Speaking at an International Hotel Investment Forum panel titled “The shape of things to come,” investors reiterated the clarion call for risk to be more shared and alignment close to perfect.

Brian Kaufman, managing director of real estate at investment firm Blackstone, said the crisis has led to stronger bonds and more touchpoints between investors and operators, notably around efficiencies and labor issues.

Cody Bradshaw, managing director and head of international hotels at Starwood Capital Group, said the pandemic has shown investors who the premier operators are.

“Are people bring these problems to you, or are they bringing these problems along with six or seven solutions?” he said, noting that labor shortage and wage pressures are the critical challenges, with “no curve in sight.”

Benjamin Habbel, CEO of Limestone Capital, said the right partnerships are everything, especially for companies that are more entrepreneurial in spirit.

“We look to partner in the areas we are not so good at, but we’ve become more nimble. We also need to be totally integrated,” he said, adding the firm recently bought its first Spanish asset, the 51-room Aethos Mallorca, formerly the Mar y Pins.

“There always is conflict potential if it is not your capital, so we start with our own,” he said.

Kaufman said investment is becoming more proactive than ever, especially at both ends of the industry — budget and luxury.

“No one had this experience [the pandemic], whether it was the Great Financial Crisis, the dot.com bubble bursting, 9/11. It’s about liquidity and cash. In the U.S., we have shifted to the proactive, to best position our assets to perform better when we come out of the pandemic,” he said.

Dominic Seyrling, director of investments at Archer Hotel Capital B.V., said his firm is interested in long-term capital but it has now spent more time in the pandemic than out of it.

“Our focus is on creating value up and above where assets were positioned pre-pandemic. This comes from an ongoing rethinking of our strategy, improving our operating capabilities, showing returns to shareholders and obtaining the highest guest scores," he said.

“We came into the sector with open eyes. What we are now doing is doubling down on our hotels, as there are few new assets coming onto the market.”

Flexibility and pivoting on strategy are all fine, but patience and discipline remain key, panelists said.

“You do not want to do deals just to get cash out. Now is not the time to play hero,” Bradshaw said, adding that Starwood Capital and Blackstone are 50/50 partners in ownership of Extended Stay America following a $6 billion deal that closed in June.

“There could still be corrections to monetary policy and lending rates, and in two years we might not be talking as we are now, and you have to get your exits right," he said.

“Demand-supply fundamentals were deteriorating before the pandemic, so pre-COVID it was an excellent time to leave,” he added.

Bradshaw said he and his colleagues currently are busier on the credit side.

“It is overly heated on the equity side. The only way the math works to get the returns of 2019 is on the back end," he said.

“We’re going to buy several leased hotels this year with a separate bucket of capital. We're on the lookout for good real estate with good angles but not overstretching ourselves. There is a lot of capital, so you do not have to play it with just equity,” he added.

Opportunities in a Crisis

Will Duffey, head of hotels and hospitality for Europe, Middle East and Africa at business advisory JLL, said pricing has stayed firm, which has led to investors concentrating on niche products where value can be added.

Kaufman said Blackstone is paying a lot of attention on the independent hotel space.

“We look for boutique hotels that many institutional players see as just too small and distress that goes beyond traditional reasoning, such as family and generational issues. Push the family to find solutions. We, too, are very entrepreneurial, and across four investments over the last 18 years, in all of them something was broken. That is absorbed into the price,” he said.

Investors are also considering sustainability, including whether an asset or firm has its green credentials and operation strategies in place.

“That’s a big focus for us. If there is no consideration of this, that’s a big red flag,” Seyrling said.

Kaufman said such aspects must not be regarded as savings but as investment opportunities.

“We take this super-seriously and implement best practices. If there are none in place at the buy, we’re less inclined to buy,” he said.

“This is part of the upside story,” Bradshaw added.

Distress has not been a major factor in transactions, due to government-backed initiatives, bank policies and owners being unwilling to drop asset prices, panelists said. Habbel, however, said distress has been a factor in family-owned hotels of between 50 and 100 rooms.

“This is not a leveraged crisis, as was seen after the Great Financial Crisis, but a liquidity one. Family businesses have lost two summer seasons now,” Bradshaw said.

“It also is not about [return on investment], but about profitability, and that requires a longer hold period. We’re not thinking about selling, rather to leverage and extend loans. We have time to be profitable.”

Habbel added “banks are not calling in loans, but they will not make new ones.”

Bradshaw said although it takes several years for assets to trade in some markets, in the U.S. it is far more draconian.

“In the U.S., you default on your loan, then boom. It is a machine,” he said.

By Terence Baker