New York – It’s shaping up to be a good four- to five-year stretch for the hotel industry. That’s if you believe a slew of hotel executives, who spoke on the matter at June’s New York University International Hospitality Industry Investment Conference at the Marriott Marquis.
The annual conference is an early-summer barometer of which way the wind is blowing in the hospitality industry. In this case, it’s a tailwind, said Thomas Baltimore, CEO of RLJ Lodging Trust, during the “REIT Beat” panel. “I think we are in the fifth inning,” he said. “I see another four to five years in the cycle.”
Jay Shah, CEO of Hersha Hospitality, was as hopeful and positive. “Unemployment continues to improve and that helps the economy,” he said. “We are in an era of urbanization, globalization and digitization. It drives travel.”
Added Monty Bennett, chairman and CEO of Ashford Hospitality Trust, “We have many years to run. The Fed is very accommodative. Rates need to move up to slow it. I don’t see recession any time soon.”
CEOS CHECK IN
The cheerful news from the REITs was echoed by many of the hotel company CEOs, participating in the “The CEOs Check In” panel. Richard Solomons, CEO of InterContinental Hotels Group, may have said it best and with brevity: “We’ve had 37 months of record demand.”
Other hotel operators were of similar accord. “There is rising wealth, greater demand and a big influence in technology,” said Frits van Paasschen, CEO of Starwood Hotels & Resorts Worldwide.
And it’s happening at all levels and segments. “The high end and low end are both doing positively,” said J. Allen Smith, president and CEO of Four Seasons Hotels & Resorts. “With exception of locations of political strife, there are remarkable RevPAR gains from around the world.”
Understanding guests, personalization and emerging markets were other topics of significance.
Arne Sorenson, CEO of Marriott International, said Marriott Rewards, Marriott’s loyalty program, will hit 50 million members this year.
“They all like being engaged. The focus now is on capturing folks we don’t have. Let’s find SPG members, bring them in and see what they are all about,” he said, eliciting a grin from Starwood’s van Paasschen.
THE VIEW FROM BLACKSTONE
One of the better-attended sessions featured Jonathan Gray, global head of real estate for Blackstone Group. One, because Blackstone tends to be quiet about their business, and, two, because it’s one of the largest players in the hotel industry: it successfully took Hilton Worldwide public last year after acquiring it for some $26 billion in 2007 and, more recently, bought The Cosmopolitan in Las Vegas for $1.73 billion in May.
Gray, who joined Blackstone in 1992, offered the audience a glimpse into why Blackstone has been so successful over the years, even during the economic downturn. Much of it having to do with not panicking, when others around them were. “At the bottom of the crisis, it’s easy to lose your faith,” he said. “The natural inclination is to hide under the covers. We had a view that it was cyclical. If you own great assets and you hold on to them, then there is a recovery, travel picks up, debt picks up. So you hold tightly to assets you own and buy debt. And you move quickly, but at a discount.”
Buying at a discount to replacement cost was exactly what Blackstone did in purchasing The Cosmopolitan.
“It was built in a different era,” Gray said of the Strip-facing hotel, which began construction in 2005, opened in 2010 and fell on hard times after the original developer could no longer afford it.
The property subsequently fell into the hands of its lender, Deutsche Bank, which then sold it to Blackstone—for more than $2 billion less than it cost to build.
For the future, Gray said he sees markets such as India continuing to emerge. “It’s an interesting place, unloved by investors,” Gray said. Perfect for Blackstone, which likes to buy and invest where others don’t. Gray said Blackstone has been buying office buildings there.
In the U.S., “We like low occupancy and no new construction,” Gray said, adding that markets such as San Francisco and Oahu are enticing. “We like select-service hotels. They are cash-flow generating and have low CapEx.”
From a financing perspective, private-equity firms generally agree that the next few years will be good for the industry, and are being as opportunistic as possible when it comes to searching for deals.
But for companies that invest beyond hospitality, hotels still are a good bet. For Suril Shah, SVP of Starwood Capital Group, it’s always about the specific buy, not just the asset class. “We’re constantly churning our portfolio,” he said. “We go where the opportunities are.” For Starwood Capital, a lot of that opportunity is international.
Glenn Alba, managing director in Blackstone’s real estate group, agreed that international investments are hot right now. In March, the company closed its fourth European real estate fund at its cap of around $7 billion.
Amount of rooms Hilton Worldwide has added since being bought by Blackstone Group in 2007.
Source: Jonathan Gray, Blackstone Group
Cia Buckley, CIO of Dune Real Estate Partners, which invests one-third of its portfolio in hospitality, said it’s a good time for her company, since its strategy is “to own unique assets that stand the test of time, but to get to them in a creative way.”
That’s not the strategy for Merrick Kleeman, managing partner of Wheelock Street Capital. “New development doesn’t make sense early in the cycle,” he said. “It’s risky late in the cycle because then you have a three-year development window with no cashflow or exit flexibility. We think the ability to choose exits is one of the biggest tools we have in the industry.”
Wheelock Street Capital is currently involved in buying and selling, Kleeman said. What really matters, he said, is where we are in the cycle. “Select-service is great because it’s high cash flow with less volatility, and they’re nice to own later in the cycle. But they’re susceptible to new supply. Full service has better flow-through and better operating leverage, but if something happens, like a demand shocker, you fall a lot faster.”
The moral of that story, he said, is to pay attention to supply. “The only thing we can do in this business is pay attention to supply. It’s what kills cycles.”