Despite ongoing macroeconomic tailwinds and revpar in the industry decelerating, the next 6-12 months in hospitality are going to be “very active” for dealmakers, according to Joe Delli Santi, chief investment officer of vertically integrated hotel owner-operator MCR. “I think you have a debt market that is now fully cooperating,” he says. Santi notes that MCR has executed deals in recent times at debt costs “comparable to pre-Covid spread levels”. He adds: “You have so many debt funds that are willing to lend into any transaction, and you have a bid-ask spread that I would say is narrowing between buyers and sellers.”
Adds Mark Owens, vice chair capital markets at Colliers: “I think what we all forget, particularly post-Covid, in terms of the long-term historical average of interest rates, is that we are a bit wider today, but not that dramatically wider.” He adds that the relatively recent “zero rate” environment was “an exception… not the norm”. He notes that for transactions today, there are still opportunities to “engineer the capital stack to make it work or educate the market on what’s required to make it work”.
Sean Gormley, managing director at Morgan Stanley, also perceives “an environment of stability”. He notes: “Rates have certainly gapped out on an overall basis relative to 36 months ago, but on a historical basis it's attractive. I think there's an expectation that it's going to be at this level - maybe a little bit tighter - for a period of time.” All this makes waiting to strike less compelling, he suggests. Meanwhile, greater clarity from lenders and “in-place debt” is also improving the outlook.
Asset sales
James Francque, global head of transactions, Hyatt Hotels Corporation, shares that the last 12 months have been extremely active for Hyatt on the deals front, as part of the hotel group’s journey towards becoming “asset light”. “We’ve sold about $775 million worth of hotels in the last year,” he says. “One in Aruba, one in Zurich, and two in the US. I think with those sales we now view ourselves officially as asset light – that’s a journey we’ve been on.”
He adds: “We have now sold $4.5 billion worth of hotels over the last six years or so. Of the most recent deals, a variety of factors came into play to get those over the line.” Francque explains that while “patience and persistence” helped, the firm was also able to take advantage of “a different credit market in the Caribbean and in Europe to get relatively lower costs of debt relative to the US, which was really helpful”.
Adds Owens: “Flexibility and creativity are really important because things continually and constantly pivot. If you don’t have the thought and ability to maybe structure some mezzanine debt or come up with an alternative solution, its easy for someone to just throw up their hands and view everything as taking longer.” He also suggests that timing is still important when placing assets on the market, with waiting occasionally bearing fruit.
Time for action
Gormley underlines that once a deal is in play, however, there is no time to lose. “With the volatility and events going on in the market, anything you’re able to do to shorten times will increase the likelihood of closing.”
Adds Delli Santi: “What are we focused on? We want to make money – to maximise value for our LPs. And that might be selling an asset, refinancing an asset, renovating an asset, or just focusing on our core operations, which we are spending a tonne of time on.” He recounts how MCR is examining the hourly costs of housekeepers, for example, and how that eats into margins, and has moved to making its hotels cashless. He concludes: “We are looking across our portfolio and trying to make MCR the best operator it can be.”