NEW YORK — The valuation of publicly traded hotel brand companies and hotel real estate investment trusts is a tale of two cities.
During the Industry Real Estate Financing Advisory Council session at the 2024 NYU International Hospitality Industry Investment Conference, industry executives spoke about the factors underlying the dichotomy between the REITs and C-corps.
Brands and Experiential Travel
The idea that people are looking for experiences is real, and the trend was exacerbated during the pandemic and the years that followed, said Kevin Jacobs, chief financial officer and president of global development at Hilton. People had been stuck in their homes, buying goods online, so when they had the opportunity to get out, they had a “thirst for experiences,” Jacobs added.
Many companies have been investing in this trend for a long time, he said. That’s why Hilton recently partnered with AutoCamp, and that’s why it will continue to try to connect its guests with the experiences they want.
“We do that through our hotels at our core business, but we will continue to try to look for ways to do it in the non-core business where you can partner with a cruise company, you can partner with a safari company,” he said.
Hilton believes in the idea that it can be a platform to sell guests everything, but it doesn’t believe it will suddenly be good at being an adventure company, Jacobs said. That’s why it will continue to partner with companies over time to expand its offerings in a capital-light way that doesn’t require it to buy other businesses. Its partnership with Small Luxury Hotels of the World gives it access to 500 incremental luxury hotels.
“They’re small, and it’s not going to be hundreds of millions of dollars of fees, but it’s a way for us to present that opportunity to our customers in a very capital-light way without having to build that business or buy it,” Jacobs said.
Brands are good at distribution and loyalty, so if they can move toward a membership subscription model that opens up to experiential travel businesses, companies such as KSL Capital Partners can benefit from having brands as a distribution partner, said Eric Resnick, CEO and co-founder of KSL. The brands are starting to do this, such as the Hilton and AutoCamp partnership, but there could be greater flexibility compared to the current branding model.
“The more the brands can leverage that distribution engine to help solve a problem that consumers have, which is how to curate the myriad opportunities they have,” he said.
Things are different now with an overwhelming amount of information everywhere, Resnick said. On one hand, guests can look at any hotel room online and see pictures and videos.
“They all look great, but it’s hard to navigate that if you’re a consumer, so the more that brands can help to curate that through your partnerships — that’s a real value to anybody,” he said.
The brands have done an exceptional job creating ecosystems and building them for entertainment and experiences, said Shai Zelering, managing partner of real estate at Brookfield. The Wall Street Journal published a story about millennials and Gen Z travelers skipping the free travel credit cards and getting the highest tiers to maximize the travel amenities and services they can receive.
“I think that's indicative of what we're going to see for the next 10 years is people will prioritize their experiences and their travel,” he said. “Especially when they're getting priced out of other venues, like owning a home or other privileges that other generations have. They're going to say, ‘Look, I'm never going to get to buy this home. Let me just enjoy life.’”
Changes in Real Estate Investment
Public investors have a lot of things going on right now, said Jeffrey Horowitz, global head of real estate, gaming and lodging at Bank of America. First, all their funds aren’t exactly permanent, and they’re judged by their returns, so they’re sometimes a bit short-term oriented. There’s a long list of things to be concerned about, including geopolitics, interest rates, inflation and artificial intelligence.
“People are moving their money very quickly, and they tend to move away from real estate-oriented sectors,” he said. “They say, ‘Well, what’s the growth going to be tomorrow? What’s the growth going to be next week or next month?’”
Real estate investment trusts are frustrated because there aren’t that many investors and they don’t have that much money, which creates opportunity on the private side, Horowitz said.
“The question is, will the private people step forth?” he asked. “Will the public people let them have the assets and at what price? I think that’s what creates a [mergers and acquisitions] market. That’s the natural evolution of this.”
Before the Great Recession, the REITs all sold at once, and the industry created new ones in 2009 and 2010, Horowitz said.
“It wouldn’t surprise me if we’re here three years from now and there’s a few companies left in there, and they’re at scale, but the other ones disappear,” he said.
There’s still plenty of people making money by investing in hotel real estate, Jacobs said. All the REITs are partners of Hilton, and there’s a place in the world for REITs and always will be. There are some reasons they’ve been challenged. REITs used to have a big liquidity premium, but the market has changed and the liquidity premium doesn’t matter that much anymore.
“As much as we are growing our business and creating value for shareholders through growth, for every hotel we open, there is a real estate investor that is making money,” Jacobs said.
The REITs are structurally limited in what they can do, and people are valuing less the liquidity premium and the tax benefit, Resnick said.
“If those two things are not valued — the liquidity premium is a big deal, right? — then all you’re getting is a group of companies that fight with one arm tied behind their back, and I don’t think that’s fair, but I think that’s what we have,” he said.
Resnick’s KSL bought Hersha Hospitality Trust last year in a $1.4 billion deal that took the REIT private.
Noble Investment Group has taken the owner/operator model and institutionalized it, said Mit Shah, CEO and founder of Noble. He added owners throughout the country and across the world have built great hotels and created good lives for themselves. About 20% of the space that Noble operates in is owned by institutions such as Brookfield, Blackstone and TPG Hotels, Resorts & Marinas.
“We built a business that essentially buys from these owner/operators and add different competencies to it,” he said. “Then you create an income stream and sell it to a yield buyer. This is a fantastic business.”
Many in the hotel industry are old enough to have gone through multiple crises and cycles over the last 30 years, Shah said. Each time, the industry has bounced back stronger than it was before because it grows and expands the experiences it can offer to travelers.
“The frustration that we’re all feeling, and I certainly know our REIT cohorts are feeling, is that they can essentially do anything — they can buy great assets — and nothing’s going to change in terms of how people value that income stream,” he said. “Fortunately, we’re private, but I do believe that this industry needs to do a better job of being able to articulate the strength of our business.”