NEW YORK—Two private-equity icons told attendees of the 33rd annual New York University International Hospitality Industry Investment Conference on Monday that the time is right for investment in hotels as the industry is trying to find its footing on the slippery slope coming out of the recession. But they cautioned against clear warning signs that something might not be quite right with the global economy.
“Being an investor … if you wait for the all-clear sign, it’s generally too late,” said Jonathan Gray, senior managing director and co-head of real estate for The Blackstone Group. He added that the fundamental question to ask in acquiring hotels is the cost to purchase a hotel compared with the cost to replace it. If it costs less to buy the property, that’s a good signal to pull the trigger.
“I’m a little more optimistic … because of significant discounts to replacement costs that exist,” said Gray, whose company’s hotel holdings include Hilton Worldwide and LaQuinta Inns & Suites. “There are a lot of assets that need to be fixed that suffered from financial issues in the (2005-2007) period.”
Barry Sternlicht, chairman and CEO of Starwood Capital Group, wasn’t as optimistic as Gray.
“I worry about the downside more than I ever have in my career,” said Sternlicht, whose company holds hotel assets that include Groupe Du Louvre, which has more than 1,000 hotels. “I’m playing our (investment) fund with a large amount of safety. I’m just worried about the world.”
That worry won’t stop Sternlicht from searching for hotel acquisitions, however. He said his company was within US$25 million of the US$3.8-billion winning bid for Extended Stay America last October. The winning bidder was an investment group led by Blackstone Real Estate Partners VI, Paulson & Company and Centerbridge Partners.
“There’s plenty of money around for everything,” Sternlicht said, adding that his company is looking for unique opportunities.
He said the attention the hotel industry is garnering is somewhat surprising.
“There has been incredible crossover of hedge funds into our space,” he said.
He said that phenomenon, coupled with the fact that a number of real-estate investment trusts are heavily investing in hotels, has driven up hotel acquisition prices.
“We look at some of the trades and wonder if they understand what they’re doing,” Sternlicht said.
Fundamentals improve
Gray said the industry’s fundamentals are getting better but headwinds remain because the economy is not growing as fast as some people think it should.
Sternlicht said investors are looking for something other than government-related entities in which to invest.
“There is this wall of money looking for something other than U.S. treasuries,” he said.
Both executives said the biggest risk for the hotel industry revolves around interest rates.
“The risk is that interest rates will pop up,” Sternlicht said.
He added he is anxious to see what happens after 30 June, which is when a government program called quantitative easing and referred to as QE2 expires. The program revolves around the government pledging to buy US$600 billion worth of treasury bonds to keep interest rates low and help spur lending and economic growth.
“I think we’re going to have a very volatile fall,” he said. “If the equity market stumbles, that’s really bad.”
“The big risk is the unsustainably low interest rates,” Gray said. “You want your capital structure to anticipate higher interest rates.”
Other thoughts
Other highlights from the conversation, which was moderated by Maria Bartiromo, an anchor with CNBC:
• “What I worry about is exit strategy,” Sternlicht said. “You have to worry about things you didn’t have to worry about before…. The macro trends make you nervous.”
• Sternlicht said a divisive U.S. election caused by the sluggish economy and overspending will be an issue in 2012. He said the U.S. government has no choice but to cut spending the way a number of state governors are doing.
• “There are two really great markets—the (San Francisco) Bay Area and New York,” Sternlicht said. “Everything else is sort of OK.”
• Gray said naysayers have to remember the cyclical nature of the hotel industry. “Commercial construction is not going to go forever without building a new hotel in the U.S.,” he said. “Part of it is cyclical. Part of it is we lost some confidence.”
• “The deals we’ve done in lodging have been up and down the food chain,” said Gray, who mentioned deals for the assets of Extended Stay America, Highland Hospitality and Columbia Sussex Corporation. “In all of these cases, the underlying issue was the same—excess leverage from the (2005-2007) period. We thought we could fix the capital structures and we believed there (will) be a recovery.”
• Sternlicht said Starwood actually looked at a deal to acquire a hotel in New York with a zero capitalization rate. “That was just a little pricey!” he said, which drew laughter from the audience.
