Excerpt from CoStar
Interest rate increases, the higher cost of debt and possibilities of a recession are factoring in to the overall hotel investment landscape, but the industry’s continuing strong performance metrics have investors confident in a more normalized playing field in the near future.
Hotel investors on a panel covering economic trends at the NYU International Hospitality Industry Investment Conference all said the U.S. economy isn’t necessarily behaving in typical ways right now, but the factors driving hotel demand are making up for interest rate and inflation woes.
The May announcement that private equity investor Brookfield Asset Management would acquire non-traded real estate investment trust Watermark Lodging Trust’s 25-hotel portfolio for $3.8 billion all cash represented “a good read-through of the market and how investors are thinking about the world today,” said Michael Bluhm, managing director and global head of gaming and lodging for Morgan Stanley Investment Banking, which is exclusive financial adviser to Watermark on the deal.
Despite yield curve shifts as interest rates rose during the process, Bluhm said the real takeaway from the deal was “that you realize investors are really buying into growth,” he said. “They believe [revenue per available room] is going to keep going up.”
Leveling Out
Investors today are seeing that the Federal Reserve “will keep pushing on rates and the financing of hotels will continue to be expensive. I think the expectation is that this will come down and rates will normalize,” Bluhm said.
While private capital is abundant if not expensive — Ashford Hospitality Trust president and CEO Rob Hays said “everybody and their mother raised a $5 billion real estate fund in the last couple of years” — lodging REITs still are trading below net asset value and are looking closer at alternative capital, Hays said.
“What’s interesting is that typically when the Fed raises rate, you see that while rates go up, spreads typically come down, and that’s not happening right now,” Hays said. “So even though you’re seeing volatility associated with the geopolitical environment and inflation … you’re just ebbing and flowing as best you can. It will come down eventually over the next few months.”
Proskauer senior partner and panel moderator Jeffrey Horwitz tossed out the idea that current conditions call for “a separation of the financial economy and the so-called real economy — how you do business and finance the companies you have, versus people’s willingness to travel and spend money and go to your hotels.”
Tom Morey, executive vice president and chief investment officer for Park Hotels & Resorts, agreed, pointing to pretty strong corporate and consumer health, with good corporate profit margins and low unemployment.
Michael Lipson, CEO and chairman of the board of Access Point Financial, reminded the audience that “the cultural anthropology side of the business,” or the strong affinity Americans feel toward travel, keeps the recovery strong despite economic shifts, which may not be that bad anyway.
“There’s still plenty of capital out there,” he said. “It’s still pretty cheap money. It was free money, and now you have to pay for it, but that’s OK. ... My view has been that there’s no better place to be in a recession than hospitality because it’s going to improve every day as the market gets better and you reprice every day.”
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