Where the alpha leads, the pack follows.
The hotel industry is notorious for its pack mentality, which has materialized most visibly in disciplines such as design and brand segmentation. (One need only attend an industry conference to hear redundant talks of commoditization for proof.)
But the pack mentality exists on the real estate side of the business as well. While some lone wolves do exist, the vast majority of investors seek opportunities like a school of fish, swimming en masse within the currents of larger macroeconomic waters.
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Blindly following the movement of others can provide a false sense of security, even as you swim into the open mouth of a shark. Adjusting course based on the thoughtful execution of the alpha dog? That’s a whole different story.
Alpha dogs are alpha dogs for a reason. If they’re not the strongest, then odds are they’re the smartest. That means they have a better sense of their surroundings and how to navigate them than the rest of the pack.
In the hotel industry, I can think of no more prominent alpha than Blackstone. And guess what? It just bolted in a new direction.
Late Wednesday, the private equity firm filed for its much anticipated initial public offering of Hilton Worldwide. The details are still fuzzy. The $1.25-billion initial value, which was “estimated solely for the purpose of determining the amount of the (SEC) registration fee,” according to the SEC filing, likely will inflate significantly.
Also unclear is whether Blackstone will include all 10 Hilton brands in the IPO or retain ownership of a select few.
More certain is what the IPO says about Blackstone’s view of the cycle.
“There’s probably no smarter company in business, so when Blackstone says it’s time to liquidate, it must mean we’re heading toward the top of the economic cycle, or at least in this case, the hotel real estate cycle,” my colleague Ed Watkins wrote 13 August.
That was back when Blackstone had only taken steps toward an IPO of Extended Stay America, another of its hotel portfolios. The Hilton IPO was still a ways off in the future—or so we thought.
Now that Blackstone has filed to take its most valuable hotel portfolio public, you can highlight, underline and put a star next to Ed’s main point: The firm thinks we’re nearing the top of the cycle, and they’re looking to cash out.
This shouldn’t come as a surprise. The hotel industry is four years into a recovery. The last growth cycle, by comparison, lasted approximately five years.
These things don’t last forever, folks. If the smartest guys in the room say now’s the time to liquidate, they’re doing so for a reason.
Will the bottom fall out tomorrow? No. (At least I hope not.) If we operate under the assumption that Blackstone knows exactly what it’s doing, it means we’ve still got a year or two of growth left. The actual offering of Hilton stock, in whatever form it takes, likely won’t happen until early 2014 by the time all the necessary regulatory boxes are checked.
And expect more growth even after that. Blackstone wouldn’t sell if it couldn’t entice investors with the promise of more growth. Conducting an offering at the absolute peak of the market would imply stock values have nowhere to go but down, meaning Blackstone would be stuck with devalued shares of its own entity.
Various industry data firms corroborate this view, with forecasts projecting growth through at least 2014. Amanda Hite, president and COO of STR, parent company of Hotel News Now, said during the Hotel Data Conference that RevPAR will end the year up 5.7% followed by 6% growth through 2014.
PKF Hospitality Research has issued an even more bullish forecast, in which RevPAR will increase 5.9% and 7.2% this year and next, respectively.
Beyond that is anyone’s guess, which is why following the alpha dog might not be a bad approach.
As Ed Watkins wrote in his aforementioned column, “the smart ones in the hotel business are positioning themselves to cash-in, even if, like Blackstone, it means cashing out.”
Now on to the usual goodies …
Stat of the week
$26.7 billion: Approximate amount Blackstone paid to take Hilton Hotels Corporation private on 3 July 2007. That $1.25-billion figure in the IPO filing looks paltry by comparison. Expect it to increase significantly as we get closer to the actual offering.
Quote of the week
“There are going to be several lodging IPOs over the next 12 to 18 months, whether it be Hilton and ESA, which have already filed, or La Quinta. Who knows what Blackstone is going to do with its Motel 6 and Studio 6 business; Apple REIT; and the various other private REITs that could go public. Apple REITs have consolidated their REITs to have a scale in which they could go public.”
—Ryan Meliker, an analyst with MLV & Company, as reported in "Hotel analysts applaud Hilton IPO"
Reader comment of the week
“I wholeheartedly disagree with the notion that booking outside the block is a phenomenon that is impacting the hotel business in any meaningful way more so than in the past. I base this statement on a number of pieces of information: 1) It's been going on for years, well before the downturn. 2) For all the metasearch technology that enables this behavior (also not new to the post-down turn era) there have been advancements in technology that keeps guests booking INSIDE the block. 3) When speaking with the finance folks at many companies, the F&B spend is not disproportionately high which would indicate feeding more people than registrants. In my opinion, this is a story line that sounds good, but takes away the focus of the real issue which is that group is still 4 million room nights away from recovering to the prior peak levels on a 12 month moving basis. Even if there is some noise in that number, there has been a seismic shift in what makes up the segmentation in the hotel business over the last 5 years.”
—STR’s Chris Crenshaw, responding to reports that group demand is materializing as transient demand booked outside of group room blocks.
Email Patrick Mayock or find him on Twitter.
The opinions expressed in this blog do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.