NEW YORK — Hotel deals are one of the barometers gauging the health of the industry, and owners and operators are trying to get a clear reading.
During the recent meeting of the Lodging Industry Investment Council, hotel industry leaders shared their outlook on hotel transactions, lending and consolidation among third-party operators.
Transactions Market
Many would-be hotel buyers are looking for sellers who have a strategic reason to sell, said Mike Cahill, founder and CEO of brokerage firm Hospitality Real Estate Counselors. They’re not looking for sellers who are testing the waters to see what price they could get for their properties; instead, they want someone with actual motivation.
“It could be that they have a loan coming due they don’t want to deal with,” he said. “It could be they have partners who don’t want to put in any more capital to do the renovation of the hotel. It could be they’ve hit their target number. Their partners are getting older. It could be a strategic divestment of stuff that’s not strategic to them.”
Cahill said HREC has clients who are merchant developers in need of recycling capital. What the industry will see is a greater sell-through rate because the brokers are taking properties to the market priced for the current market.
“In the end, what we’re seeing is hopefully better hotels that are better priced and priced in the market to sell,” he said. “Otherwise, we shouldn’t be taking them to the market at this point in time.”
MetLife Investment Management is taking a small pause on acquisitions, said Scott Hochman, director of real estate investments. Its hotel portfolio has some big-box hotels in gateway markets, but the company wants to focus on smaller markets that rely less on corporate demand.
“We’ve purchased a few smaller limited- and select-service hotels,” he said. “They’ve performed really well. We want more of that.”
Its strategy of moving away from urban cores is more about diversifying the portfolio than anything else, he said.
Lender’s Perspective
When considering loans, CIM Group looks for three things: people, the asset and the market, said Bruce Lowrey, managing director at CIM. It has a strong preference for people who have been in the business at least five years and have owned at least five properties.
CIM Group is focusing on bridge lending currently, he said. The company will lend on existing stabilized or non-stabilized properties, but it doesn’t have much appetite for new construction. Brands add value, and premium hotel brands are preferred.
“We’re very comfortable with the story,” he said.
For the $4.5 trillion dollars in commercial real estate investments, more than $3 trillion of that is with banks, Lowrey said. The banks were successful in 2021 and 2022 by adding loans when interest rates were much lower than now. Loans are maturing in a higher interest rate environment, so it’s difficult to make newer deals.
Coming from the debt fund/private capital side, CIM Group is open to these situations, he said. It has views on what’s important in a sponsor as well as how brands and assets perform, and it’s willing to believe in recoveries, continued performance and underwriting into the upside. All of those factors together can make a compelling story.
“There’s a lot of people looking for money, and sometimes they’re tire-kickers but if you don’t have that story, or you own 10,000 apartment units and this is your first hotel, you’re not my borrower,” he said.
The same is true for hotel owners without an operator, he said. If they’re new to hotels and they say they’re going to self-manage, if they want to buy a hotel to convert it for an unrealistic estimate in the cost per key — that’s a red flag.
“You’re looking for a story that holds together because investment committees are not easier to get things through in this environment,” he said. “People are looking at credit card debt up with the constant threat of recession that’s always in the news, where interest rates go up. There’s a lot of uncertainty, so you need a story that really hangs together.”
Third-Party Management Consolidation
The HP Hotels-Raines deal that brought two third-party managers together earlier this year was about growing bigger and building on each company’s strengths, said Kerry Ranson, president of operations and partner at Raines. One side was an owner/operator that dealt with its own investments with some private equity and high net worth individuals. The other was a third-party manager that had moved to a strict private equity real estate investment trust operator.
The two companies coming together wasn’t about growing to 500 hotels but finding a way to balance what they can own, operate and develop, he said. Traditionally, the approach has been developing from the ground up, but there are a lot of opportunities now for conversions and improving a property’s performance through changing operators and branding.
The deal also expanded the combined company's geographic reach across the “smile” region of the U.S. along the coastlines, Ranson said.
Mark Wang, senior vice president of acquisitions and business development, Europe, at Davidson Hospitality Group, said his company has looked at a handful of acquisition deals over the years, but most of its growth came organically. Whenever such an opportunity arises, principals look at whether the assets are a good fit for the portfolio. As it’s a full-service, third-party hotel management company, there aren’t many other companies that are a match, he said.
The other issue is a cultural fit, he said. The personnel must line up.
“On top of all that, on the property investments, there’s always seemingly a bid-ask gap as well,” he said. “It makes things a little bit challenging to get some of those deals across the finish line.”
In conversations he’s had with smaller hotel owner/operators, Cahill said those who have bought, sold or merged their companies said it all comes back to economics. An owner of a company with 10 to 12 hotels was profitable with great flow through that grew to 20 to 25 hotels through a deal that didn’t report seeing improved profits as costs grew along with the company.
“I’m working twice as hard and dealing with more owners, more people in my company and I’m not making any more money,” he said, quoting an operator.
For smaller operations, it may be a matter of how much more money the deal will generate versus the increased amount of stress that comes from running a larger business, he said.