PHOENIX – “Uncertainty” has been used as a descriptor quite
a bit in the investment world this year and it was mentioned again on Monday as
the Lodging Conference opened in Phoenix. But judging by the big crowd of more
than 3,000 attendees, perhaps “opportunity” trumped (no pun intended).
Opening session panelists still talked about waiting for and
hoping for lower interest rates they were expecting by now but might have to
wait for until 2026. So, maybe its optimism driven by a buoyant stock market,
knowledge that a lot of dry powder remains on the sideline and resilience that
has defined hotel investment for more than a few decades that created the
positive buzz in the air.
The conference came with requisite brand launches – soft brands
from Wyndham and Hilton – and admitted pain points surrounding operating costs,
a bifurcated marketplace favoring luxury over economy, squeezed NOI margins
when trying underwrite, and laments about what to do about PIPs when solid GOPs
remain elusive.
Which brings us back to “uncertainty” and no one being quite
sure what to expect next other than to tell the crowd what they want them to
hear – develop, convert or transact, and believe in the big picture surrounding
travel. Perspective is everything and playing the long game is often the way to
move forward.
Driving GOP
Perhaps one of the more interesting questions brought to the
panelists in “The Dealmakers” session surrounded what can be done to improve
the owners’ business model as they are the ones taking it on the chin with
diminished GOPs.
Discussions ranged from giving salespeople more tools to
drive the topline to adjusting staffing levels in a very short window to
address fast-moving market dynamics and how to activate every inch of a
property by, for example, partnering with outside F&B professionals by
taking equity positions instead of offering a simple lease deal.
Dave Pollin, co-founder and president of Buccini Pollin
Group|PM Hotel Group in Washington, D.C., said he is more concerned about where
inflation and the cost of goods will settle, as well as the unpredictability
and inability to know how to stock hotels and costs to renovate hotels being unsettling.
He said it actually easier to talk about day-to-day, “but
when I think about a two-year hold or a five-year hold, trying to anticipate
your cash basis on the other side and where your levered returns might be, is a
lot harder to predict and forecast accurately.”
On the other side, Pollin continued, travel and consumerism
are up, and that the hotel business can be correlated to GDP. “And we have a
country that really rallies around ensuring that this is the case for as long
as I can predict, despite short-term headwinds.”
Pollin believes that the hotel industry remains in a low
supply environment and that it remains a hedge against inflation.
When asked about M&A trends Starwood Capital Group’s
Managing Director Ben Rosenbaum said that there remains a lack of liquidity in
the marketplace, and he doesn’t think potential buyers are waiting for interest
rates to come down. He said the uncertainty of being able to forecast with
confidence what NOI looks like creates lack of confidence in underwriting and stymies
dealmaking. He also said too many players are shifting to playing the credit
side or preferred equity because they can generate similar equity type returns
with a little bit more debt type risks and fill in the space where some of
these banks have shied away.