Blackstone MD laments slimmer hotel portfolio

ATLANTA—Blackstone is the big cheese in hotel asset real estate, but even it wishes it had a bigger slice. 

Speaking at the Hunter Hotel Investment Conference, here at the Marriott Marquis, Tyler Henritze, senior managing director of Blackstone, said that Blackstone’s overall exposure to the hospitality space is at a “historically low” rate. “When we got into COVID, it was around 12 percent. Today, we wish our hotel portfolio was bigger.”

Blackstone, which has more than $800 billion of assets under management, began unwinding from its investment in Hilton in 2018 and has since made some less seismic-shifting acquisitions in companies such as Extended Stay America and a portfolio of WoodSpring Suites hotels. It’s also been active internationally, having made deals to acquire, for example, provincial Spanish hotel companies, such as Hispania.

The alternative investment management company has largely concentrated instead on the industrial and logistics spaces, along with the residential housing market, while eschewing sectors such as malls. Blackstone, Henritze said, has always looked to invest by identifying “large-scale shifts.”

Turning its back on hospitality toward other asset classes was a function of the times. “We saw supply picking up, cost pressures picking up and stagnating cash flow,” Henritze said. “We thought there were better asset opportunities elsewhere.”

The script has flipped in the time since COVID and with Blackstone capital on the sidelines, the behemoth could be primed for a big splash. “Supply has slowed down and capital has pulled out,” Henritze said, though conceding that the distressed assets they thought would materialize has not come to fruition. “It is scarier to invest now, but less capital gets us excited,” he said.


Cap rate crunch

Despite a pandemic that crushed hotel demand and revenue, cap rates stayed relatively stable and compression is now likely as hotel valuations increase, despite rising interest rates. Cap rate rises have existed in major business travel markets, such as Washington, D.C., and in the full-service asset space. Conversely, hotels in drive-to and leisure-driven markets, especially in the extended-stay sector, have seen their cap rates compress, as they draw investor interest. 

Henritze was speaking on a “Wall Street Talks” panel, wherein all participants remained optimistic and bullish on the hotel space, even as headwinds blow. “There is pressure on cap rates to compress further even in face of rising interest rates,” said Suril Shah, CEO and managing partner of private equity firm Riller Capital. For Shah, the hotel asset space remains attractive for its ability to produce yield, unlike other asset classes, such as multifamily and student housing, where cap rates can hover around 3 percent. 

Soft spot for select service 

All panelists were bullish on the select-service asset space. “If you look around, it’s select service,” said Justin Knight, CEO of Apple Hospitality REIT, which invests exclusively in the asset class. “The assets remain relevant for longer and are easier to renovate. It’s a model that works better and is more consistent.”

Henritze bemoaned the heavy lifting in operating large, full-service hotels (“Waldorfs are a nightmare to run,” he said) and referred to select service as easier. “Select service is in the rooms business,” he said. “They are not trying to wow you and are focused on it. They know what they are.”

KSL Capital Partners has traditionally invested in the higher end of the market, especially resort. It saw a gap in its portfolio in the select-service market and launched Mission Hill Hospitality to address it, investing in extended-stay and select-service assets. KSL is a large fund and Mission Hill’s CEO, Greg Kennealey, explained his task of “scaling down to a $20-million Hampton Inn. The only way to do it is to take the KSL DNA and hire select-service expertise people,” he said.

For all, the labor crunch continues to be the biggest obstacle to overcome. There is less of it, it’s more expensive if you can get it and concern that as hotels staff up, the cost of it will remain high.

“The ‘Great Resignation’ hurt this industry,” Shah said. “Wages are the only way to solve it. Frankly, [the workers] deserve it.”