During a recent ALIS Summer Update session, executives from Goldman Sachs and Morgan Stanley shared their views on the future of hotel investment.
REPORT FROM THE U.S.—Kellan Florio, managing director and global head of lodging and leisure investment banking for Goldman Sachs, said there’s a consistent theme he’s heard over the past few months no matter whom he speaks to about the hotel industry.
“What had been very much a growth-minded corporate strategy is shifting to a liquidity and defensive-minded strategy,” he said. “Mostly the publicly traded companies have worked through the liquidity-enhancing transactions and are starting to think about what’s next.”
With the industry in survival mode, that question of “what’s next?” grows ever more important, panelists said speaking during the “Investment insights—the dealmakers” session at the online ALIS Summer Update-NYC event.
Florio said those companies that are well-positioned right now are pivoting to how to “take advantage of what is clearly a dislocated market,” although it’s unclear how that happens going forward.
Croft Young, managing director of real estate, gaming and lodging investment banking at Morgan Stanley, said how that dislocation plays out depends on where you are and what segment you’re in.
“We paint with a broad brush because this happened to everyone so quickly, but there is a very different place the different players in the space sit,” he said. “If you’re in an extended-stay platform and you’re outside the major markets, you may even be doing better than you would be doing otherwise. If you’re a New York City group-business-oriented convention hotel, you probably have the longest road ahead.”
Florio said his clients have “a high variability of scenario planning” when it comes to preparing for the future.
“From our standpoint, it tends to be more on capital cushion and liquidity reserves and how does that parlay into the ability to be a user of capital for growth purposes or investment purposes,” he said. “The range of scenarios our clients are focused on are still very broad and still very much in a cautious standpoint in terms of what’s going to govern the allocation of capital toward growth.”
Young noted there is “an inordinate amount of capital sitting on the sidelines” but people are also “extremely concerned about missing out.”
“One of the things driving the lack of transaction activity, among a number of factors, is that uncertainty that still remains and people are just waiting for the moment they feel comfortable enough to get in. And they are obviously looking at a wide variety of opportunities,” he said, noting different investors are looking at different sectors of the industry.
Florio said he expects U.S. hotel investment is going to “straddle offense versus defense for a long period of time.”
“Because there’s all this capital on the sidelines, all that capital will eventually find a home,” he said. “Bid-ask spreads on transactions will certainly narrow. We’re still in this phase where transactions are meant to support liquidity as opposed to being a change of control, especially at an asset level.”
Young said many companies will come out of this crisis with highly elevated leverage levels that might spur equity sales or asset sales or catalyze mergers and acquisitions.
In terms of what deals could take place, Florio noted there’s not a lot of appetite for more REIT-to-REIT transactions.
“When we look at the (hotel) REIT space, there have been three large corporate M&A transactions over the past three-and-a-half years, all of which ended up being predominantly stock deals,” he said. “Frankly, the acquirers in those cases have been net underperformers of their peers in the subsequent period for a variety of reasons. The point being investors have been underwhelmed with their returns.”
He said there is possibility of REIT portfolios going private, but that will require better conditions in CMBS markets.
Despite all of the ongoing uncertainty around the industry, panelists don’t foresee this ultimately meaning a drastic shift in how the industry operates.
Florio noted he believes companies are having discussions about how things could change now, but he doesn’t expect that to be a long-term approach.
“I don’t think anything really changes, at least not at any significant scale,” he said. “The public companies have tried-and-true strategies and investors who like those strategies. Big pivots through public expenditure and M&A are often a difficult hurdle for public companies to overcome.”
What he does expect are “more marginal pivots on investment strategy.”
“Could you see a REIT do more to team up with a short-term rental company in order to optimize their space or something like that? Yeah, I think you could see some of that,” Florio said.