Despite ‘short-term headwinds’ and some carryover from a slow 2016, investors believe 2017 will be a better year for hotel transactions.
ATLANTA—Investors at the Hunter Hotel Investment Conference don’t know when the next industry downturn will be, but that’s not affecting their outlook that 2017 will be a better year for transactions than 2016.
“Everyone asks, ‘When will it end?’, but you don’t know and you can’t invest that way,” said Suril Shah, managing director of acquisitions and asset management of Starwood Capital Group. “Your greatest hedge is to buy a lot of cash flow. It will help you get through.”
Suril Shah joined Mit Shah, senior managing principal and CEO of Noble Investment Group and Tyler Morse, CEO and managing partner of MCR Development, on a “State of the Industry” panel last week at the conference.
2016: Slow transactions pace
While the panelists differed in their opinions of what might be next, they all agreed that 2016 wasn’t what they expected in terms of transactions.
Morse called 2016 “a wasteland from a transactions standpoint,” and both he and Suril Shah referenced a wide bid-ask gap between what sellers asked for and what buyers were willing to pay for hotel assets. That trend contributed to the muted transaction volume that characterized much of the year.
Mit Shah chalked up 2016’s transactions slowdown in part to low visibility that hasn’t necessarily improved very much.
“Public companies started (2016) projecting RevPAR growth of 2% to 4% and everyone reduced that quarter over quarter,” he said. “Prior to the election we thought where we are today (in the first quarter of 2017) would be more clear. And now there’s actually even less clarity today.”
He pointed to the public hotel companies’ “very conservative” 2017 RevPAR forecasts as another indicator that the industry may not be out of the 2016 woods yet.
2017: Shaping up
Suril Shah said Starwood Capital’s approach has been to underwrite with “a very clear story of a lot of cash flow.”
With a market that he characterized as “illiquid,” he said the company’s strategy has been to buy into cash-flowing assets.
On the topic of cash flow, Mit Shah said the issue Noble is facing as sellers is “the dilemma of whether forward cash flows are better than in-place cash flows.”
“That’s the unknown,” he said.
Morse took a more macro approach to 2017’s outlook, calling the Shahs’ worries “some of the short-term headwinds.”
“These guys are Debbie Downers,” he said jokingly.
Morse’s reasons for thinking positively when it comes to hotel transactions this year and beyond? A healthy traveling public, along with the strong select-service model many companies—including those represented on the panel—subscribe to.
“More people are traveling in 2017 than they have in years,” he said, calling out the popularity of discount airlines as a reason behind a travel uptick.
Morse also called select-service hotels “the way to play the recession.”
“If (a recession) does come in two or three years, our cash flows will be more stable than the cash flows of the building we’re sitting in,” he said, indicating the conference host hotel, the Marriott Marquis Atlanta.
All three speakers agreed that select-service hotels remain the industry’s strong point in terms of cash flow and value, which has earned the segment wide respect.
“It’s amazing to see how select-service has transformed over the decade,” Suril Shah said.
Mit Shah agreed, crediting Suril Shah and Starwood Capital Group with adding “significant, positive momentum to that space in terms of creating an institutional environment.” He said that once SCG began investing more in select-service hotels, “it created a platform and public understanding of select-service, that this is a resilient, durable investment class.”
When it comes to forecasting how the remainder of 2017 will play out, Mit Shah said there’s still an issue of not much clarity when it comes to predicting deal flow and volume right now, but he’s optimistic the industry will see more deal volume toward the middle to end of the year.
Mith Shah said he’s still “very, very positive on overall RevPAR for the industry for this year,” though he did point to some potential bumps in the road, including wage inflation, increasing construction costs and the glut of CMBS loans originating in 2006 and 2007 that still must be resolved.
Morse pointed out that from a global perspective, the U.S. remains a good destination for capital.
“If you’re a global sovereign wealth fund or institutional money manager, the best place to put your money is still the United States,” he said. “Europe is dealing with Brexit; there’s talk about ‘Frexit’ and investors are seeing this. Sovereign wealth is coming to the U.S. across all asset classes.”
Despite current hurdles, Morse and Mit Shah said that one year from now, the hotel industry should still be happy.
“We’ll be talking about how 2017 wasn’t as good as we thought it would be or as bad as we thought it would be,” Mit Shah said. “This is a great business and we’ve seen it evolve over time. The right hotels in the right brands and right markets are all we try to do, and when you do that, the cash flow is resilient.”
Morse closed with a typical, yet positive, baseball analogy.
“We’re all participating in a great ecosystem that is going to last for a long time,” he said. “Next year we’ll be talking about a 10th inning in an 18-inning game.”