Some of the industry’s most high-profile players gathered at
ALIS to speak frankly about the day’s biggest challenges and opportunities.
Here is Part 1 of their candid conversation.
LOS ANGELES – Perhaps the most anticipated panel at ALIS each year is IREFAC (Industry Real Estate Financing Advisory Council) and this year was no exception with Marriott International CEO Tony Capuano, Accor Chief Strategy Officer and CEO of Orient Express Gilda Perez-Alvarado, Brookfield Managing Partner Shai Zelering, and Morgan Stanley Global Head of Gaming & Lodging Michael Bluhm offering candid perspectives about topics ranging from projected M&A, growth opportunities, the pros and cons of moving into adjacent spaces, "The Great PIP Problem," and more.
All the panelists
were eminently quotable, and this two-part report will highlight some of the
more thoughtful responses to the big questions of the day presented by
moderators Mit Shah, CEO of Noble Investment Group and Suril Shah, principal,
Riller Capital. Today’s discussion will focus on projected M&A activity and
the “Great PIP Problem.” Look for Part 2 on Friday when the panelists address
growth opportunities, including hospitality adjacencies.
Q: How much M&A activity should we expect 2024 given the
expected macroeconomic landscape?
Michael Bluhm: The overwhelming story is a soft landing,
giving investor a lot more confidence…
In our world, when you look at lending and what drives
transaction activity it is largely the CMBS market, which was nowhere even back
in November… We started taking real risks at the end of last year and when you
look at the financing market, the supply demand is completely out of balance.
But as people believed the soft landing, no one was paying attention to what
was happening with CMBS, and it got really cheap. Then you started to see funds
flow into the capital market. Then you saw what happened on the Hersha transaction
and how much more favorable the financing came out, which is indicative of
those trends…
How does that ultimately manifest itself in terms of
transaction activity? You must believe right now that we have the grease to
start to move things. A lot of investors were testing the market last year and
didn’t get what they wanted. The beginning half of this year is still going to
be slow. But I do think that the amount of risk is going to change meaningfully.
Q: How much transaction volume will we see this year
compared to last year?
Gilda Perez-Alvarado: This year will be way better than last
year – it has to be… We’re going to see a little bit more capitulation [on
price] and hopefully more transaction activity to revive the sector.
It’s among the most complex riddles we have to solve. It’s a riddle we knew we were exacerbating for all the right reasons. We were facing an existential threat, we put all our petty arguments aside, came to the same side of the table with our owners and franchisees, and did everything we could to ensure that we all survived that threat.
Tony Capuano
Bluhm: We will see more M&A activity in the second half
of the year… I also think you have at least one less REIT by the end of the
year. Outside of the public markets, I think the transaction activity is even
pretty high in terms of scale. There are some scaled platforms out there that
can be looking for an exit after being held by sponsors for years. People are
trying to return capital to their LPs. There are some situations that need a
lot of capital, and the existing ownership doesn’t have it. So, now, you can
start to have price discovery in a more intellectually interesting way than you
could last year.
Tony Capuano: There are some wonderful short chains reaching
an inflection point where they must ask if they have the resources and the
appetite to invest in a meaningful way in two areas – technology and loyalty…
If the answer to either of those questions is ‘no,’ that starts them down the
path of evaluating strategic alternatives.
Q: How are you managing through “The Great PIP Problem?”
Capuano: It’s among the most complex riddles we have to
solve. It’s a riddle we knew we were exacerbating for all the right reasons. We
were facing an existential threat, we put all our petty arguments aside, came
to the same side of the table with our owners and franchisees, and did
everything we could to ensure that we all survived that threat. But we did that
eventually that bill would come due.
Even at our scale, the best strategy to try to navigate that
riddle is to not take a one-size-fits-all approach and to really look at,
particularly in the franchise community, how we are doing in terms of service
scores. Are we doing things that should allow us to provide a bit more
flexibility, as opposed to just pulling the contract out of the drawer and
saying, ‘here’s what the contract says. That’s what every one of our 9,000 hotels
is required to do?’
It has to be a much more bespoke approach because we’re
coming out of a set of circumstances that none of us have ever faced. We have
to be much more creative. With that said, we have a responsibility to the 1,000s
of owners in our system, who have invested billions of dollars, to protect the
equity and the brands. One of the ways we do that is to ensure that capital
gets reinvested into those assets.
Perez-Alvarado: It’s a reality check, and in some cases,
people need to reset the basis. We were speaking to some owners who have very
big hotels that require very expensive renovation, but they’re already
overinvested in the asset. They said it doesn’t make sense to do this PIP. They
know it’s the right thing for the brand and to be relevant again, but they say
they are done because there’s no return for them.
Maybe what this does is promote more transaction activity
with fresh capital taking a fresh look. And then we need to come up with some
more sensible plans. But in certain markets, in the U.S. in particular with
some of our larger assets, it’s a big problem. So, we either lean in and provide
some assistance... But it’s a very big problem.
Shai Zelering: I’ve seen plenty of hotels with deferred
capital investments in Europe. So, I wouldn’t call it the PIP problem; I would
call it the deferred capex problem… Everybody thought going into this past
three years that the big crisis will be debt maturities, but that has hasn’t
happened. The squeeze will come from the deferred capex and we have to solve
for it and in certain occasions it might mean reset the basis.
Watch for Part 2 of the IREFAC report tomorrow.