Why Certares is so optimistic about the M&A market

NEW YORK CITY — You might think from the relatively low volume of hotel acquisitions that this isn’t a good time to buy hotels. Certares’ Nolan Hecht would disagree.

“We believe that this is one of the better hotel acquisition periods in the last couple decades,” Hecht, senior managing director and head of real estate at New York City-based Certares, told Hotel Investment Today.

Two weeks ago, Certares partnered with Harrisburg, Pennsylvania-based HHM Hotels to acquire the 246-key Carté Hotel San Diego Downtown from Carté Hotel Partners for an undisclosed amount. Carté negotiated directly with Certares and HHM and is reinvesting in the new ownership entity as part of the transaction.

Hecht said the Carté deal fits an acquisition dynamic that explains his optimism: high-performing markets like San Diego that don’t have much new supply but have extremely high and diversified demand, especially for business and leisure, coupled with assets that have capital with an upcoming deadline.

“Our viewpoint on the hotel market is that this is probably the most favorable supply-demand dynamics we’ve had in the last couple of decades,” he said. “New supply is under 1%, probably for the next 36 to 48 months, and demand is staying super strong. That’s a catalyst for opportunities.”

Hecht said Certares has several deals in its pipeline and that the number could grow “because lenders are getting anxious.” He said he could see another three to four deals for the company over the next 12 months, assuming its investment thesis dynamics continue.

“We play in a nice space, where we typically are below the mega funds… but above the regional owner-operators. I’ll call it that a $30-$60 million equity check. We’ve carved out a nice niche.”

There were similar dynamics at play with Certares’ other acquisition this year, the $171 million purchase of the 390-key Hilton Boston Back Bay from Dallas-based Ashford Hospitality Trust. 

Hecht said both markets also have the commonality of not having many hotel transactions in general. “You go a whole career without buying a hotel in Boston,” he said. “We are picking our spots and being opportunistic right now while most of the industry, candidly, is on the sidelines.”

Ashford Hospitality Trust has been selling assets to help pay off debt, which created a “significant discount to both replacement cost and historical trades” for that hotel. Hecht said similar dynamics were at play in San Diego, with the Carté hotel opening in 2019 and an upcoming deadline for its pre-COVID debt.

“The ownership group had a choice. They couldn’t really fully refinance it, so they decided to sell it to an experienced group. They are rolling some of their equity and reinvesting it for further upside,” he said.

Carté was the first seller to reinvest with Certares in this cycle, Hecht said, but he thinks there will be similar “recapitalizations” in the future.

This is the fifth deal for which Certares has partnered with HHM (they have co-invested in four of them). Hecht said he likes working with HHM “because they’re managers that think like owners.” HHM is a minority equity owner and will manage the property. They also manage Certares’ other property in San Diego, the 245-key Courtyard San Diego Downtown, which Hecht said could bring other synergies.

“We certainly think the best is yet to come,” he said. “By leveraging HHM, which already has a strong presence in San Diego, we can help really turbocharge this asset.”

More deals are coming

Certares is building a pipeline around its investment thesis. Hecht has previously told Hotel Investment Today that the company doesn’t like to follow a herd mentality and is “getting ahead” of the market.

Hecht said he still sees a lot of opportunities in the marketplace, especially because investors have been hanging on to assets for longer than they initially planned to because of COVID.

“Most folks underwrite to a five-year hold, and many are starting to come up on years eight to 10,” he said. “That may be a catalyst and drive further transactions into the fourth quarter.”

While Certares is out ahead of the pack right now, Hecht said he doesn’t expect that to continue, especially if the Federal Reserve makes a rate cut later this year. “Then the shark is out of the water, and you’ll see more people swimming.”

While he can’t talk about Certares’ use of its investment funds or fundraising, Hecht said plenty of capital is available. (Certares worked with Blackstone Real Estate Debt Strategies for both Boston and San Diego acquisitions.)

“We are financing the hotels with primarily debt funds, and I will tell you, both in Boston and San Diego, significant hotel capital was available to finance these purchases.”

Hecht said that meant numerous high-quality debt funds that were willing to lend 65% LTV for the acquisitions. “From a debt perspective, there’s not a lack of hotel financing available for the right deals, meaning good markets and good sponsors with some level of cash flow,” he said. “Numerous lenders were willing to do those loans. They’re more expensive than traditional hotel loans. But that’s why you’re not seeing a lot of hotel [acquisitions] because a lot of borrowers don’t want to take negative leverage.”