As part of the Americas
Lodging Investment Summit’s Patron sponsorship program, ALIS organizers asked
Braemar’s Richard Stockton nine timely questions as we prepare for the 22nd
annual event January 23-25, 2023, at the JW Marriott/Ritz-Carlton Los Angeles
L.A. LIVE. Following are his responses.
inflation and the threat of a recession affected the U.S. hotel industry?
inflation has been a benefit to the industry, while the “threat of recession”
has had no discernable impact. Inflation impacts the lodging industry in terms
of both top line revenues and expenses. Our revenues have been driven to record
levels by record high average daily rates, which were up over 40% in the second
quarter compared to 2019. Meanwhile, even though expenses were higher as well,
overall Gross Operating Profit was up over 40%. In terms of the “threat of recession”
… economic cycles pull back into recession periodically and regularly. But each
recession is different and what is far more important is the cause of
the recession. A slight pullback in GDP, which is what we are now seeing, is accompanied
by low unemployment and record high ADR inflation
due to pent up demand and other emerging travel trends. This means that this
“threat of recession” has had no detrimental impact on the industry.
the biggest lesson you’ve learned during the last
2.5 years, and how will you apply it going forward?
prepared for the worst! We had a very conservative leverage strategy going into
the pandemic, but it was not one that anticipated a largely
government mandated shut down of 90% of our hotels and the resulting
release of 90% of our employees. As a result, we were forced to seek
forbearance from our lenders and raise common equity to build liquidity to get
through that difficult period. As a result, we are now targeting a much lower
absolute level of leverage, which we plan to maintain going forward. Pre-pandemic,
we utilized 45% Net Debt to Gross Assets, including Commercial Mortgage-Backed
Securities debt. Going forward, we will utilize 35% Net Debt to Gross Assets
and severely restrict our reliance on inflexible CMBS debt.
ALIS: How have guest expectations evolved over
the past year, and how do you expect them to change going forward?
expectations have increased and will continue to be very
high due to record high ADR's and increased leisure segment mix. Many of our resort hotels have high repeat
customers who recognize they are now paying more than they have in the past and
this comes with increased expectations. That said, we are positioned well for
this as our hotels are some of the absolute best in the world and are
accustomed to delivering exceptional service and exceeding guest expectations. Increasingly,
customers want more experiential activities and dining while on property. To
meet these needs, we are building out new amenities and services, including
adding kids’ pools and splash pads, Top Golf simulator suites, increased and
enhanced cabana offerings, expanded beach activities, and targeted restaurant
re-concepting, for example.
ALIS: How has Braemer Hotels & Resorts been
impacted by the labor crisis? Is there a way the industry can overcome that
issue any time soon?
certainly been impacted and are operating at about 90% of pre-pandemic staffing
levels. That said, we are fortunate in that we have not had to take any rooms
out of service because of this. We primarily feel it in our restaurants and
have had to flex hours based on available staffing.
said, the labor shortage has improved recently, and we've had more success in
hiring in late Q2/Q3 than last year. And while earlier this year our housekeeping
departments experienced hiring challenges, we were able to navigate this by utilizing
third party or contract labor to cover shifts where necessary.
forward, to overcome this problem, we need to be more flexible in our labor
models. Line level employees want flexibility in their schedules and to be paid
quickly. We have encouraged some of our larger brand partners to adopt daily
pay as well as tech partnerships to allow housekeepers to pick up shifts conveniently.
is your general outlook for the hotel REIT space in
2023, including consolidation, transaction pace and stock performance?
As an industry, transaction volumes are up compared
to last year and pre-pandemic levels. That said, the recent dislocation in the
hotel debt capital market has resulted in higher spreads and lower advance
rates, making it more challenging for leveraged buyers to transact. As a
result, we have seen a high proportion of properties offered by brokers getting
pulled from the market as seller’s expectations are not matched by buyer’s
stock prices have been slow to track the recovery in operating fundamentals,
resulting in chronic undervaluation. I would expect this to correct as investor
confidence builds in the recovery.
in the REIT sector is infrequent. That said, the few mergers that we have seen
over the last five years have been regarded as unsuccessful in generating
shareholder value. As a result, I don’t expect
there to be much activity.
Braemer be a net buyer or net seller in the coming 12 months? If acquisitions
are part of the plan, what type of assets is it looking
to add to its portfolio?
Braemar will be an acquiror. We don’t have any current plans to sell any assets and
like the positioning of our portfolio in the luxury segment, with equal
exposure to resort and urban properties. Our resorts are delivering all-time
high performance, while our urban properties are serving as our growth engine
as the recovery related to the return of the business transient and group
Looking forward, our investment focus is extremely specific: luxury hotels. They can
be either resort or urban properties, and we have recently been able to find
value in each. It all depends on the circumstances related to the seller. The
luxury segment has delivered the highest RevPAR growth of any chain-scale
segment for the last 30 years, which has informed our long-term investment
transactions trends will emerge for the hotel industry in general as we head
We see a lot less reliance on leveraged
acquisitions. This means that unleveraged balance sheet buyers, such as REITs, should have a comparative advantage relative to
private equity funds and others. Furthermore, unleveraged buyers don’t need to
have a financing contingency in their offers, providing far more certainty to
sellers in these uncertain times in the hotel debt capital markets.
a smaller buyer pool, this should also mean that you will see less
“opportunistic” sellers seeking the highest possible prices and more motivated
buyers that need to transact. This could lead to a higher success rate on deals
offered going forward and potentially more attractive pricing metrics for
ALIS: What’s the most underestimated challenge the hotel industry
faces, and why?
Recent increases in the cost of both insurance
and property taxes have certainly provided headwinds to Net Operating Income
growth. Opportunistic municipalities have continued to push up property taxes
to the detriment of hotel owners. In particular, the reassessment and growth of
property taxes is something that brokers and
sellers seem to ignore when offering assets to the market, resulting in
divergent views on values between buyers and sellers.
the cost of construction, which has recently inflated dramatically (viewed as
up over 20% in the past year), can also be overlooked. When estimating the
costs of upbranding, repositioning and conversion, this is an extremely crucial
factor to properly forecast.
ALIS: What’s the most underestimated opportunity for the hotel
industry, and why?
recent years, with the flexibility in work schedules and the advent of “revenge
travel” encouraged by government mandated stay at home orders, resorts have outperformed
considerably. They have become the “belle of the ball,” while their urban
brethren have seen a sluggish recovery tied to the rebuilding of the conference
and meeting calendar, including large citywide conventions. Our belief is that
urban centers will return to previous activity levels and these urban hotels
will ultimately outperform the resort segment. However,
transaction activity has been more focused on resorts than urban properties
(particularly in the luxury segment), which appears to
be driven by short term performance trends rather than long term value