The hotel industry has reached an interesting point in the cycle, and CEOs at this year’s ALIS conference discussed what that means for industry M&A and hotel sales.
LOS ANGELES—The hotel industry has seen a number of transactions over the past several years, both in the hotel asset and portfolio market as well as with hotel companies.
During the “Boardroom outlook: Assets” general session at the recent Americas Lodging Investment Summit, hotel CEOs discussed the hotel transaction environment as well as industry consolidation.
The hotel industry is a local business, regardless of whether it’s an entire real estate business or a local property, said Richard Stockton, president and CEO of Braemar Hotels & Resorts. However, the reality is there are benefits to scale in terms of access to capital, the cost of capital, in particular for publicly traded companies, he added.
Among the REITs, the benefits to consolidation include achieving synergies through general and administrative expenses, Stockton said, adding that there are a number of REITs that could benefit by bringing their complimentary strategies together.
“It provides value for shareholders in many cases because of the scale and the cost of capital and synergies there,” he said.
DiamondRock Hospitality President and CEO Mark Brugger said his company thinks about consolidation differently among brands, management companies and REITs. For brands, bigger is better because it means a bigger ecosystem and rewards program. Supply is an issue, however, when the brand opens a competing property next door, he said. Generally, though, bigger brands are better.
“The bigger and more powerful the brand is, their reservation system, their point system, we’re in favor of that,” Brugger said. “We like consolidation. We like less fragmentation among the brands.”
Consolidation of management companies can pose challenges, Brugger said. DiamondRock likes when managers have enough scale to attract talented people, but often those that have 30 or 40 hotels in their portfolio become the hot manager and then double in size, he said.
“Then they kind of get the A Team and a B Team of players, and some do that work well and some lose a step,” he said. “I’d say that’s not quite as beneficial.”
There have been three public deals in recent years, but they have not proved out to be successful yet, Brugger said. After some time, the industry will see how the numbers play out, but it’s difficult at this point to go into the boardroom and say making a public-to-public deal is the right move.
“Now ultimately, some of these deals may work out to be very good deals,” he said. “We'll be in a different position. I think we're more likely this year, talking about size, the smaller-size REITs are probably more likely for the public-private transaction, so smaller size probably helps you be more attractive.”
Transactions and exit strategies
The market is still hot, and there are a lot of people who want to buy hotels, Brugger said. However, there are fewer people out there who can write billion-dollar-plus checks.
“There’s a lot of (capital) out there, but I would say it continues to get very selective,” he said.
For a property that fits in what most buyers want, a seller might receive 10 to 20 bids, he said. If the property is outside of the box, the seller will likely get one bid.
“It’s a pretty binary market for as far as the type of hotels that people want,” Brugger said. “In our experiences, there’s a lot of capital right now that will inspire us, so we think this year will be a good sellers’ market.”
Stockton disagreed, saying it’s not a hot transaction market. There have been a number of times he’s seen sellers not get the price they want, so they take it off the market and just recap it. The debt markets are favorable enough to go that route, he said.
Transactions are going to go down again this year, and everyone seems to have gotten on board with that, Stockton said.
“This isn’t a growth year for us, let’s be honest,” he said.
There are always ways to create growth, Stockton said. Hoteliers can find a price to pay for an asset that has negative revenue-per-available-room growth and increasing expenses. Sweating an asset makes sense if they can find ways to pick up margin to counteract the other factors, particularly labor costs, he said. Hoteliers can optimize revenue by adding rooms and other things to drive top line and make those transactions happen.
“Those opportunities are still there,” he said. “It involves capital and money and right now, as far as the research is concerned, access to capital, particularly equity capital, is not at the right price, let’s say, but then debt capital, if you have the leverage capacity, you can do these sorts of things.”
When Vesta Hospitality buys a hotel or a portfolio, the team conducts its traditional five-year pro formas, Vesta Chairman and CEO Rick Takach said. They set an exit value that’s tacked on to each transaction, and when the company thinks it can hit its exit, it makes a decision on what to do with the property, he said.
“We look at it today and ask, ‘Is this the right time for us to sell?’” he said. “We’ll look at the market, look at the hotel. We’re looking at supply increases going in the market. We have an election year, and that could have a huge impact over the next few years.”
Vesta’s team tries to stay disciplined in its approach while being flexible enough if it’s not the right time to sell, Takach said.
When Outrigger Hotels and Resorts sold six properties to Thailand’s Singha Estate Public Company Limited for $310 million in 2018, Outrigger maintained management and branding of the hotels, President and CEO Jeff Wagoner said. Along with that, the company created a great partnership with Singha, which just went public on its hotel side, he said. It now has additional capital for assets, so Outrigger is working with them on that.
“When you go out and look to sell assets like that, you don’t want to have that damage the brand in any way,” he said. “But at the same time, if you can do it with somebody that you trust, that’s a good partner, then it can really be accretive to the growth of the company.”
Outrigger is three years into being acquired by KSL Capital, Wagoner said. Looking at a typical private equity environment, in his company’s case, there are a lot of levers to pull to create value. When looking at an exit of an individual asset or a company, there’s a big runway to figure out what to do, he said. Specifically for assets, there are renovations that can help increase revenue, average daily rate and profitability.
Today Outrigger is in an aggressive clean-up mode from a growth perspective and isn’t necessarily looking at what it can exit, he said.
“I learned from somebody a long time ago, just do what you do well, and everything will fall in place to create big success for you,” Wagoner said. “So that's kind of our mentality and our focus.”