‘No timeline on funds’: Execs at ALIS discuss M&A landscape

LOS ANGELES — Just because there’s a lot of capital available for hotel acquisitions in 2025 doesn’t necessarily mean there’s a deadline to spend it. Russell Urban, principal and managing partner of West Palm Beach, Florida-based Electra America Hospitality Group, is a believer in patient capital.

“We have no timeline in our funds. So, we’re not anxious to get our money out necessarily,” he said. “Certainly, we like to play. A lot of capital is going to be reasonably patient. I don’t talk to a lot of people that say, ‘Gee, we have to put out $300 [million] of our $500 million this year or our fund as it's closing its investment period at the end of the year. So, we have to get this out.’”

Urban said the big hotel brands and their decisions on PIP requirements may be a major factor in the pace of 2025 hotel M&A.

“We’ve talked a lot about the FF&E requirements that are way overdue,” he said. “We need some issues there motivating sellers this year. I think we’ll see some interesting things around the brand requirements. That’s going to motivate activity.”

Urban was part of the “Boardroom Outlook: Hotel real estate” panel that kicked off the second day of the Americas Lodging Investment Summit (ALIS) by Northstar event in Los Angeles. The panel also included Greg Juceam, CEO of Charlotte-based Extended Stay America; Benjamin Rowe, managing partner of San Francisco-based KHP Capital Partners; and Stephen Zsigray, president and CEO of Dallas-based Ashford Hospitality Trust. Bill Grice, president and head of hotels, Americas for CBRE, was the moderator.

M&A, development strategy

Zsigray and his REIT Ashford Hospitality Trust have made many strategic dispositions in the past few years to pay off financing. So, he said the REIT’s strategy on M&A has altered in the past few years.

“It’s changed a lot, and while the objective never really changes, we want to maximize the return on our investment dollars; the way that we go about that is, in some cases, being dictated,” he said. “We have a number of PIPs that we have to get through, and the decision there is, do we complete this work, or is there a buyer that may value this asset and maybe it becomes something else? Completing your own PIP may not be a high return on investment, but we have some properties in great locations where if somebody wants to come in and blow the doors off, that’s an interesting opportunity for us.”

Zsigray said that margins have been compressed between the interest rates and labor environments.

“There’s just less capital for us to allocate, particularly on the REIT side, and it makes things more challenging,” he said. “On the acquisition side, we’re not out looking for big acquisitions, but we’ve been able to find development opportunities where, for a small capital outlay, plus some incentive financing with government-backed programs, certain development has become an interesting opportunity.

“That’s how we’re going to continue to approach this in 2025 -- check the boxes on the PIPs where we feel like we’re getting a great return and we’re probably going to be sellers on the assets where there’s a better buyer for those and continue to expand our portfolio through targeted acquisitions.”

Rowe said the environment for new development is still very much of a challenge in 2025.

“For us at this point, when you can buy at a deep discount to replacement cost, it’s hard to justify new development,” he said. “Those markets that have been slower to recover - some of them have interesting opportunities where you can buy high-quality real estate in good locations that needs renovation and create a lot of value.”

Rowe said it still comes down to getting the right price for those assets.

“But you can underwrite fairly conservative growth assumptions in those markets,” he said. “These are the sort of assets that, in a different environment would have traded to a lower cost of capital buyer, but a lot of those buyers still aren’t there, and that creates opportunity.”

Investors’ comfort zones

Juceam said he’s seeing many investors retreat to where they are comfortable.

“What I noticed is that everybody’s gone back to their own zone. If they’re a developer, and they thought about buying now, they’re just going to develop and for those that are buying existing assets who ultimately thought about development and realized that this is really complicated and difficult and they’re just going to buying stuff. So, everybody went back to their perspective corners,” he said.  

Juceam said development at the lower end of the chain scales has been incredibly challenging.

“It’s been harder at the lower end of the market to develop and make the project pencil,” he said. “I’m seeing that it’s more interesting and probably a better use of capital to buy an existing asset if you can get it on a good basis and change brands. That’s not a new 2024 or 2025 strategy. That’s just always a good thing to do when new brands are being made available.”

Juceam said that depending on the market dynamics, converting those properties into extended-stay can make sense, as well.

“The other thing that I’ve seen that is unique to our space in extended-stay is people who have calculated that maybe there’s an oversupply of transient hotels in a market and an undersupply of extended-stay,” he said. “If the room is large enough, and if they could buy it right, then they’re going to perhaps do that conversion to extended-stay. We’re seeing a lot more of that now.”