Certares' Hecht on M&A disconnect, finding pockets

EDITOR'S NOTE: Last week, Hotel Investment Today talked to Nolan Hecht, senior managing director and head of real estate at New York City-based Certares, about the company's most recent acquisition and its current investment philosophy. Here is the second part of our conversation on a range of topics. 

NEW YORK CITY — While Nolan Hecht is wildly optimistic about hotel M&A right now — especially for his company Certares and its investment thesis — he admits there is a disconnect in the market.

“You still have, overall in the market, probably 100 basis points disconnect between buyer and seller,” said Hecht, senior managing director and head of real estate at New York City-based Certares. “Stuff that is getting sold is getting sold because there is pressure on the capital stack, largely.”

Certares' Nolan Hecht

But Hecht thinks it will just take one event to get the M&A market moving faster. “Some of these funds have held these assets for too long, and their investors want their capital back,” he said. “We’re heading into an environment where transaction activity is going to increase significantly next year, and I think the starting catalyst will likely be a rate cut.”

While the bid-ask spread has reduced in the past few years, Hecht said the gap can still be pretty large, especially in markets that are slower to recover from COVID. “In the weaker markets, [the bid-ask spread] is very large, and people are only going to buy if it is a super high cap rate or super-distressed pricing,” he said. “In some of the markets that we’re looking, the top 10 U.S. markets, that gap is shrinking. I think one rate cut will really shrink it.”

Hecht also said there is a wide disparity in the hotel M&A market. “There are haves and have-nots in terms of sponsors that can get loans on hotel assets,” he said. “There’s plenty of debt available for the top sponsors with a good game plan and an experienced management team as a partner... We haven’t had any difficulty finding financing for us, which is certainly an advantage.”

We’re heading into an environment where transaction activity is going to increase significantly next year, and I think the starting catalyst will likely be a rate cut.

Nolan Hecht

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Ultimately, Hecht thinks there will be more hotel transactions in the second half of 2024, at least in terms of quantity. “In terms of dollars, it’s hard to say because you had some massive transactions. You had the Arizona Biltmore and a couple of outliers,” he said. “But I think there’ll be more transaction activity in the next 12 months than in the previous 12 months.”

We asked Hecht a number of other questions about everything from finding “pocket” neighborhoods for growth, to trends with group business, business transient, and “opportunistic” refinances.

Hotel Investment Today: When we talked last year, you discussed going against the herd and finding “new pockets” of places to invest. Can you explain that more?

Nolan Hecht: I was talking about new pockets, meaning new micro markets or sub-markets, like Little Italy in San Diego (where Certares acquired the Carté Hotel San Diego Downtown).

I’ll give you another example of a market we’re not in. It used to be you wanted to be on Broadway in Nashville, but now the highest rates in that market are coming out of the Gulch. It’s the same thing in Austin, you don’t necessarily want to be on Sixth Street, but now you want to be in Rainey. We bought a hotel in Midtown Atlanta, and now that’s the pocket we want to be in Atlanta. If you asked me five years ago, you’d want to be in Buckhead or downtown. Now, I’d rather be in Midtown or Alpharetta. In all these major markets, we are hyper-focused on the new pocket of growth and where we may find opportunity.

HIT: Would you go into secondary markets to find those “pockets”?

Hecht: No, we’re focused on major U.S. urban and coastal markets. We’re finding enough good opportunities in the major cities. Our early investments tended to have a high leisure, coastal focus because that’s where we thought, coming out of COVID, would have the fastest response and recovery. It’s a little bit of “Back to the Future” now. We're starting to look at some of the traditional urban markets that have recovered… (New York, Boston, DC) These major Eastern seaboard cities are showing real recovery strength.

What’s amazed me this summer is that summer concerts are becoming blockbusters for the cities — and I’m not talking about just Taylor Swift. If you look at the top concerts this summer in the U.S., they are filling major cities, and it’s becoming a big part of the business, especially with flexible travel.

Nolan Hecht

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HIT: What trends are you seeing with group business and leisure?

Hecht: Group business is back and really strong, and some of that is convention business. What’s amazed me this summer is that summer concerts are becoming blockbusters for the cities—and I’m not talking about just Taylor Swift. If you look at the top concerts this summer in the U.S., they are filling major cities, and it’s becoming a big part of the business, especially with flexible travel.

HIT: What other trends are you seeing in your hotels?

Hecht: We see a lot of strength in the upper-tier hotels. So, 3.5 stars (upper upscale) and above are showing really good strength… Some of the softness is more at the lower end. And that’s probably telling you that inflation is hurting that customer’s wallet a little bit, and you’re seeing some level of consumer pushback at the lower end of the market. Whereas at the upper end of the market, we’re really seeing none of that.

HIT: What are your thoughts on business transient?

Hecht: I’m not seeing a huge change. It’s probably somewhere in the 80% to 85% recovered from 2019… It’s been interesting to me to try and figure out what your business transient customer looks like these days because there's so much more combined business. I see it at our hotels where somebody goes on a business trip and then stays a leisure day or two… Blended travel makes it hard to quantify the current business traveler perfectly. Business travelers used to check in on Monday and check out on Thursday. That’s not really what we’re seeing.

HIT: Certares and Trinity Investments did a $185 million refinance of the 352-key EAST Miami Hotel in Florida early this year in something Colliers called an 'opportunistic' refinance. Are any more of those in your pipeline?

Hecht: In cases where we don’t believe the sale market is quite there yet, we’ve been opportunistically refinancing and will continue doing that. We have a handful of deals in our portfolio that we will probably refinance in the third and fourth quarters of this year. We got ahead of it with the (EAST Miami Hotel) which is an asset where NOI has almost doubled since we acquired it and did a cash-out refinancing because we didn’t feel the climate was quite ready for a sale of that size. We have a couple of other deals that are similar.