about the suburbs,” he said. “When was the last urban core that was overbuilt? There are physical barriers that will probably curtail the development.”
Another key issue
Money from around the world trying to acquire U.S. hotel assets also drew some direct comments from the panelists, who said money from China and the Middle East are making big plays in that arena.
“People have said the U.S. is the safest market; Europe is the second safest and (they) want a certain percentage of (their) investment there just to be safe,” Elliott said. “They’re putting them into hard assets like office and hotels.”
“There’s really not many places for the money to go in the world today,” Bennett said.
He said Europe needs to print more money to become more solvent; Japan has a number of issues; and the question of who really owns a hotel in China are reasons the U.S. is becoming a safe haven for hotel investment.
Hsieh pointed to the luxury condo market in gateway cities such as New York, where apartments that cost $20 million to $30 million are being bought by foreigners.
“It’s starting to come into hotels,” Hsieh said. “I wouldn’t call it flight capital; I would call it diversification capital.”
“That is institutional type capital that is looking for yield,” Shah said.
U.S. investors are beginning to look overseas, particularly to Europe, for acquisition opportunities, according to the panelists.
Bennett said Ashford is looking for opportunities to acquire assets in overseas markets where net new supply is low.
“The European equity markets aren’t strong enough to buy the assets in Europe, so a lot of the activity will come from the U.S.,” Elliott said.
“Most of the legacy loan activity in the U.S. is over,” Plavin said. “In Europe, the banks are just evolving to the point where they can sell their legacy loans, which will create interesting investment opportunities in Europe. Financing platforms are going to move to Europe.”