NEW YORK—Hotel transactions are in but mergers are out—at least for the time being, according to executives serving on a merger-and-acquisitions general session panel conducted during last week’s 35th Annual New York University International Hospitality Industry Investment Conference.
Speaking on the opening panel of the second day of the conference at the Marriott Marquis Hotel on Times Square, the speakers said there’s plenty of action taking place in the hotel industry as it recovers from the recession.
Dan Hansen, president, CEO and director of Summit Hotel Properties, said he doesn’t see a lot of significant merger activity because there are a wide variety of philosophies among companies when it comes to creating value.
“There’s really a fairly broad offering,” Hansen said. “To consolidate eliminates some of the value propositions of the individual companies.”
However, Mark Brugger, CEO of DiamondRock Hospitality Company, said there will be a case for merger action during the next 24 months as more debt becomes available. He suggested several of the real estate investment trusts with values in the $3-billion range could join forces to create a major REIT.
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Mit Shah Noble Investment Group |
While mergers might be few and far between, the acquisition landscape continues to gain momentum.
Mit Shah, CEO of Noble Investment Group, said he expects the transactions cycle to quicken because the hotel industry historically attracts more investors when fundamentals are solid.
“You’ll start seeing more and more capital from different sources,” Shah said.
Rick Smith, president and CEO of FelCor Lodging Trust, said the Dallas-based REIT is seeing “good movement” on the transactions front.
“As the debt markets have gotten more aggressive you see private equity start to come back in,” Smith said. “Seventy percent (loan-to-value debt) at 4% (interest) and you can get (mezzanine financing) … that starts to play in their wheelhouse.”
Art Adler, managing director and CEO of the hotels and hospitality group for Jones Lang LaSalle, who served as the panel’s moderator, said transaction volume has reached $7.9 billion thus far in 2013 and there is $60 billion in equity available for hotel acquisitions.
Different strategies
The panelists have a variety of transaction strategies:
- Brugger said DiamondRock is a “net seller for 2013.” He said the company’s strategy has been to buy early and heavy in the cycle to find value deals. “As you move through the cycle you always pull 20% of your assets to improve your portfolio.”
- Hansen said Summit is “net buyers. We still have capacity for more assets.”
- Shah said Noble falls in the middle. “We just raised our most recent fund. We’re two months into a 24-month (program). We’ll sell $500 million (of assets) and acquire $500 million at the same time.”
- Smith said FelCor is a net seller and has sold 19 of the 39 non-core assets it has for sale. “We’re not looking to acquire.”
- Marcel Verbaas, president and CEO of Inland American Lodging Group, said the company will be net acquirers. “We’re very opportunistic buyers (and will spend) $300 million to as much as a billion (dollars), depending on what happens with rest of the REITs.”
Those strategies are largely in place because of the ever-improving debt prospects for acquirers.
“A lot of buyers can get good debt now ... we’re seeing a lot of buyers coming into the marketplace, especially private equity,” Brugger said, adding that what’s lacking is a large number of institutional-grade assets on the market.
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Rick Smith |
However, select-service assets are becoming more attractive to institutional investors, according to Hansen and Shah.
“Select service today has an incredible value proposition … it’s different than it may have been a cycle or two ago,” Hansen said. “Guests like the experience … the rooms have come long way.”
Hansen said Summit sees a lot of opportunities in the transactions market because there’s hasn’t been a meaningful slowdown in the availability of limited-service, one-off assets, which is the REIT’s primary focus.
Shah said select-service and extended-stay hotels are attractive because they have the ability to create yield that lasts through cycles.
“There is an institutional focus on this sector because of the consistency of the performance over time,” he said. “There’s a broadening landscape of being able to acquire, add value, then sell.”
Meanwhile, Verbaas said Inland is primarily acquiring full-service assets.
“I’m a little more concerned about long-term supply on select service,” he said. “(Acquisition) costs are getting closer to replacement costs.”
Leveraged positions
The executives also revealed vastly different philosophies when it comes to leverage for transactions.
Verbaas said Inland is “almost exclusively 50% leverage buyers. … 250 (basis points) to 275 (basis points) over Libor creates great deals.”
“We go as high as 65 (percent leverage) but try to keep it around 60,” Shah said. “We need to keep it flexible. We’re seeing things in the 10ish debt-yield range.”
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Marcel Verbaas Inland American |
The landscape could dramatically change as the commercial-mortgage-backed-securities market grows, the Noble executive said. “It will open some different kinds of financing to balance sheet lenders, that’s typically who we borrow from,” Shah said.
Overall, the speakers had positive outlooks for the overall hotel industry.
Brugger said he expects an extended run of growth, and Hansen agreed that fundamentals are strong.
“The slow (supply) growth environment is creating a strong foundation for several years of good, sustainable growth,” Hansen said.
Shah said the hotel company executives are waiting for group business to return to pre-recession levels.
“When it comes back in the way we hope it will, it will clearly allow the industry to take the next step—the ability to move pricing and all the ancillary revenue that comes from it,” he said.
Final takeaways
Executives participating on the panel revealed their biggest concerns about the industry:
- Verbaas: “The fact that we’ve always been our worst enemy. Supply issues are the one thing that concerns me.”
- Smith: “What I worry about are the little things you can’t control … the macro economy.”
- Shah: “We choose brands because their ability to drive preference and loyalty. The threat is real of millennials and what they are loyal to. Two is the transparency of pricing.”
- Hansen: “We’ve asked employees to take care of assets we’ve invested in … are we investing in them to take care of the assets? Second is technology. Technology is giving our travelers and guests transparency into our hotels. That visibility does drive behavior.”
- Brugger: “Government policies on travel, visas, infrastructure, investments, health care. Those are things that could cause a slowdown in our industry.”