Executives at Hilton, Marriott International and Goldman Sachs say now is the time to take advantage of the opportunity to build out a diverse portfolio by snatching up bargained assets and developing at lower costs.
REPORT FROM THE U.S.—With crises comes opportunities, and hotel owners and investors should act on those now, industry executives said.
Speaking during Driftwood Capital’s 2020 online annual investor conference, Driftwood Capital CEO Carlos Rodriguez Sr. said some of these opportunities will be ones “of a lifetime.”
“When the capital markets have been dislocated the way they have, and with discounts we’re seeing in the hotels being transacted, I can’t help but get excited for the future of all of our funds. With discipline and a methodical manner, now is the time to pounce,” he said.
Driftwood Capital collectively has three funds—one for acquisitions, another for development and its most recently launched mezzanine lending fund.
Rodriguez said people and businesses will start to travel again, just like in past recessions. This pent-up demand will bode well for the industry, he said.
While technology may change some of the previous demand patterns, it will also give rise to new types of businesses as well as more combined business/leisure travel, he said.
Hilton President and CEO Chris Nassetta* said through this current crisis, he has stayed consistent with his playbook that he’s written over the past 30-plus years.
“First and foremost … we’re a business of people serving people. The first lesson consistent with past crises … is about protecting people. The second chapter in the book is about protecting the core business … and then the last is preparing for recovery,” he said.
He said in an environment where everything is good, it gets harder for companies to distinguish themselves in terms of finding the right opportunities and outperforming competitors because “the rising tide lifts all the boats.” But when the tide goes down, it’s a time of opportunity, he said.
Nassetta said he’s always been a contrarian, which he feels is a necessity to making money in hotel real estate.
When asked where to look for deals, Nassetta said to look in areas that have the greatest pain. For example, buying in markets or segments that people think will never be the same, such as urban or meetings-oriented hotels. Because, eventually, that demand will come back.
“Now, I wouldn’t go buy every urban, meetings hotel in America either but, selectively, there’s a lot of pain in places like that or people that have a heavy orientation (to those assets) and might have other assets that they need to create liquidity out of—that might present opportunities,” he said.
He added that buying debt can be tricky, painful and structurally messy, but can also lead to some good things.
In terms of development, he said now is when you will find properties in the best brands and locations where owners have already done all the work but have been disrupted and don’t have the means to carry the project through.
“You’re going to build it cheaper, most likely, because you can get (subcontractors) at a better price, more of them, better quality work because they need the work … and you’re going to build it while everything is coming back in the next couple of years. Then, you’re going to deliver it to a big upswing,” he said.
Nassetta said where people go wrong in development is they take too long in a cycle to rationalize the rate structure and wait until the end of a cycle to build. Then, they deliver the product “into the jaws of the tiger.” He added that’s not as good as building at a lower price in a time of disruption and delivering in the upswing.
He said in the next 12 months, development opportunities will abate but could pick back up again by mid-next year.
Advice to investors: “Have faith and maintain discipline. Have faith that the world will get better and our business is not dead. People will travel and will go on business trips. …But have discipline. Not all opportunities are created equal,” Nassetta said.
Arne Sorenson, president and CEO of Marriott International, said it’s important to recognize that in almost every stage of an economic cycle or crisis there are circumstances that can make it wise to either buy or sell. Ultimately, it will depend on location and product position.
He said some investors will be ready to proceed with underwriting a deal in 2021. But there will also be those who say, “we’re going to wait and see whether we get more clarity and make a decision only after we see what happens with group (business), for example,” he said.
There are hotels across the U.S. that are under enormous financial pressure, he said, magnified by high levels of debt. Some of those properties will come to market in 2021, he said.
“There’s obviously plenty of money investing in our industry … one of the things we’ve learned is that the bargains are less available with each crisis because everybody knows (they can get a bargain),” he said.
Tony Capuano, group president, global development, design and operations services at Marriott, said when looking at the way the domestic lending community has dealt with this crisis in the short term, they work quick to offer forbearance.
But patience of lenders could begin to run out, causing some assets to shake loose and trade, he said.
In terms of building in a crisis, the availability of debt capital for construction tends to be more constricted but the cost of construction tends to be more attractive, he said.
“We are seeing many of the trades indicating their pipeline of work is starting to end towards the end of the year, and we’re seeing a lot of attractive cost opportunities on the labor side, as much as 10% or 15% in some cases,” he said. “If you can leverage your lender relationships … I think there will be some appealing opportunities in the right markets.”
Rodriguez said Driftwood Capital is proceeding with building a Westin property because they will be able to take advantage of cost reductions. He anticipates his team will be able to lower construction costs by 5% to 10% for that project.
“A big chunk (of the reductions) should be on the labor side and also on the profits that the (general contractors and subcontractors) are willing to take,” Rodriguez said. “Maybe it’s a little bit of a compression on the profit side for them, but along with payroll savings.”
Advice to investors:
- Sorenson: “Don’t lose hope. This has been a complicated year. 2021’s going to be better, without a doubt, than 2020. There’s no doubt in my mind that this pandemic will get behind us. We’ll get back to a place which feels a lot more like 2019 quite quickly and we’ll grow from there.”
- Capuano: “It’s an industry that will endure for decades if not centuries to come. It is an industry that has certainly taken a disproportional hit in the midst of this pandemic, but it’s an industry that will come roaring back.”
Kellan Florio, managing director and global head of lodging and leisure investment banking for Goldman Sachs, said it’s possible the industry will see a lot of short holds where someone might purchase an asset at a deep discount, enjoy the benefits of significant outperformance over a short period and then sell into a market that’s back to normal.
“We’ve probably had more conversations with family offices and some foreign investors that frankly just have a much longer-term view of the world … than (we) have in the last five years combined,” he said.
“A lot of these folks maybe are not necessarily hotel investors but broader real estate investors and have been looking for what’s that right opportunity to invest in the space. … People looked at the hospitality space this year and said, ‘OK this is that time. This is the once in a decade or maybe lifetime opportunity to find discounted deals,’” Florio said.
*Editor’s note: Hotel News Now is a division of STR, a CoStar Group company. Chris Nassetta serves on CoStar Group’s Board of Directors.