LOS ANGELES — The resiliency of the U.S. hotel industry and strength of its recovery through the COVID-19 pandemic has attracted the attention and capital of investors.
During a session of the Industry Real Estate and Finance Advisory Council at the Americas Lodging Investment Summit, Michael Bluhm, global head of gaming and lodging at Morgan Stanley, said the conviction of hoteliers over the past two years has inspired investors to take risks with capital to support the industry's recovery.
“Banks, regulators, private investors across the board really looked at this more as an opportunity to fix the business versus capitalizing on the distress,” he said. “You see it today in our valuations. It’s not dissimilar to what you see throughout the macro environment and equities generally, which is a kind of confidence around the business today — globally but certainly in North America — about how we’re going to recover coming out of this and the glide path to get there.”
The hotel industry has proven its resilience through demand, said Leeny Oberg, executive vice president and chief financial officer at Marriott International. Everyone can talk about the fundamental demand and belief in travel, but it’s another thing to watch markets around the world pop once travel restrictions eased and people felt comfortable traveling, she said.
“It really was remarkable, and I think incredibly comforting to investors, to lenders,” she said. “Let’s not forget that at the end of the day, in most countries, it takes a vibrant lending community to make sure that these deals work, particularly on the new-construction side.”
During the Great Recession, hotel industry performance dropped 25% before recovering, but this time was “a wildly different ride,” Oberg said.
Hotel owners and operators cut costs and worked through cash management issues faster than ever before, she said. Marriott executives also realized that the company's cash break-even point was better than expected, meaning it was possible to turn a profit at lower hotel occupancy levels.
Deals and Valuations
In terms of transactions, luxury resorts in strong markets are trading like they did in 2019, if not at premiums to that year’s valuations, Bluhm said, adding that investors who hesitated regret not acting more quickly in this segment.
“But there’s still a bit of question mark about what the business hotel recovery is going to look like,” he said.
The recovery isn’t just about getting the hotel industry back to 2019 levels but being able to see a path beyond that, said Leslie Hale, president and CEO of RLJ Lodging Trust. The real estate investment trust has been focused on maximizing multiple channels of growth, including acquisitions.
RLJ entered the pandemic with a strong balance sheet, allowing it to pivot to auctions early and sell assets opportunistically rather than in distress, she said. It has a long-term view on what it’s buying and looking at markets where there could be growth in the cycle with demand seven days a week.
“We believe that our investment thesis has been reinforced by the pandemic,” she said. “The markets that we bought in have had a strong, on-the-line economic base, a seven-day-week demand trend line,” she said. “We’ve been buying young assets, limiting the capital that we’re going to get, really focusing on having that incremental growth relative to our overall portfolio.”
Investors have been drawn to quality hotels in markets that have performed exceptionally well, said Gilda Perez-Alvarado, global CEO of JLL Hotels & Hospitality.
At the same time, investment is growing in markets such as New York City and industrialized cities in the north that have not fared well during the pandemic. Some of those cities are investing on infrastructure improvements, which has led to greater diversity in office occupancies, attracting life science, tech, media and marketing companies.
There are cities that are still far behind with a significant share of social issues that have no investment, she said. Companies are moving away from those cities.
“My personal expectation is that we’re going to start to see maybe impact fund investors going there, those that are playing on sustainability, [environmental, social and governance],” she said. “’Let’s reinvest in the city. Let’s gentrify the city.’ That obviously comes at a cost, and you’re going to see deep discounts there.”
Buyer and Owner Strategies
More capital investment, particularly private equity, in the U.S. hotel industry is coming out of Mexico, Perez-Alvarado said.
The biggest shift from international buyers over the past two to three years is that sovereign wealth funds are coming in through a local party, such as private equity or a new investment vehicle, she said.
“I think you’re going to see [sovereign wealth funds] play more of a secondary role,” she said. “It’s still very meaningful from a capital perspective, but you will not see them fronting a transaction.”
International investors interested in the U.S. hotel industry have capital aimed at leisure hotels, properties that are financially distressed and those with double-digit, top-line growth, Bluhm said.
“Whether it’s from the Middle East, whether it’s Canada, whether it’s from Mexico, we’re seeing a lot of capital come into this country to try to find out what is the way to play lodging,” he said. “It’s clear it’s not distress, but I don’t need to think about today’s environment. Where else am I going to find double-digit, top-line growth other than some gaming tech company? It’s pretty difficult.”
Capital will be incredibly supportive of the hotel industry for the next 12 months, he said.
Many hotel owners have turned to JLL to recapitalize existing portfolios rather than selling, Perez-Alvarado said.
“People are saying, ‘You know what, I believe in the asset. I believe in the trajectory to '23, '24, '25. It’s sizable, maybe I’m just going to de-risk a little bit. I’m going to bring in a partner, and we’re going to execute whatever the new business plan is going to be: a renovation, an expansion or repositioning,’” she said.
Many of the hotel deals that JLL is working on involve buyers interested in conversions to other real estate classes, she said. The deals are happening in Atlanta, New York City and San Diego, specifically, but also in markets where the life sciences field is hot or there are opportunities with housing.
“They are our best buyers right now,” she said.
Construction financing and the limitations created by the supply chain will keep new hotel supply in check, but the existing supply that’s not performing well is going to get converted to something else, she said.
“We’re going to definitely see way more conversions work, way more creativity in terms of deal-making, more structure transactions taking place,” she said.