ATLANTA — Real estate titan Blackstone hasn’t acquired a hotel in the last two years. And it’s not for lack of conviction, said Scott Trebilco, senior managing director of Blackstone, during a panel session at the Hunter Hotel Investment Conference, here at the Marriott Marquis. It turns out, despite its reputation as a guzzler of real estate, even it isn’t immune to the disruption in capital markets illustrated most by higher interest rates that have increased the cost of capital.
The company, which famously acquired Hilton back in 2007 before winding out of its investment in 2018 with $14 billion in profit, has looked at hundreds of deals over the past couple of years, Trebilco said, but nothing panned out.
“The cost of capital is a challenge. The cost of debt has elevated and has constrained leverage,” he said. Companies like Blackstone typically take on high debt loads to pull deals off, but when debt becomes more expensive, it makes it harder for them to pull the trigger. He added that unlevered IRRs have increased.
Blackstone in recent years has shifted its dollars to assets outside hotels, including logistics, data warehouses and student housing. It’s a good bet, however, that Blackstone will pile back into hotels this year, evidenced by Trebilco’s statement that it could buy in the neighborhood of $5 billion worth of domestic hotels, though not stating if it would be by piecemeal or portfolios.
Why the change in course? “Things are shifting,” he said. “The cost of capital is coming down. Being patient has been a good thing.”
Transactions last year were flimsy both volume and dollar wise: According to JLL, global hotel transactions hit $50 billion in 2023, $23 billion less than in 2022. Expectations for 2024 are much better and part of it will be hotel owners’ being forced to sell, due to variables such as loan maturities, refinancing costs and the specter of property improvement plans that the brands now expect after years of deferment due to the pandemic.
“It’s starting to play out,” Trebilco said, adding that Blackstone itself has already invested some $2 billion in CapEx into its existing portfolio, including Hotel Del Coronado, which it acquired in 2011, and put $160 million into last year, and Grand Wailea, a Waldorf Astoria hotel, it paid more than $1 billion for in 2018.
Brand Bingo
Mit Shah, founder and CEO of Noble Investment Group, which has some $4 billion in hotel assets under management, mostly in the select-service and extended-stay segments, sees a wave of PIPs coming, or else. “Brands are trying to figure out how to get hotels renovated,” he said, noting that the CapEx spend that dropped 40% during the Great Financial Crisis, actually doubled in Covid. “Those dollars are going to be needed,” he said, and if they don’t come to the fore, expectations are for a parade of sales as bid/ask spreads narrow.
“A lot of owners later in their career are passing [assets] down or exiting the business altogether,” he said. “They have no more cycles left, so there will be an uptick in opportunities.”
In January, Noble closed on a $1-billion fund focused on value-added investments in select-service and extended-stay hotels across the U.S. Shah also said that the firm has been buying up tranches of CMBS debt.
Blackstone peer Brookfield has been waiting in the wings, too, said its managing partner of real estate, Shai Zelering. “It’s a good time to be patient,” he said. One of its most notable deals was its sale of a WoodSpring Suites portfolio to Blackstone and Starwood Capital, netting it $1.5 billion in profit. But that was in early 2022. Zelering said that Brookfield will be a net seller and net buyer in 2024, telling the audience that it would sell $1.5 billion of real estate and buy an equal amount “toward the end of the year.” He said now is the time to look out for deals as replacement costs trend up.
But Zelering is skeptical of the brands and their daring words around PIPs. He referred to it as a game of chicken: Who will blink first? “The reality is that brands are speaking from both sides of their mouth,” he said. “Rid those assets from the system if not PIPd?”
The reality is that the brands need the units and the pandemic’s hangover mixed with tougher credit markets have all but depleted some FF&E reserves, Zelering said, allowing that it could, like Shah and Trebilco said, spur deals. “There are transactions driven by the condition of the asset and debt levels,” he said.
An oftentimes perceived misalignment between brands and owners is often a thorny, if not unresolved issue. “We are focused on return on capital and brands aren’t,” Trebilco said. In today’s asset-light, franchised-focused approach, brands are interested in growing net unit growth—it’s how they are judged by shareholders and how they grow their share price. And it’s why there are so many new brands that flood the market. “Brands are more empowered today,” Trebilco said, pointing to the wide chasm between hotel C-corp stock prices and real estate investment trusts.
The relationship between brands and owners is one of necessity and of convenience. Lenders like hotels attached to a brand and it makes obtaining a loan easier. At the same time, owners need brands for their distribution systems and, moreover, their loyalty programs, where members number the millions and deliver guests at a lower cost of customer acquisition.
Zelering is blunt when it comes to loyalty programs, referring to them as credit cards and merely a way to rack up points, which, actually, dilutes the value of brands.
Hotel companies are now mutating into travel companies, argued Blackstone’s Trebilco, an opinion that some hotel companies might not push back on. Hilton’s partnership with AutoCamp, which Trebilco called a Bonvoy creation without the PIPs, and Marriott’s partnership with MGM Resorts count as examples. “It’s a travel ecosystem. Not a hotel business.”
Noble’s Shah views it similarly, but doesn’t see it necessarily as a bad thing. “They want to provide experiences for their guests on every step of the journey,” he said, alluding to The Ritz-Carlton Yacht Collection, which launched its first voyage two years ago, and is adding two more ships. Other hotel companies, including Four Seasons and Aman, have followed suit.
Shah called it a “metamorphosis,” invoking Blackstone’s President & COO Jon Gray, who “will say we are investing in the travel business.”
“Institutional and private equity are looking afield,” he said. “Human interaction is how we create joy. How does that live as we move forward?