Growth and Expansion in the Hotel and Lodging Industry with Christopher Jones from Telsey Advisory Group
Christopher Jones, the Managing Director and Senior Research Analyst, Gaming & Lodging for Telsey Advisory Group, joins iGlobal Forum as a moderator for the 3rd Global Hospitality and Lodging Investment Summit on November 20th. He led our panel session focusing on increased M&A activity, and brought his valuable insight from his experiences working for Telsey Advisory Group.
Q: Financing for full-service hotels in areas like LA and San Francisco is difficult to come by, but the recent emergence of new supply has made this possible. Will higher interest rates slow down new supply in these areas, or is demand so high that supply will accelerate?
A: Higher interest rates are a signal that the economy is improving, so an improving economy should keep demand growing and some supply following. The West coast as a whole continues to benefit from strong underlying demand. This strength could come from a strong tech sector or direct access from Asian markets. I think that LA and San Francisco have their own issues, with new development very challenging in San Francisco with or without low rates (seismic and community concerns), while LA will see pockets of continued growth such as downtown. That said, I think the sun has set on the full-service hotel in North America. I think there is fairly limited appetite for traditional full-service hotels outside the primary urban markets, given the success seen with more upscale limited service or “selective service” options, with three-a-day restaurants and multipurpose function rooms.
Q: Where will we see this supply growth?
A: Global gateway markets such as London, Paris, New York, Hong Kong and others will continue to see supply growth, as the demand is driven by multiple factors. Hotel operators desperate for a flag in these important markets, sovereigns looking for markets and investments with less principle risk and liquidity, and developers looking to bolster returns with mixed use developments are all going to lead expansion. Frontier markets will also see major expansion.
Q: Are high prices in areas like New York City limiting tourist expansion?
A: I don’t think so, as based on a walk down Fifth Avenue; there is no shortage of tourism. I think New York City’s terrible transportation infrastructure from its airports, waits at customs and immigration, and simply getting a visa to visit the United States are more of a deterrent to tourists than the price of hotels. Once in NYC, it’s incredibly tourist friendly.
Q: As hotel valuations increase, will REITs become net sellers rather than buyers?
A: If an opportunistic sale of a very well-priced asset allows the REIT an opportunity to move on assets more modestly prices in markets with opportunity to appreciate, then I think they are obligated to their shareholders to make such a transaction. So I see a shift from net buyer to something more in the middle. With perhaps one or two exceptions, I don’t see REIT’s making massive portfolio transactions, I think they will assess the offers that are made and trim/adjust the portfolio as they see fit.
Q: Will REITs change their strategy when access to capital becomes more expensive, or will they become larger issuers of equity to complete transactions?
A: I think that as the lodging cycle matures, there will be all sorts of adjustments. There is a crowd around primary urban markets today, as this has been the safer play. As the cycle matures, you will see REIT’s modestly shift their strategy to include strong/rebounding secondary markets, where they believe they can achieve acceptable returns, despite higher cost of capital. Whether a REIT uses debt or equity is really REIT specific, as they will look at their cost of debt vs. equity and decide. But as the overall cost of capital increases, you will see REIT’s adjust their strategy accordingly.
Christopher Jones has been a consumer sell-side analyst for 15 years, covering the Gaming & Lodging Sector for the last six of those years. He started his professional career in corporate finance within Saks Fifth Avenue, supporting the development of Sak’s Fifth Avenue stores and lease businesses. Chris then transitioned to Sell-Side research, starting at Lehman Brothers before advancing to Merrill Lynch, Oppenheimer and then TAG, where he started coverage of Gaming & Lodging in its darkest hour. Coming from outside the industry at this point was one of his best assets as he built his coverage, as Chris was not fixated on the old version of the process. This dynamic has continued to prove true as the cycle progressed, as this cycle has been so different to prior lodging cycles. Chris’ interest in real estate started at a young age, with a father whose favorite thing to do on vacation was to visit the local real estate window or listings and walk around looking at properties.
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Interview by Jennifer Wiegele of iGlobal Forum