LOS ANGLES—Wall Street likes the hotel industry, at least for the time being.
The current state of the industry’s publicly traded companies, the re-emergence of real estate investment trusts and the opportunity for more merger-and-acquisition activity had members of the “Wall Street Outlook” panel during last week’s Americas Lodging Investment Summit bullish about the sector’s future.
The existing landscape is largely the product of an active stock market that was jump-started by the election of Donald Trump as U.S. president, panelists said. The R.W. Baird/STR Hotel Stock Index has gained more than 29% since the election.
“Before the election, the outlook was not very good. … It quickly flipped when it was clear Trump was the winner,” said Michael Bluhm, managing director for Morgan Stanley.
“The renewed optimism has created a big wave of investors coming back into these stocks,” added moderator Peter Benudiz, partner with Sidley Austin.
Boost from stock market
REITs have been among the companies that have enjoyed the bounce, and panelists said that phenomenon could help extend the hotel industry’s cycle.
“All of a sudden, it’s pivoted to where they can issue equity capital to grow,” said Ben Leahy, managing director for Goldman Sachs & Co.
Bluhm said IPO chatter about REIT consolidation has begun as a result of the rising stock market.
“It’s back, but not great,” Leahy said. “You’ll see a lot list, but they won’t go to IPO; they’ll go to sale.”
Bluhm said there are too many REITs still looking to acquire assets in top 10 markets—and just about all of the REITs have values between $2 billion and $3 billion.
When it comes to the capital markets buying into REITs, Bluhm is skeptical.
“I don’t see the buy side willing to buy into one of these stories,” he said. “You really have to have a compelling story because there isn’t that euphoria around the industry that you’re going to get extraordinary valuations in the absence of that.”
The increase in stock prices could cool potential mergers and acquisitions in the REIT sector, Leahy said.
But that doesn’t mean M&A activity won’t be on the front burner for the industry as a whole, according to the panelists.
“Optimism drives the thought process around (mergers and acquisitions),” Bluhm said.
Benudiz said there’s been “a significant uptick” in initial discussions for deals. Panelists agreed that companies are deploying time, energy, human capital and resources to get things done. A lot of it hinges on how quickly President Trump’s economic platform develops.
“If Trump is able to follow through (on campaign promises) and we have less regulation, the spigots to the banks will open up so more transactions can occur,” said Mark Lanspa, EVP for Wells Fargo Bank’s hospitality finance group.
Lanspa said many of Wells Fargo’s clients went into 2016 with the idea they would sell assets, but pulled them back because they weren’t happy with the offers they received.
“They’re back in the last two weeks,” he said.
That doesn’t mean panelists expect the dollar volume of transactions to reach the frenetic value of 2015.
“From an M&A volume perspective, it’s hard to imagine seeing more dollar volume, but I’d be surprised if the number of transactions didn’t increase this year,” said Lawrence Kwon, managing director for Moelis & Co.
The expected transactions will run the gamut, but panelists said they’ll be closely watching M&A at the corporate level.
Big-game hunting
Speakers said the large number of companies left at the altar while watching large deals—including Marriott International’s acquisition of Starwood Hotels & Resorts Worldwide and AccorHotels' buy of Fairmont Raffles—are still looking for ways to quickly expand.
“Their boards are still keeping a focus on how to fill the gaps, how to combat OTAs, how to combat Airbnb, how they are going to compete in the cycle,” Bluhm said.
Kwon said during the last six months, there’s been more of a willingness for some companies to cut smaller checks for things they see as a strategic fit.
“For the last couple of years, everyone was hunting the big game,” he said.
The panelists pointed to Hyatt Hotels Corporation’s $215-million acquisition of Miraval Group in mid-January as an example of things to come.
“That experiential type of asset is something you’re seeing the lodging companies pretty keenly focused on today,” Bluhm said. “Those are not big tickets … a couple-hundred-million or billion-dollar-type trades, but it does create a platform for differentiated services for your customer.”
Financing—and the hope that more would be available as 2017 unfolds—were among the other hot topics addressed during the panel.
Even without additional financing dollars available, executives are looking to put their companies on more solid footing.
“The increase in interest rates has motivated many of our clients to refinance (corporate debt),” Leahy said.
However, not all hotel owners—particularly those owners who are facing CMBS loan maturities—have been fortunate to find refinance funding, panelists said.
“CMBS volumes don’t seem to be quite where we want them to be, particularly in the context of the maturities that we’re facing,” Leahy said.
Lanspa added that it’s the largest and best capitalized CMBS issuers that are going to be able to increase market share.
“Those on the fringe that can’t hold for five or 10 years will fall by the wayside,” he said.
Lanspa said alternative lenders have come into the market to help fill the capital needed to refinance the “huge wall of CMBS maturities” that will occur in the next two years.
“A lot of people are looking to put out (mezzanine) money, gap money, because people aren’t able to refinance what they have on the books,” Leahy said. “CMBS will be stronger, but I don’t know if that will close the gap. We’re going to be short by billions within context of maturities of CMBS.”