Investors at ALIS are bullish on the industry’s long-term prospects and say the focus
should be on costs compared to RevPAR predictions.
LOS ANGELES — Investors on stage at ALIS' popular IREFAC panel agreed that hospitality
remains a secularly growing sector with long-term tailwinds, albeit with
current cyclical challenges.
With that in mind, Shai
Zelering, managing partner and head of hospitality investments at Brookfield,
was asked how he’s thinking about hotel investment right now and whether he’s
on offense, defense (or special teams).
Zelering’s answer focused on
stability — and the boring.
“When you compare [hospitality’s] performance to the
S&P 500 and other sectors, to me, you have to ask yourself, am I in the
business of buying durability or buying hope?” he said. “As long-term
investors, we look at the mispriced real estate [for] particular hotels and see
incredible opportunities.
People will look back, two to three years from now, [and see] this as one of the best buying opportunities, as long as you're a long-term investor and you're really looking at the capability of the business.
Shai Zelering
“I think that people will look
back two to three years from now [and see] this as one of the best buying
opportunities, as long as you're a long-term investor and you're really looking
at the capability of the business,” he said, noting Brookfield would definitely
be on offense.
So where would he be looking?
“I would buy those boring hotels
in secondary, tertiary markets where I see really good dynamics and labor from
infrastructure and manufacturing,” he said. “If you think about the investments
that [the U.S.] is going to have and you think about the CHIPS Act and all
this, that money hasn't even worked through the system. We're going to see,
over the next 18 to 24 months, that it manifests itself in capital spending and
infrastructure. The spending on manufacturing for defense is going to increase.
I would look specifically at those [secondary] markets — it's not the top 10
markets because I feel that they are less business-friendly. I would buy the
most boring stuff — branded, working [assets] with durable cash flow.”
Zelering was a member of the
“IREFAC — The financial gurus tell it like it is” panel on the final day of
ALIS by Northstar at the JW Marriott/Ritz-Carlton Los Angeles L.A.
Live in Los Angeles. The panel included Larry Kwon, managing director of New
York City-based Moelis & Company; Leeny Oberg, CFO and executive vice
president of development for Marriott International; and Louis Sternivou, senior
managing director of New York City-based Eastdil Secured. Mit Shah, CEO of
Noble Investment Group, and Scott Trebilco, senior managing director of
Blackstone, co-moderated the panel.
Focus on cost
control
Kwon, whose company
last year served as the exclusive
financial advisor to Aimbridge’s $1.2 billion restructuring, was asked about
the broader ecosystem of what owners and third-party managers are thinking
about these days. He said the industry’s focus is often on performance, but the
real story lies in costs and cash flow.
“We're obsessed with RevPAR as
an industry… but really the story is around cost structure and margin and cash
flow,” he said. “We can sit here and debate valuation for 45 minutes and maybe
never talk about cash flow. That's just the type of world that we live in.”
Kwon said in his discussions
with owners and operators, there’s a lot of talk about control.
A lot of the [third-party] managers that we're spending time with are really starting to think of themselves less as hotel companies and more as professional services organizations. They are ultimately providing a service to their clients.
Larry Kwon
“There's a general focus on
control, what you can control and don't worry about the rest. None of us can
control what's going to happen out there in the world. None of us can control
the macro environment. But [we can have] a religious focus on cost structure,
labor costs, labor friction cost and the hidden costs on the P&L.
“There's a lot that the
management companies can do to really create discipline around that, and I know
that a lot of companies that we spend time with around the third-party
management space are thinking about how they can serve their clients more in the
context of giving them at least visibility on cost.”
While no one can claim to have a
crystal ball for what will happen to RevPAR over the next 12 months, Kwon said
companies should at least have a “hazy crystal ball” for what the cost side of
the P&L will look like.
“A lot of the [third-party]
managers that we're spending time with are really starting to think of
themselves less as hotel companies and more as professional services
organizations. They are ultimately providing a service to their clients,” he
said.
Calling for San Francisco
When asked what types of calls
he’s fielding from buyers, Stervinou said he’s hearing a lot about a quickly
recovering market where he is based.
“The call we’ve received the
most is, ‘I want to participate in the San Francisco recovery.’ We
didn't get those calls two years ago. Three years ago, we were begging people
to actually come and visit the city, and they just didn't have time for it. Now
you can underwrite high single-digit or double-digit market growth. The reason
you can do that is a growing corporate market. You have a really resilient
and growing group [business]. The market is supported by a mayor who will
actually go to the pitch with the meeting planner and call the CEO handling the
big group to secure that business, which is unheard of, right?”
Stervinou said there are a
number of positive things happening in San Francisco right now (not the least
of which is the Super Bowl it’s hosting in two weeks).
“We’re going to get a lot of
eyes and great notoriety,” he said. “The real benefit of all this is you are
buying at an extreme discount to replacement cost… So, you can buy in this
market, underwrite growth, and you're buying it at a COVID discount still.”
Parting advice
Oberg was awarded the Jack A.
Shaffer Financial Advisor of the Year award at the conference and will also
retire from Marriott at the end of March. She was asked at the end of the
session about any advice she would offer to a younger generation in the audience.
“It's probably a theme along
what you've heard this morning… whether it's investors in equity markets or
whatever, there is this desire that I want to wait for the bottom price, or I
don't want to sell until the very top price. I think it's a mistake,” she said.
Oberg said while you have to do
the fundamental research, when the general outlook has enough stability and
enough positive factors, you need to move.”
“In
our business, change and moving are good over the long term. I would say, don't
try to perfectly time it. I mean that in your careers, I mean that in how we
allocate capital. You really need to think about it over the long term.”