ALIS Boardroom panel on dealmaking focuses on, among other
things, when to buy and when to walk away.
LOS ANGELES – If there was any consensus coming out of ALIS
2026 last month in Los Angeles, it was that it is hard to get development to
make sense with razor thin margins and the deal trough has still not opened
with buyers unable to justify the spreads.
With the as a backdrop, high-profile developers and private
credit providers from Peachtree Group, RIDA Development, KHP Capital Partners
and EOS Investors gathered on stage to explore how different stakeholders from
different perspectives underwrite the risk and values of opportunities and how
they decide when to act.
The conversation was led by Clint Hodges of Hodges Ward
Elliott and Robert Webster of CBRE who first asked what aspects of a potential
deal give them confidence to proceed or walk away.
Ira Mitzner of RIDA Development said they look for growth
markets and because they trade in 1,000-room convention hotels they ask if there
is a reason why groups continue to come to that market or region. “Hence, both
our acquisitions and as well as our new developments have been over the last 20
years in the Sun Belt, Texas, Florida, Colorado and now California,” Mitzner
said. “While San Francisco is an interesting turnaround opportunity, it’s
really hard to make a case where RevPAR growth is diminishing, where groups are
not attracted to that particular city.”
We are focused on mid-tier hotels, and a big part of it is just making sure we have hotels that have very sustainable demand drivers. I’m also a big believer that you make your money on the buy side.
Greg Friedman
Peachtree Managing Principal and CEO Greg Friedman agreed that
acquisition and development decisions come down to brand, basis, location and
what’s driving demand.
“We are focused on mid-tier hotels, and a big part of it is
just making sure we have hotels that have very sustainable demand drivers. I’m
also a big believer that you make your money on the buy side.”
KP Patel, chairman of AAHOA and a hotel developer out of
Santa Cruz, California, said he “ultra-backset right now. Unless it’s a perfect
deal and it meets all my criteria, I’m not touching it... Unless I know I can
pay out of pocket for at least five years, I’m not touching it.”
Patel added that he also is concerned about meeting loan
covenants based on flawed revenue projections. And for his AAHOA members and
new investors he suggested, “The most important aspect of purchasing and making
sure that you’re in a successful opportunity requires educate yourself,” he
continued. “Understand that it’s more than purchase price and location. Understand
that there are regulatory pressures. There are terms and conditions you can
always negotiate, but you’re not going to understand that unless you learn from
each other and then use a lot of the resources that AHLA and AHOAA have to offer.”
KHP Capital Partners Ben Rowe said they are focused on value-add
opportunities in the lifestyle hotel space. “It starts with what is the top-line growth potential,” he said. “How much do we think we can move RevPAR and
particularly ADR relative to the competitive set? And how is that going to be
achieved? Is it a different brand and manager? Is a better revenue management
strategy? Is it a better service experience. Or is it a better product? What's
it going to cost to ultimately get there?”
Rowe also referenced the F&B component, particularly for
lifestyle hotels, and how it is performing relative to potential. “How much
space is there that we can work with to create more of an experience? Some of
that is about driving incremental profit, but it's really about the overall
experience and how that translates into incremental ADR,” he said.
The conversation moved to RevPAR growth potential with EOS
Investors’ Wang saying the past four years have been so hard to predict. “You
have urban markets that revenues are far below what they were in 2019, resort
properties that spiked,” he said. “Now it is coming backwards and more market
by market right now than ever. I’m more bullish than the expert predictions
this year for the overall U.S. RevPAR growth.”
Capex complexities
The accrual of capex with its increasing costs and how it
could move the needle on dealmaking was the next topic of conversation with
Patel suggesting brand are starting to “turn the page” in a positive way for
franchisees and asset holders.
How much space is there that we can work with to create more of an experience? Some of that is about driving incremental profit, but it's really about the overall experience and how that translates into incremental ADR.
Ben Rowe
“They’re looking at what we used to be accustomed to, and
what we're looking at what we've been able to do in the past, which is not
realistic... I do believe the brands are now seeing that and are starting to
understand that the traditional model is not a sustainable one.”
That said, Rowe talked about contending with tariffs and the
impact on renovation costs. Most of their FF&E pieces are custom designed,
manufactured overseas and costing more. “Manufacturers are eating some of
that cost, for renovation projects where the largest component of the renovation is labor, the overall increase is manageable,” he said.
Rowe added that KHP is now developing model room furniture
packages with multiple vendors in different countries to create optionality
depending on the direction of tariffs. “We’ve negotiated cost- sharing
agreements to the extent that tariffs increase relative to where they are today,”
he said.
Rowe also said because of the uncertainty surrounding the
cost of renovations, fewer buyers want to acquire these types of properties and
underwriting is assuming more of a worst-case scenario. “The decline in values of those properties over the last year has been greater
than those that don’t need renovation. That discount is often greater than the increase in renovation cost, making those opportunities actually more compelling than they were before,” he said.
While Wang agreed with Rowe’s capex assessment, he said
capex has been manageable with maximum price increases around 10%, more often
below budget and on time compared to three or four years ago when supply chain
issues were more acute.
On the construction side, Mitzner said what was a $600,000
per key budget about five or six years ago has ballooned to $900,000. “The
challenge of new construction right now is not so much a regional challenge as
it is the fact that our RevPAR growth hasn’t kept up with the inflationary cost
of construction,” he said.
If developers can get the credit support needed to develop
big box hotels, Mitzner said profitability of ancillary income is exceedingly
important. He said big resort F&B profits can range from 38% to 50% when
well executed. “So, imagine the importance of $120 million of F&B revenue,”
he said.
The challenge of new construction right now is not so much a regional challenge as it is the fact that our RevPAR growth hasn’t kept up with the inflationary cost of construction.
Ira Mitzner
Not surprisingly, Mitzner talked about the high profit
margin for banquets, especially for RIDA’s big box convention hotels. “In October,
when the groups come in, we will see an overall 60% profitability for F&B
that month. And then December, when it is leisure transient business, we see
30% profitability. So. It’s really that ancillary part of the business is
extremely important.”
Brand v Indie
Among the final questions to the panel was the value of
brands today versus independents or soft brands.
Rowe was called on first and said most of their properties
are affiliated with a brand, but mostly soft brands, where they get the benefit
of distribution and loyalty while retaining flexibility to create an
independent experience.
“Overall, the brands still do deliver real value in many
circumstances, but not in all,” Rowe continued. “We have a number of properties,
including the Hotel Viking [in Newport, Rhode Island] that will remain
independent. It depends on the strength of the market and the nature of the
demand. How much corporate business do you need where they care more about those points? Then, how saturated is that market with product affiliated with
those brands, particularly at the higher end of the market where we’re
competing? I think that’s a big factor. As the brands are adding more and more
brands and product, that’s a real challenge in some markets. There’s just too
many.”