NEW YORK — Interest rate increases, the higher cost of debt and possibilities of a recession are factoring in to the overall hotel investment landscape, but the industry’s continuing strong performance metrics have investors confident in a more normalized playing field in the near future.
Hotel investors on a panel covering economic trends at the NYU International Hospitality Industry Investment Conference all said the U.S. economy isn’t necessarily behaving in typical ways right now, but the factors driving hotel demand are making up for interest rate and inflation woes.
The May announcement that private equity investor Brookfield Asset Management would acquire non-traded real estate investment trust Watermark Lodging Trust’s 25-hotel portfolio for $3.8 billion all cash represented “a good read-through of the market and how investors are thinking about the world today,” said Michael Bluhm, managing director and global head of gaming and lodging for Morgan Stanley Investment Banking, which is exclusive financial adviser to Watermark on the deal.
Despite yield curve shifts as interest rates rose during the process, Bluhm said the real takeaway from the deal was “that you realize investors are really buying into growth,” he said. “They believe [revenue per available room] is going to keep going up.”
Leveling Out
Investors today are seeing that the Federal Reserve “will keep pushing on rates and the financing of hotels will continue to be expensive. I think the expectation is that this will come down and rates will normalize,” Bluhm said.
While private capital is abundant if not expensive — Ashford Hospitality Trust president and CEO Rob Hays said “everybody and their mother raised a $5 billion real estate fund in the last couple of years” — lodging REITs still are trading below net asset value and are looking closer at alternative capital, Hays said.
“What’s interesting is that typically when the Fed raises rate, you see that while rates go up, spreads typically come down, and that’s not happening right now,” Hays said. “So even though you’re seeing volatility associated with the geopolitical environment and inflation … you’re just ebbing and flowing as best you can. It will come down eventually over the next few months.”
Proskauer senior partner and panel moderator Jeffrey Horwitz tossed out the idea that current conditions call for “a separation of the financial economy and the so-called real economy — how you do business and finance the companies you have, versus people’s willingness to travel and spend money and go to your hotels.”
Tom Morey, executive vice president and chief investment officer for Park Hotels & Resorts, agreed, pointing to pretty strong corporate and consumer health, with good corporate profit margins and low unemployment.
Michael Lipson, CEO and chairman of the board of Access Point Financial, reminded the audience that “the cultural anthropology side of the business,” or the strong affinity Americans feel toward travel, keeps the recovery strong despite economic shifts, which may not be that bad anyway.
“There’s still plenty of capital out there,” he said. “It’s still pretty cheap money. It was free money, and now you have to pay for it, but that’s OK. ... My view has been that there’s no better place to be in a recession than hospitality because it’s going to improve every day as the market gets better and you reprice every day.”
The ‘R’ Word
Regarding “the R word,” as Horwitz called a recession, panelists weren’t that concerned.
“We had our first quarter of negative growth. We could be in a recession,” said Jay Shah, CEO of Hersha Hospitality Trust. “We had a negative quarter and I don’t think it was expected; it was a big swing from what outlooks were.”
Technical recession or not, Hays said, “In many ways, who cares?”
He pointed to all of the COVID-19 waves to date as “way deeper than it ever was through the financial crisis, and we just blew through it. So if you tell me that we have six months of growth being slower, and it’s down 5% or 10%, who cares!”
But Bluhm pointed out one potential concern; a recession could dampen mergers-and-acquisitions activity, as boards get skittish to push through deals if a deep recession or another crippling COVID-19 variant hits.
“It’s M&A 101, which starts with CEO confidence, and my view is that there are a lot of CEOs and boards uncertain about this environment,” he said.
Still, most panelists were confident in a long runway for more industry recovery.
Shah said the winners through this cycle “are the ones with the conviction that the microeconomy of hospitality is decoupled from the macroeconomy because we still have so much recovery left.” And while financial market shifts may result in a period of slower supply growth, the industry still has the promise of full business-transient recovery and the return of international tourism ahead.
Morey said that the Brookfield/Watermark deal represents another potential shift in private equity investment trends: While private equity investments concentrated heavily in select-service and extended-stay properties and companies, the tide may be turning.
“Wham, there was Brookfield/Watermark and we’ve been hearing this around the edges, but the major private equity firms are going to get more constructive on urban full-service and full-service in general,” he said. “This is a benchmark event. … is it really showing that the major [private equity investors] are getting constructive not just on resorts … but are now pivoting into urban full-service and luxury?”
Horwitz agreed that this may be the case.
“There may be a little pause, but the machines are continuing to raise the money,” he said.
“Amen, brother,” said Lipson. “It’s the wall of money ... it just keeps coming.”