IREFAC at ALIS: Talking M&A, REIT consolidation, big picture

LOS ANGELES – The always popular IREFAC panel at last week’s ALIS tackled questions surrounding pending M&A and the potential for consolidation, especially among the REITs.

Lawrence Kwon, managing director at Moelis & Co., a global independent investment bank providing strategic advice, said while everyone at the conference suggested M&A activity is going to accelerate, the number of properties on the market is not much higher than a year ago. At the same time, he said everyone he talked to feels the need to put capital to work.

“I think that the environment that we’re in, the challenges that we’re dealing with, are forcing a lot of people to say, ‘I can’t stand still, and I need to think about transaction activity, capital formation, M&A as a way to accelerate whatever my strategy is.’ So, from a transaction volume perspective, I think that we’re going to be surprised a year from now on how busy things were in 2025,” Kwon said. “I think we’ll observe that a lot of it happened bilaterally, behind closed doors, in quiet conversations, quickly, quietly and discreetly.”

From a transaction volume perspective, I think that we’re going to be surprised a year from now on how busy things were in 2025. I think we’ll observe that a lot of it happened bilaterally, behind closed doors, in quiet conversations, quickly, quietly and discreetly.

Lawrence Kwon

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As for REITs trading, Kwon said, “The obvious arithmetic is mostly around G&A savings” and he doesn’t sense a lot of pressure from shareholders to try to create growth. “Shareholders have proven, over time, to be relatively patient, and I think that shareholders also appreciate that owners of real estate are dealing with a lot of very unique situations right now, particularly in circumstances around labor expenses, around overall supply growth and overall capital costs. So, I think ultimately the REITs are going to take the time for that.”

Pebblebrook Hotel Trust Chairman and CEO Jon Bortz said he doesn’t necessarily see REIT consolidation because there are few economies to scale and the bigger companies don’t trade at higher values. “Host [Hotels & Resorts] is much bigger than we are, but they trade at a much lower multiple,” Bortz said. “The only real savings on a deal are corporate GA, and that gets wiped out with transaction costs. So, you’re more likely to see public to private.”

When asked why a take-private among the REITs hasn’t happened yet, Bortz said 2024 was a volatile year from a capital markets perspective, particularly the debt markets, with a lot of uncertainty going on. “There was an optimism going into last year that we were finally going to have accelerating top line growth and hopefully stabilized or, if not at some point, growing bottom lines. It didn’t happen. So, I think you need that second variable. It’s not just about the capital markets. It’s about getting back to growth… Some of it’s going to come from the top line. The other thing we have to figure out are ways to operate more efficiently and more effectively. We have to take cost out of the system because it doesn’t work right now. It’s very challenged.”

Kwon added that he sees real estate investors thinking about creating platforms to build a growth story. “They are trying to signal something to their investors that says, ‘this isn’t about me owning five hotels.’ It’s about owning something with a theme, whether it’s luxury, extended-stay or economy extended- stay, and I’m going to grow that.”

He also talked about real estate investors buying into vertical integration of their businesses. “We’ve gone through a 20-year cycle of vertical disintegration, but I think we have a lot of clients who are on the real estate capital formation side who are saying our LPs want us to be doing more than just allocating capital. I think that’s going to create opportunities for a lot of real estate investors to think about strategic partnerships, whether it’s brands or management companies – really think about how they can deliver a better return opportunity for their own LPs.”

Longer-term trends

Bigger picture, Marriott International CFO and Executive Vice President of Development Leeny Oberg talked about the long-term trend of human’s desire for great experiences, and how overwhelmingly that involves travel. “One of the best examples of this is coming out of COVID,” she said. “You saw literally people feeling like they’ve been let out of the cage and traveled like crazy.”

The only real savings on a deal are corporate GA, and that gets wiped out with transaction costs. So, you’re more likely to see public to private.

Jon Bortz

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She added that travel and tourism expenditures are growing at least 100, if not 200, basis points faster than the local GDPs and also referenced the coming greatest transfer of wealth as additional data points that bode well for industry growth.

“We get caught up in inflation or interest rates or unemployment. But what I always hearken back to is what’s really going on in the fundamental drivers of our business, and that is demand for travel, which is very robust,” Oberg said.

Private equity giant Brookfield Managing Partner Shai Zelering added on to Oberg’s optimistic perspective by citing continued improvement in productivity, which means the next generation will work less and have more time to travel.

“We couldn't make a better industry as leisure will continue to be a priority,” he said. “From an investment perspective, you have to pick your spots. When we made the investment in [India’s] Leela brand, we were fascinated by the growth of the middle class and the prospects for India. We went there pretty early and were able to grow the Leela brand from four assets to north of 20. What that taught me is really picking your spots in the real estate.”

While Zelering back Marriott credit for growing its luxury portfolio, he said the space is also ripe for independents because of consumer price elasticity. “They’ll pay you whatever it is to stay at Lake Como during season. So, I think that from an investment perspective, those segments are quite attractive.”

Looking globally, Zelering said the U.S. is in incredible shape from a GDP growth perspective, which has led Brookfield to continue to be acquisitive. “There are some weaker pockets across the globe. But in general, if you’re balancing your geographic exposure in the right segments, there are some great opportunities,” he said.

While the fundamentals get Brookfield excited, Zelering said the remaining question is when do sector investors decide to move on. “We haven’t had that catalyst. It didn’t happen during COVID. It’s not happening this environment,” he said. “One has to wonder what needs to happen for that take place.”