IREFAC: M&A market closer to heating upBy Jeffrey Weinstein | January 26, 2023Share High-profile dealmakers tell the ALIS crowd that while the macros remain uncertain, confidence is growing for much more robust trading. The most insightful session at ALIS is always the IREFAC panel, where the leading dealmakers in the hotel industry take the pulse on where the investment world is going. This week was no exception as the leaders acknowledged great industry fundamentals are in place but were not quite ready to go all in on the investment side with the shadow of a recession, layoffs, slow sales growth at tech giants in the headlines. Nonetheless, there was consensus that a more vigorous dealmaking pace is not too far off.The stress points surrounding M&A appear to revolve around uncertain about inflation, when interest rate increases will stop and what kind of recession the U.S. will have. No one really knows the answers.Moderator Neil Shah, president and COO, Hersha Hotels & Resorts, Philadelphia, recalled a recent conversation with Jeff Davis of JLL he termed as memorable and truly sets the scene. “He said, there’s going to be three or four months of nothing [deals], then people are either going to see a tidal wave coming in and panic, or there’s going to be fear of missing out and everybody’s going to be rushing to buy,” Shah said of Davis’ remarks.The likes of Blackstone, Starwood Capital and Noble Investment Group – all with seats on the stage during IREFAC – all have plenty of dry powder waiting to invest. “We’re all waiting for three or four months to see what happens,” Noble’s Mit Shah said. “If it doesn’t look like a tsunami, we may all start to plow in because the fundamentals are inherently good.”The backboneMike Deitemeyer, president and CEO of Aimbridge Hospitality, was the operator on the panel and backed up the thesis about strong fundamentals, and even took it a step further suggesting first quarter results will be RevPAR growth expectations from the likes of STR.“Group was incredibly strong domestically,” Deitemeyer said. “We completely saw our numbers exceed the blocks that we put in place. There is a lot of interest and desire to travel on the group segment and we continue to see the leisure side hold up. Right now, we feel very good about the second quarter.”In Europe, Deitemeyer said Aimbridge results are strong, but the costs are causing challenges, especially the cost of utilities. “In the UK right now, utility costs are four times what they were pre-Ukraine invasion. So, there’s a little bit more pressure on P&L there.”Overall, Deitemeyer said he feels good about the state of business, adding, “Business travel customers are telling us they’re not getting the pressure that they’ve had historically because there’s so much built-up need to travel and they’re already operating at levels below historic norm.”If performance is good, what’s the problem and why so much nervousness? Deitemeyer stated some owners simply have cash-flow problems. “I was talking to one of our owners who also has a lending business. He has 17 hotels in that portfolio with construction and mezz-type lending products. In his 2023 budgets [for those hotels] only two have positive cash flow just based on the interest rate.”Clarity is comingReturning to the discussion on acquisition expectations, Scott Trebilco, senior managing director at Blackstone, said that while they have not made a hotel deal in seven or eight months, they are out there actively looking. They like the fundamentals and believes the world’s penchant for travel is extraordinary.I think this sector is incredibly well set up today to withstand whatever’s in front of us in a way that it hasn’t been prior environments like this... We will get through the other side and when we do, I think we’re going to be in a really interesting environment.Scott TrebilcoShare this quote“We are open for business,” Trebilco said. “Clearly, right now the cost of capital is elevated. It’s a moment in time, an epidemic, because there’s really no activity… We tend to look forward and think about where the curve is going and when The Fed is going to achieve their objectives one way or another. Inflation is going to normalize and, therefore, people’s real return requirements will come down… The challenge is that the macro is extraordinarily difficult to predict right now as we think about base rates going from zero to five, which is where they’ll be in a couple of months… I think this sector is incredibly well set up today to withstand whatever’s in front of us in a way that it hasn’t been prior environments like this... We will get through the other side and when we do, I think we’re going to be in a really interesting environment.”If the Fed is getting the recovery equation right, the expectation is that other sources of capital will start coming back into hospitality, including foreign capital, sovereign wealth and more family offices.JLL Global CEO Gilda Perez-Alvarado said those sources of capital are, in fact, starting to return to the hospitality market and are mostly looking for some trades to take place to guide pricing. But, she said, it is coming. “The number of conversations that we’ve been having globally, especially with the sovereign wealth funds and some of these ultra-high net worth individuals mostly out of Europe to set up global vehicles for the hospitality sector is coming. Right now, we’re too dependent on private equity and there is a mismatch making it very difficult to transact.”Perez-Alvarado added the industry needs to trade more to attract capital and pointed to Europe where right now, she said, an investor could make one of the world’s most effective portfolios. “There are assets that are irreplaceable real estate currently available for investments in Paris, Rome, London, Zurich, Geneva, Barcelona – never one time have we had so many of these assets be able to available for investment… The sovereign wealth funds are starting to make a very big commitment into the sector, both on the corporate and real estate side, and we are going to start to see more activity.”What will also move the needle on transactions, according to the IREFAC panel, is pending debt maturities and debt extension tests that are not going to be met. At the same time, healthy banks will no longer need to play “extend and pretend.” Perhaps even more importantly, there are a lot of capex needs that will further act as deal catalysts. But the panel agreed that these circumstances won’t necessarily lead to a wave of distress sales.