The pace of the U.S. hotel industry recovery from the pandemic has created unique financial opportunities for hotel owners, including a substantial amount of pent-up capital and potential transactions.
There’s not just a lot of capital out there, but perhaps the most equity capital that has ever existing in this industry, Rob Hays, president and CEO of Ashford Hospitality Trust, said during the “Capital Outlook” session of the NYU International Hospitality Industry Investment Conference.
“Everybody and their grandmother has raised a $5 billion equity fund,” he said. “It’s unbelievable. I’ve had conversations ... over the past several months where literally every one of them is, ‘I just raised a $6 billion fund; I just raised a $7 billion fund; I’ve got to get this money out.’”
It’s mostly the same players, just with a lot more money to deploy, said Thomas Morey, executive vice president and chief investment officer at Park Hotels & Resorts. There hasn’t been a significant change in how deals are done, except they may get done a little faster, at least on the selling side, he said.
“When you’re selling something, if you’ve got good demand for something, you can get sold more quickly,” he said.
This year, Access Point Financial will work on about 60 transactions, a sign that the market is recovering, CEO Michael Lipson said. Performance of the company’s legacy portfolio has returned to 2019 levels, and a significant portion of it has exceeded 2018 and 2019 numbers.
“The liquidity is back. The wall of money is there, from all the institutions and investors, overseas and here,” he said. “We’re seeing this is becoming a very competitive marketplace. It's almost like the pandemic didn't exist.”
Deals Appetite
As Park looks to acquire, it’s guided by the demonstrated strength of the core hotel brands and the belief that business travel, though perhaps different, will return, Morey said.
Park has not been involved in single-asset purchases in the real estate investment trust's relatively short history. Since taking the real estate formerly owned by Hilton and spinning off in early 2017, the company sold 31 hotels for $1.7 billion and bought 18 hotels as a portfolio in acquiring Chesapeake Lodging Trust in 2019.
If it were to pursue a single-asset deal, the hotel REIT would focus on exciting markets — such as Austin, Nashville, Miami or Phoenix — and properties with exposure to both leisure travel and a thriving business community, Morey said.
“I don't think we're going to buy a big convention box right now,” he said.
Morey said he could see Park selling a couple of hotels and buying one within the next year. He doubted whether any of the REITs would issue substantial equity in the near future, so being a net buyer would likely be challenging.
“In our pivot to offense, we're kind of substantially most of the way through,” he said. “We've done a lot of deleveraging since we bought Chesapeake, but it’s hard to say exactly when we're buying that first property.”
Ashford also is likely to be somewhat evenly divided between buying and selling, Hays said. The company has the necessary strategic financing to acquire favorable assets, but also some properties that could be culled from the portfolio, he said.
Ashford has been building up a cash balance not knowing what the recovery would look like and knowing it has some extension tests on debt due in the next few years, he said.
“If the recovery comes back in the way that we’re hoping, we may be able to pivot pretty quickly and start deploying that,” he said.
The cost of capital has made Hersha Hospitality Trust “very deliberate” as it looks at acquisitions, CEO Jay Shah said. The company hasn’t made a move to buy as its portfolio recovery profile is superior to anything it has underwritten, he said.
As the recovery moves forward, Hersha's acquisitions focus could shift as its underwriting constantly changes market by market, he said. It’s looking at a handful of new markets in the cycle that have more of a leisure component in addition to the typical business revenue mix.
“A lot of urban markets have been hit pretty hard, and the growth profile in urban markets is very, very attractive,” he said.
Overall, though, Hersha will likely be a net seller, he said.
“The recovery is going to be market by market,” he said. “There's going to be pockets to time capital plays.”
Mergers and Acquisitions
There’s enough of a value opportunity in hotel companies for mergers and acquisitions activity to pick up, said Michael Bluhm, global head of gaming and lodging at Morgan Stanley.
However, he said, industry talk of mergers and acquisitions has slowed somewhat. He also said the CorePoint Lodging deal announced last week was not a true test of the capital markets because it was a smaller deal.
Early on, there was a lot of discussion of REIT-to-REIT deals, which for those companies would be a simple way to weather the storm, Bluhm said. But as liquidity came back quickly and REITs stabilized, those talks cooled off.
Increased confidence in the recovery and group pace, as well as acceleration of the capital markets, will make 2022 ripe for mergers and acquisitions, he said.