ATLANTA — Wall Street investors have been patient the past few years, but more hotel transactions activity coming to the table is reigniting conversations around deal-making.
During the "Wall Street Talks" panel at the Hunter Hotel Investment Conference, Scott Trebilco, senior managing director of Blackstone, said his company hasn't acquired any hotels in the past two years. However, the investment management company is prepared to be more active in the market this year.
Blackstone has about $25 billion invested in U.S. hospitality assets, excluding its gaming business.
"We haven't made a new hotel investment since April 2022, certainly not for the lack of conviction in the hospitality space or lack of effort from the team. We've bid and looked at hundreds of deals over that time period. It's really the cost of capital challenge for us," Trebilco said. "I would say it's two elements for us, it's an absolute cost of capital issue and it's a relative cost of capital issue."
In the past 24 months, cost of debt has been elevated and unleveraged internal rate of return has "gone up dramatically," Trebilco said. As a result, Blackstone turned its focus to assets with "better" risk-return profiles.
Blackstone also focused on reinvesting about $2 billion into its existing hotel portfolio, including the Grand Wailea Resort.
"I would say things are continuing to shift in real time. Why I'm more optimistic about the outlook for the next year [is because] cost of capital is coming down. We feel like being patient has been a good thing in hospitality. We're starting to see signs of people being more open, coming to the table. We're having more and more conversations as a group around what's the right profile of opportunity, and these conversations are much more constructive than they have been in the past 12 to 24 months," Trebilco said.
Blackstone's goal is to invest $4 billion to $5 billion in hotel acquisitions domestically in 2024 while also refining its existing portfolio, Trebilco said.
Brookfield Real Estate Group Managing Partner Shai Zelering said his company, which owns, operates and develops real estate assets including hotels, has about $22 billion invested globally. About half of that is in the U.S.
Zelering said 2024 "will be an active year" for Brookfield. "I think we will probably sell about $1.5 billion to $2 billion and buy [that same] amount hopefully towards the end of the year," he said.
In 2022, Blackstone and Starwood Capital teamed up to purchase 111 WoodSpring Suites from Brookfield Asset Management for about $1.5 billion.
Noble Investment Group has just shy of $4 billion invested in hotel assets and has acquired $2 billion in assets over the past 20 months alone.
"What has happened is we sold a substantial majority of our assets in '18 and '19 and acquired a significant amount since that point in time. As we think about [our strategy] we'll [probably] be buying a little bit more over the next year or two and keeping with what we have done over the last two years," said Mit Shah, founder and CEO of Noble Investment Group.
Additionally, Noble has been active in putting new capital into existing partnerships to help partners with capital expenditures or to pay down loans. Noble has also been buying tranches of commercial mortgage-backed securities debt.
"Our core focus continues to be investing in that way, but we're also playing it in a couple of other different ways," Shah said.
Tired Assets Equal More Deals
Hotel brands are taking a harder stance on requiring hotels to either do a full renovation or update soft goods, which will be a catalyst for deals, Zelering said.
"Will [property-improvement plans] be an accelerator of deals? I think to an extent, yes. If you're a holder of an asset that is tired and is starting to slide in terms of market share because of the condition, [owners] have a choice to make. I think there's going to be a lot of transactions that are driven by the condition of the asset and the [loan] maturities or debt load," he said. "Then, on the other hand, the companies come up with a new brand every week because they need transition brands. Depending on the asset, do you change brands? Go unbranded where applicable? That is going to be the story told in 2024."
Trebilco said there's misalignment between brands and hotel owners in terms of what's best for a property.
A proliferation of soft brands has opened up some options for owners. "If you don't want to do the PIP you can become part of [a soft brand]; there's your alternative, and revenue-per-available-room impact will be less than if you go completely out of the system," he said.
"I'm not sure that's the right answer. I think there needs to be more open dialogue around what's right for both of us," Trebilco added.
Investing in Alternative Assets
Institutional private equity players, such as Apollo, are already investing in alternative lodging such as cruise ships. Shah said it's incumbent upon the hotel industry to keep understanding that there are strong secular trends within travel.
"We know that human interaction is a part of how we create joy. The question is, how does that live as we move forward and [how do] those types of opportunities continue to manifest? I think we're all thinking about what that could be," he said. "AutoCamp wasn't even a thing a few years ago and now there's multiple of these platforms that are out there today."
Trebilco said non-traditional hotels are part of Blackstone's investment strategy, as the firm collaborates with various businesses to study how the travel ecosystem is evolving.
"I think you're going to see a lot more of that," he said.
Advice to New Real Estate Investors
Executives admitted the hotel industry is a tough business to be in but it's also rewarding, and much of one's success comes down to relationships.
Shah: "There's very few people that I love and care for more than [Suril Shah, CEO and Managing Partner at Riller Capital, who moderated the "Wall Street Talks" panel]. If he wasn't here, I wasn't here [at the Hunter Conference more than a decade ago], that friendship wouldn't have existed. I would recommend everyone that's young, go out and seek people. Build friendships. This is tough business, but it's a great business. The people that you get to do all this with makes it all full of joy."
Trebilco: "It's a relationship business at the end of the day. In those relationships, be super authentic. Have integrity; you're going to have tough conversations across the table, but if you do it in the right way, you'll get the outcomes where both people feel really happy with the interaction and you're going to do business again. I would focus on that."
Zelering: "It's a very small industry after all and we all interact with each other on a daily basis. To the up-and-coming talent, in addition to the human side of relationships — which is by far the most important — I think it's really important to touch the real estate. You learn so much more by being in the field than sitting in front of your computer. Nothing will replace that experience."