NEW YORK — As uncertainties linger, the question among investors today is whether to pump the brakes on buying hotel assets.
Speaking at the 2022 NYU International Hospitality Investment Conference, Lonny Henry, global chairman of investment banking at JPMorgan, said C-corps, such as Marriott International, are all "trading at close to all-time highs; way higher than their prices in 2019. And it's the first time in two, three years communicating that they're buying back stock."
That signifies an ode to confidence about a company's capital structure, he said. However, on the real estate investment trust side, Henry said it's trickier.
"While we've recouped essentially all that we lost in 2019, and EBITDA is going to probably get back to '19 levels by 2023, valuations are sort of mid-cycle [and] stock prices have, in large part, recovered from 2019 [but] they're still 30%-50% down from where they were seven years ago," he said, adding full-service lodging REIT stock prices peaked in 2015. "That was the point in time when we started having an inflection of decelerating RevPAR, which is usually a signal to investors that things are slowing down; we also had elevated supply."
The good news is there isn't an issue with supply, Henry said. There are, however, several things making it challenging to underwrite, including inflation, interest rates and a highly unpredictable war in Ukraine.
Notwithstanding what hotel companies are saying about the strength and bullishness of their business for the remainder of the year, equity investors are nervous, he added. One way equity investors are expressing that is by raising risk premiums.
Additionally, the tenure of debt cost is now doubled year to date, and credit spreads "for even the safest class of CMBS, which is AAA," have gone up 100% or 115%, Henry said.
"As a buyer of a hotel, generally speaking today, unless prices reprice, you've got negative leverage; you're essentially funding debt service with reserves. In an environment where we've got all these headwinds, my sense is that the transaction market is sort of on hold," he said. "You've got the public market with a lot of volatility and prices trading in a fairly tight pattern. While at first the REITs started to buy and recycle capital and use their balance sheet, I think they're pumping on the brakes a little bit here and taking lead from the debt market."
Tyler Henritze, senior managing director and head of strategic investments at Blackstone, said his company has been bullish during the pandemic, and executives have been disappointed there haven't been more opportunities to invest.
Resort, economy and upper-upscale segments have had strong momentum, Henritze said, and "we absolutely would have an interest today investing more in the hospitality space."
"I think in an inflationary environment, what we're steering clear of is real estate investments that are more bond like — think about office buildings leased for 15 years, there's not a lot you can do in an inflationary environment," he added.
Hotels, on the other hand, are essentially daily leases, Henritze said.
"You have the opportunity to stay in line with inflation or exceed inflation," he added. "What we see today with rates is that rates are running well in excess of inflation."
Debt Markets Pose a Challenge
The challenge with investing in hotels today is the debt markets, Henritze said. It's an environment now where base rates have significantly and quickly widened out, but so have spreads.
"That's creating in the last month or two a real challenge in terms of getting deals done," he added.
Christopher Jordan, managing director of Wells Fargo Corporate & Investment Banking, said the debt markets have become increasingly problematic for investors, both in terms of cost and availability.
"The spread widening is true, it's unusual. It's more of an anomaly," he said.
Jordan said there's a lot more scrutiny around coverage levels and refinance risk on loans today. In the past, those metrics weren't impediments to financing.
"I do worry a little bit, too, about overall liquidity in the second half of the year. I think it's going to get a little tougher to find price and availability, despite the fact that fundamentals are very good," he added. "Liquidity is a bit of a wild card."
JPMorgan's Henry said nontraditional lenders and direct lenders are taking up a massive part of the lending landscape today. The CMBS market, however, has given sticker shock to some borrowers.
"Something's going to break. Cap rates either have to go up, and I think sellers are going to have to be more realistic, or credit spreads are going to have to tighten," he said.
Leeny Oberg, chief financial officer and executive vice president of business operations at Marriott International, said if someone is selling or buying a hotel, "I think we've still got a pretty big bid-ask spread."
"Frankly, from a profit standpoint, it's pretty remarkable how in many markets the hotels have been able to make up their profitability with productivity improvements. And we all know that rooms margin, we drop a lot of the ADR down to the bottom line," she said.
In terms of refinancing, Oberg said there is money to be had for properties that are proven to generate cash and are managing renovations carefully.
Majid Mangalji, president of global investment firm Westmont Hospitality Group, said one of the biggest surprises to come from the pandemic has been the value of assets. Banks have also taken a lot of hits, and in past crises, there have been more opportunities to acquire assets.
"Everybody ignores 2020 and 2021 as if it didn't happen in terms of valuations," he said. "We thought we were at the beginning of the end of the pandemic but what's happened is the headwinds of interest rates, inflation and other geopolitical issues."
Refinancing today comes with higher interest rates, Mangalji said, along with some owners wiping out replacement reserves or deferring some principal payments.
Despite these headwinds, he said the hospitality industry is one that's resilient, and most people are upbeat about the recovery.