Robust deals environment lends window of opportunity
 
Robust deals environment lends window of opportunity
11 OCTOBER 2019 7:41 AM

The industry is seeing a healthy transactions environment, and hoteliers said now is the time to lock in deals before an economic slowdown could hit, but don’t forget to manage expectations.

PHOENIX—The deals environment is robust, buyers are ambitious and interest rates are cheap, but there are still challenges, and buyers need to manage expectations around the deals they are after now.

Speaking on a panel titled “Hotel investing 2020” at the recent Lodging Conference, Vamsi Bonthala, CEO of Arbor Lodging Partners, said the deals environment is healthy because there isn’t a ton of supply and pricing isn’t quite frothy yet. Ahead of a possible economic slowdown, there’s now a window of opportunity to get some deals done as interest rates are “super cheap,” he said.

Naveen Kakarla, President and CEO of HHM, said he’s seen a better connection between the buyer and seller now than there has been in the past year.

Asset strategy
When asked whether now is the time to buy, sell or refinance assets, Raj Contractor, SVP of investments at Host Hotels & Resorts, said it depends on what the strategy is and what the cost of capital is.

He said there is huge gap in public-private market valuation right now. Part of that is due to how much equity there is and how robust the debt market is.

“You’re seeing aggressive LTVs (loan-to-value ratios) … you’re seeing really cheap single digits. I’m not saying we’re at ’09 yet, but we’re definitely (in) a robust environment,” he said. “(In terms of) buy, sell and hold, it depends on if you want to refinance,” he said.

From Host’s perspective, Contractor said the company has mainly been a net seller at this point. Host’s strategy has been divesting and selling non-core assets and investing in assets that are accretive to its portfolio.

Vinay Patel, president and CEO of Fairbrook Hotels, said his company is taking a conservative approach and is being selective in what they buy. He said Fairbrook grows organically, but if there is a good deal out there, it’s worth considering. In general, though, Patel said right now is a great time to refinance, especially a 10-year term, locking that in prior to a downturn.

Bonthala said “deal guys got to deal” and his company is always looking for deals. But for Arbor Lodging Trust, it’s all about risk evaluation and managing expectations.

“Right now we partner with private equity funds and family offices, so we are able to find deals that we have conviction on, then bring in the right partner that makes sense,” he said. “What we’re not spending a lot of time on right now are big value-add deals like rebranding, mass renovations. Those are really hard to get conviction on.”

Arbor is finding interest in deals within the select-service space, Bonthala said. The cash flow is great and the select-service model does well during a downturn, he said.

Greg O’Stean, chief development officer at Interstate Hotels & Resorts, which entered into a definitive agreement in August to merge with Aimbridge Hospitality, said his company looks a lot at underwriting owners and prospective investors.

From a lending perspective, he said he always tries to be conservative when predicting performance of the “hot markets.”

“I’m usually wrong,” he said. “Markets prove that they’re very resilient and very strong … you just don’t know what’s going to happen to interest rates.”

Challenging assets
Panelists were asked which assets they are “avoiding.” Kakarla said his company isn’t necessarily avoiding international deals, but he feels HHM doesn’t have the right capability to take on that type of investment.

He did note that his company is avoiding markets where it feels like someone else has a “purpose-built team.”

Fairbrook is a smaller operator, Patel said, and full-service assets are a challenge, especially with the labor model. He said smaller deals between $10 million and $20 million are in his company’s comfort zone.

Bonthala said his company has never done new-build construction because it never internally built up a team for it, and probably won’t start that now. However, that’s not to say his company won’t ever attempt it, he said.

“What we’ve always enjoyed (is) going after deals that have hair on them,” he said.

At one point, half of Arbor’s portfolio was extended stay—and it still is a large portion—but now with so much new supply in that space, Bonthala said his company is taking a step back.

O’Stean said it’s hard to make money in markets such as New York, and it’s hard to justify going long-term there.

Industry challenges
There’s still a number of challenges in the industry today such as labor costs and shortages, new supply and economic uncertainties. O’Stean said it’s hard to make a profit when facing increased labor costs. Wage rates aren’t going to go down anytime soon, so it’s about being more efficient.

“That’s why select service starts to look a little more attractive because it’s a less labor-intensive model,” he said.

Bonthala said he’s still facing labor shortage issues, but the only reason it’s not talked about as much anymore is because “now it’s the new normal,” he said. Most people figured out some solutions such as contract labor, he said.

“I think the model of how we’re running our hotels has changed over the last couple of years,” he said. “We had to. We had to deal with this world of tough labor. … As other industries thrive and other industries need employees, we’re not just competing with other hotels.”

To offset that, Bonthala said his company has made investments internally as far as recruitment and company culture. But it’s still “incredibly difficult,” he said.

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