Hotel companies and their owners are not always aligned. Sure, both work together toward common goals—in this asset-light, fragmented universe of hotel operations, you can't have one without the other—but, oftentimes, their goals, driven by self-interest, run incongruous.
Branded hotel companies—Marriott International, Hilton Worldwide, IHG, to name three—are judged by their stakeholders on how fast and big they can grow. Makes sense: the more hotels you open, the more fees you can charge, the more revenue you can bring in, the higher your stock price moves.
That all means new supply and new competition for existing hotel owners. If you own a hotel, you don't like another hotel opening next door. Because then, suddenly, you aren't the only game in town, you are now more like the "old guy at the club." And, as Chris Rock warned, "you don't want to be the old guy in the club."
Sure, it's great for customers—more choice and new product probably means lower rates in the vicinity to make up for the diminishing demand—but for hotel owners, it gnaws.
Couldn't Be Better v. It Ain't All That
Which is why each side, when pressed, paints strikingly divergent pictures of the hospitality landscape. That's exactly how it went down at the NYU International Hospitality Industry Investment Conference. For the most part, executives from the major branded hotel companies remain stedfast that the industry is and will continue to operate with vigor and vitality.
"Forget the next quarter or two, the next five to 10 years, the rest of our lives are going to be fantastic for travel and the hotel business," said Chris Nassetta, CEO of Hilton Worldwide.
Equally optimistic was J. Allen Smith, CEO of Four Seasons Hotels & Resorts. "When we look at the broader picture, look at global wealth, there isn’t that looming dark cloud on the horizon," he said.
The only real contrarian was David Kong, CEO of Best Western Hotels & Resorts, who, to his credit, said, "It’s not robust, but it’s not bad. At some point, earnings will be affected by rate growth." Still, overall, he remained bullish: "Most markets are strong and that gives me confidence."
Look, these are leaders of publicly traded companies, so it behooves them to be upbeat and positive. And it's not that they are prevaricating or being mendacious. STR forecasts RevPAR growing at or just below a 5-percent clip for the next two years—and other KPIs, growing, not turning negative.
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Still, the numbers are on a downward trajectory, and predictions beyond 2017 are even more precarious. Brand CEOs are going to always say the good, even within the bad.
That is why hotel owners are the best people to turn to to hear what really is going on. They are the ones with the most skin in the game, and the ones to lose the most when times are tough.
There, then, some of them were, on stage at the NYU Conference during one panel entitled: "To Own or Not to Own? That is the Question."
Participants included Monty Bennett, CEO of The Ashford Group of Companies, itself the recent target of a takeover bid, Jonathan Langer, CEO of NorthStar Realty Finance Corp., Michael Medzigian, managing partner of Watermark Capital Partners, Mit Shah, CEO of Noble Investment Group and Nate Tyrrell, managing director, investments for Host Hotels & Resorts.
Medzigian, playing the owner card, said he was surprised by how much construction is happening. He, for one, hopes and thinks it will tire. "I'd like to see that spigot slow," he said.
He may get his wish. Construction starts are curbing and, as Bennett pointed out, "Capital is tighter than it was six months ago. We’ll see if bank lending continues."
Noble's Shah echoed Bennett. "Construction lending and the amount of lenders we saw six months ago is dissipating," he said. There is trepidation of where are we. On the debt side, interest rate sentiment is like a roller coaster. Lending markets fit into that same bucket."
Added Medzigian: "One-and-a-half years ago you could finance anything. Now underwriting is stricter. We are not seeing new lenders in the space."
As debt for new construction becomes less scarce, asset trades are picking up steam, with sellers figuring now be the time to exit when valuations are still high.
REITs, for one, have been net sellers as their stock prices continue to trade below their net asset value. Such the case, they are concentrating on buying back stock. Host Hotels, the largest publicly traded REIT, is selling non-core, lower RevPAR hotels, said Tyrrell, in favor of buying back stock. "We are trading below our NAV," he said.
"This year we will sell more than we buy," said Noble's Shah. "Last year, average cap rates were 7.5 for buying and selling. Now, it's 8 and 8.5 trailing. It's pivoted to existing cash flows on both side."
Still, the trades being made are of the smaller stature, sometimes non-brokered deals. "Big transactions require lots of debt and high LTVs," Bennett said.
Tyrrell argued that bid ask spreads are rather large. Conversely, in a later owner panel titled: "A View from the Owner's Seat," Tyler Morse, CEO of MCR Development, argued that, driven by debt markets, bid ask spreads had closed. "When there is a dearth of transactions, sellers get religion and buyers move up," he said.
Kirk Kinsell, CEO of Loews Hotels & Resorts, the one true brand on the panel (Loews has equity positions in many of its hotels), said the industry was in a good place, pointing to no meaningful changes in demand. "Supply, however, is a bigger issue in individual markets."
Morse pointed to San Francisco, New York and Miami as problem areas, calling them "overbuilt."
Dan Hansen, CEO of REIT Summit Hotel Properties, was less worried over supply concerns. "We don’t think it is a rampant issue," he said. "Some developers are holding back as financing gets tighter."
On the transaction front, Hansen, like Ashford's Bennett, said there was a slowdown in big portfolio sales. "The window when debt and equity were available and created billion of transactions has closed. A stable debt market would bring back larger buyers."
With the REITs on the sidelines, the buying pool is still wide with private equity and wealth, family offices, pension funds, institutions and sovereign wealth picking up the slack. These buyers are chasing deals in gateway markets, like New York, said Mark Brugger, CEO of DiamondRock Hospitality. He acknowledged marketing a hotel in New York City and receiving dozens of inquiries. "The capital pool is wide and still robust," he said. "It's active out there for deals. The pure financial portfolio buyer has dissipated," he recognized, "driven by debt markets that have put them on sidelines."
And that's not a bad thing, according to MCR's Morse. "The lending markets have had discipline over the last six years, which has served us well, and you’ve seen 1- to 1.5-percent supply growth." Most of the new construction has been centralized in New York, Nashville, Austin and San Francisco, Morse said. "As long as you're not building there, you’ll be ok. Channeling Arne Sorenson, Morse concluded, "The hotel industry has never overbuilt itself. It's always been a demand shock."
For Starwood Capital Group's Suril Shah, recent months have felt more like an amusement park ride than anything else. "I have been surprised by the volatility in debt markets," he said. "It feels like you are getting 50 basis point moves every couple of months."
His advice for developers is this: "People should shore up lending relationships, and go with relationship banks. When the going gets tough, they go to those with the longest relationship.