NEW YORK — The U.S. hotel industry's recovery opens up a number of possibilities for owners, but not everyone is on the same page on how hoteliers take advantage of the current level of demand.
During the NYU International Hospitality Industry Investment Conference, members of the Industry Real Estate and Finance Advisory Council spoke about how they managed through the worst of the pandemic, who the industry's investors are and how hoteliers should handle pricing services and amenities.
Sources of Capital
Having worked in non-traded real estate investment trusts for years, Michael Medzigian, chairman, CEO and director at Watermark Lodging Trust, said the amount of dollars those companies are raising now is “mind-boggling.” Investors can’t find the same yield in other real estate classes, such as multifamily or industrial, he said.
Investors turn to resorts and luxury for certain reasons, but the next big one will be select-service hotels because they are a yield-driven business, he said.
“I think we’re going to see a lot of those dollars coming in our direction,” Medzigian said.
It’s not an unending pool, however, as all investors have limitations on how much of the portfolio can go into a specific product, he said.
The non-traded REITs can be a tougher competitor because they can pay a 7% fully baked yield, and that can buy a lot of hotels when all the competitors need a 20% internal rate of return, MCR Chairman and CEO Tyler Morse said. There are a lot of places people can invest their money, but real estate is one of the few segments left with any yield to it.
“Hotels have the highest yield of all the real estate food groups,” he said. “They also have the highest volatility.”
When looking at the traditional investors, the source of funding for companies such as Blackstone and Starwood Capital are the sovereign wealth funds and pension funds, said Gilda Perez-Alvarado, global CEO at JLL Hotels & Hospitality. Hospitality is the best inflation hedge, and the largest traditional investors are committed to this sector across the entire spectrum, from select-service to luxury.
JLL has also seen the emergence of ultra-high-net-worth individuals who are looking to buy a hotel in their market to diversify their core holdings, she said.
“The wall of capital just keeps getting bigger and bigger and bigger, and I wouldn’t be concerned with it drying out [or] that the retail investor is going away,” she said. “The sovereign wealth funds and pension funds are under so much pressure to diversify and grow, and we honestly provide the best hard-asset investment solution for that.”
Making a Recovery
As a non-traded real estate investment trust, Watermark Lodging Trust didn’t have access to credit lines like publicly traded REITs did, so all its mortgages were single-asset mortgage financing, Medzigian said. Wells Fargo Bank was its largest mortgage lender going back to 1994, and it worked through every one of its loans during the pandemic, extending them, refinancing them and raising $500 million in preferred equity.
The company sold the Hutton Hotel in Nashville to make sure it had enough cash to get through the crisis, he said. The buyers couldn’t get on the plane to go see it, and they couldn’t hire environmental firms to study it.
In hindsight, though the situation was bad, it wasn’t as bad as feared, Medzigian said. Though he doesn’t regret the sale as it was deemed necessary at the time, the company didn’t use as much capital as they thought it would and the recovery was faster than expected.
“When we compare ourselves to our public peers, we're performing really well because we've got so many resorts,” he said. “Our resorts are all above 2019 numbers.”
What made the situation difficult early on was Wells Fargo had a “simultaneous detonation” of every loan in its portfolio, Executive Vice President Christopher Jordan said. The bank organized around the situation quickly and worked with its borrowers.
“The only rational thing was to waive covenants, relax covenants, waive maturity dates, release cash reserves — do all the things that instinctively one would do to react to the situation and support clients,” he said.
The work was hard, and there was plenty of it, and everyone wanted their loans done first, Jordan said. The second wave of modifications that arrived in the summer and fall of last year were more difficult, because that meant providing more time, more loan terms, stretched-out maturities, more covenant relief and more testing. The banks needed to de-risk a little, too, so that meant finding the equilibrium.
Pricing Services, Amenities
The pandemic has put the hotel operating model under a microscope, and IREFAC members disagreed about what changes should be made to it long term.
The aviation business gained $105 billion of “other revenue,” Morse said. Hoteliers compete with each other by throwing in more free things with the stay, and the industry needs to stop and move to base pricing plus a la carte pricing, he said.
“The airline business laid the path for this, and hotels can be significantly more profitable,” he said. “Consumers can get what they want, and they pay up. Business travelers don’t want to use the pool, so why should they pay for it? If you want an early check-in and you’re willing to pay $10 for it, terrific.”
There are real structural differences between airlines and the hotel business, and it’s not as easy to point to airlines’ numbers and say do what they do, said Kevin Jacobs, chief financial officer and president of global development at Hilton.
Early in the pandemic, owners called up and said they were never giving away breakfast at limited-service hotels again, he said. Hilton got them to tap the brakes and temporarily stop serving the breakfasts because it wasn’t safe anyway, but now they can be better at it. Hilton has reengineered it, and it’s less expensive now.
The approach has balanced the short term and long term to help owners make more money and drive better margins, he said. At the same time, owners understand Hilton has consumer brands that come with expectations.
Hospitality is not a staying business but a living business, Perez-Alvarado said. That’s why hoteliers must redefine hospitality. Luxury and leisure will continue to do well because people are living in these hotels, so they want the proper experience, a real food and beverage experience, and they are willing to pay for it.
“Now we can work from anywhere, potentially,” she said. “Maybe not five days a week, but one or two days a week. It’s now the whole bleisure thing, so I’m very curious to hear how are you going to charge for that now.”
Morse said he’s not saying the system is broken, but hoteliers could make it a race to the bottom. Instead, hoteliers should stem the tide and turn it back around.
Laurence Geller, chairman of Geller Capital, largely disagreed and said hospitality is a fragmented industry. If a hotel charges for a certain amenity, there’s going to be a nearby hotel that doesn’t.
“This is a very competitive business, and it's not theoretical, it's absolute,” he said. “No one has a big dominant market share.”