Focus on topline; don’t expect too much distress selling: ALIS strategists

LOS ANGELES — The year gone by was a tough one for hotel real estate, but it didn’t seem to stop the brand and development leaders, as well as the lender on stage on the first day of ALIS from explaining how they grew their portfolios, controlled what they could control, and positioned themselves for success in 2024.

During the session entitled “Boardroom Outlook: Strategy” moderated by Hodges Ward Elliott's Daniel Peek, G6 Hospitality CEO Julie Arrowsmith, Margaritaville CEO John Cohlan, Access Point Financial President and CEO Michael Lipson and Rockbridge CEO and Co-Founder Jim Merkel talked about how they expect 2024 to bring more visibility about financing if the Federal Reserve follows through on expectations to start lowering interest rates in the second half of the year. They all expect operating performance to hold up and the operators said they will focus more on top line revenue at a time when implementing more cost controls have been more or less been exhausted.

Merkel said while 2023 was perhaps the most challenging he can remember in terms of transacting on both the buy and sell sides, what he recognized most was to control things within his grasp. “We are focusing on managing hotels with the best people at the properties to drive performance,” he said. “Invest in your asset performance and strategy teams as there is only so much margin you can manage. You must drive top lines in this environment and that is our biggest focus.”

Invest in your asset performance and strategy teams as there is only so much margin you can manage. You must drive top lines in this environment and that is our biggest focus.

Jim Merkel

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Merkel optimistically added that good times for dealmaking can’t be too far in the offing as the only way forward now seems to be up. He said owners will manage through with loan extensions with terms that will allow them to wait out The Fed. “Rates will come down, forward visibility will become clearer and as a result more deals will get done,” he said. “I’m optimistic that 2024 will be better than 2023 from a real estate perspective.”

At the moment, however, Merkel said deal distress is based on a lack of conviction to close. “Distress is in people’s pockets,” he said. “That will change as large capital sources say they will be more active in the coming year. With rates coming down and money on sidelines, I expect a bit more distress will soon lead to a lot more transaction activity.”

G6’s Arrowsmith echoed some of Merkel’s topline performance comments and expects a better performance year for the group’s portfolio as she sees more positive RevPAR trends.  “Network growth will continue, as well, and it will become easier on owners with lower interest rates coming,” Arrowsmith added.

Arrowsmith also said she has spent a lot of time visit properties, hearing about franchisee challenges and trying to better understand guest need to drive top line revenue. “Labor is starting to turn around a bit and owners are finding that incentives can be the best step to  keep the best staff at hotels. You pay a little more but it can help,” she added.

Arrowsmith said G6 opened 100 hotels and signed 100 hotels in 2023 with 60% of the signings coming on the extended-stay side of the ledger. Finding the right markets for expansion is the key, according to Arrowsmith, who added G6 relied a lot on technology to better understand evolving demographics and demand drivers and identify where the true opportunities lie. She added that already strong markets for G6 a bit surprisingly have some of the best growth opportunities.

Cohlan said Margaritaville drives the topline by catering to guests who like to spend on experiences, which is the brand’s sweet spot. He added that F&B experience continues to be a strength as they help operators deliver the brand DNA. “Blocking and tackling on the delivery side is a key for us,” he said.

Cohlan added that 60% of Margaritaville’s business is new build with the cost of debt delaying some projects – but not in a material way, he said. They are also developing more hybrids with, for example, vacation ownership units mixed with transient.

Loan maturities are coming up but lenders are smart enough to allow for extensions. They will extend more often as long as properties perform well... I don’t expect a lot of 50-cents-on-the-dollar deals are coming.

Michael Lipson

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Access Point Financial’s Lipson lent a different perspective to the panel, suggesting 2024 will be a better year for the economy and hotels as consumers still want to travel, albeit downshifting a bit in their accommodation choices.

He also said there is a tremendous amount of capital on the sidelines with the challenge remaining matching what the borrowers want with the capital provider’s requirements. “The two sides are still in discovery about in that regard,” Lipson said.

He later said there is a difference between “distressed” and “depressed” assets and believes there is not going to be as much distress as some suggest. “Loan maturities are coming up but lenders are smart enough to allow for extensions,” Lipson said. “They will extend more often as long as properties perform well... I don’t expect a lot of 50-cents-on-the-dollar deals are coming.”

Lipson also warned not to expect spreads on hotel loans to dramatically tighten when The Fed starts reducing rates because they didn’t widen dramatically during the recent rate increases. That said, he also believes ongoing strong industry performance will see more lenders enter the market.

Lipson also chided the industry a bit suggesting operators better be careful about consumer satisfaction dipping even further due to tired properties.