PHOENIX — Among the many hats it wears as a hotel asset manager, CHMWarnick has been doing the most brand and management company change-out selection processes that it has ever done.
It’s an indicator of what’s going on in the hotel industry at large, Managing Director and CEO Chad Sorensen said in an interview at the recent Lodging Conference. Many development deals aren’t fully crossing the finish line. Developers are doing what they can with equity, but more projects are going to come to fruition once the capital markets are straightened out.
There’s been a lot of churning within the brands, launching new brands that created a lot of activity, he said. During the pandemic, the brands had to cut quickly and deep, so as they’ve come out of it, they’re relying more on franchising, through which they generate fees.
“That’s put a whole new opportunity pool out for third-party management companies,” he said.
CHMWarnick has probably done about a dozen and a half management company selections over the past year or so, Sorensen said. The brands have loosened up what they will allow to be franchised, pointing to the Arizona Biltmore, LXR Hotels & Resorts, moving to management under Pyramid Global Hospitality following the resort’s acquisition by Henderson Park for $705 million in May.
“That would never happen 10 years ago,” he said. “That's going to change our business as well. We shift with the business shifts in the industry.”
The profiles of many third-party management companies look different than before the pandemic, Sorensen said. Many of the players have changed, or the companies have changed strategies. The big ones have gotten bigger, and they’re looking to buy up the smaller ones. There are others who haven’t bought other companies, but they’re growing as fast as they can through other opportunities.
From the hotel owner’s perspective, that’s not necessarily a good thing because it’s stretching their transition teams, corporate resources and regional resources too far, he said. Often the biggest mistake owners make is not spending time to get guidance on selecting a brand and operator until it’s too late.
“That has been a really busy line of business for us, and there's a lot of money that kind of gets lost, and there's a lot of assets that end up in places where they didn't need to if they would have had the right guidance out of the out of the gate,” he said.
Deals environment
The Federal Reserve’s cutting of the federal funds rate by 50 basis points in September had already been priced into deals, Sorensen said. The Fed is expected to cut interest rates another 25 basis points at its next meeting this week.
“I don't think this opens a floodgate,” he said. “I think what this does is the spigot gets turned on a little bit more.”
The savvy hotel investors recognize what’s going on, and they’re seeing the gap between asking price, selling price and value has narrowed, but it’s still there. More deals will get done because of these cuts, but “it’s not going to be gangbusters,” he said.
There’s an opportunity to start refining solid projects, Sorensen said. Barring any black-swan event, the industry will be able to work past any distress it’s experiencing.
Some funds have to cycle assets out, he said. If they’re high-quality properties, they’re taking them to market and there are buyers out there for them. They’re also looking at the outliers in their funds that have matured and have gotten real about pricing, so they’re also selling those.
“There’s still this turmoil under the surface of the water,” he said. “So, things are getting done, but I do see this being a very clear path where a ton of transactions are getting done.”
Company update
CHMWarnick has roughly $15 billion in hotel real estate under asset management, Sorensen said. It has about $3 billion in advisory work.
The hotel asset manager works with full-service hotels, many of which are large convention center hotels, across the U.S., he said. It’s also active in asset-managing a majority of hotels that are part of municipality deals.
Sorensen took the helm of CHMWarnick about a year and a half ago, something he and the team had been preparing for with a succession plan years prior. That helped make the move organic without any disruption. That is, along with other factors, what helps set the company apart from others.
Many advisory and asset management firms came out of the pandemic without a succession plan, and some of the smaller shops saw their senior leadership lock down the business, he said. That created opportunities for CHMWarnick.
During the pandemic, the company retained all its employees, he said. It continued to work with all its clients so they were able to weather the storm with a long-term approach.
“It really has allowed us to come out and be a much stronger organization than others in the marketplace, and it gives us that breadth and depth across the country,” he said.
CHMWarnick does only asset management, meaning it does not invest or do third-party management, Sorensen said. It’s 100% independent, and it has a fiduciary responsibility to its clients.
“We're not going to pitch our management company,” he said. “We're not going to try to invest with them. We truly are fiduciaries, and given the size of the assets we deal with, it's a really important piece, even in selecting brands and management companies. We call balls and strikes.”
Roughly 10 years ago, CHMWarnick leaned into technology investment and developed its own business intelligence system called Proph+IT, Sorensen said. It gathers data from all its client hotels to use in the true business intelligence sense, not just reporting, and that has changed how it asset-manages as well as changed the information the company shares with hotel owners to let them make qualified decisions.
The business intelligence platform has become its own line of business, he said. Many owners want to use it and have it developed further so they can use the tool internally.