H : How will improving performance fundamentals impact M & A ?
Hennessey : Hotels have high operating leverage . This underpins rapid recovery on the upturn ( as well as rapid deceleration on the downside ). Sensing a turnaround , investors want to “ get in early ” to maximize their claim on improved profitability . I think you ’ ll see the biggest and smartest investment groups at the forefront of buying activity this year and next .
Mahl : Fundamentals are expected to improve , especially over the summer when New York City reopens and the leisure demand returns , primarily focused around Times Square assets . Investors are looking forward to 2022 , creating the ability to transact on opportunities without the significant drag or burn that hotels have been experiencing since March 2022 . With increased lender allocations to hospitality coupled with the significant improvement in the debt markets , transaction activity can be expected to rebound beginning in the Q42021 .
H : How will current pipeline expectations impact M & A ?
Hennessey : It takes a good deal of time for capital to flow into new construction after a downturn , since development is typically the riskiest part of hotel investing . And pipeline growth usually begins with smaller , lower-priced hotels where the bets / risks are smaller . This suggests that there will be fewer opportunities at the high end of the market until confidence is fully restored . In terms of a pipeline for potential M & A transactions , we expect smaller hotel companies and brands looking to merge , particularly since unit growth is harder to achieve in a nascent recovery .
The Montage Healdsburg © Christian Horan
KC Patel : The current pipeline for deals in New York City and even nationally remains thin as sellers are focused on very targeted marketing rather than a robust process in the event that they don ’ t transact at their pricing . We do not foresee this changing in the near term , until we have a more clear picture on actual performance , likely following the summer months .
H : Any further comments on issues like bid-ask spread , etc .?
Michele Mahl : Investment activity continues to pick up nationally with the significant weight of capital pushing pricing beyond initial expectations . There is too much capital chasing too few deals , which has predominantly targeted states geared towards quicker re-openings . Now , as other regions of the country begin to relax restrictions , capital is shifting toward investments opportunities where discounts between pre-COVID and current values still remain wide , such as New York City .
Hennessey : Look at hotel equities : stock values have recovered nicely not because earnings are strong today but because of strong expectations of revenue and profit recovery as the economy turns the corner . This will embolden sellers to hold out for fulsome pricing . And while buyers may have hoped for discounted opportunities , there is such a tremendous amount of dry powder looking for investments that my bet is buyers will dive in without the inducement of significant discounts . In this regard , I think the recent deals for the Four Seasons at Disney World and the Montage Healdsburg are illustrative of buyers ’ intentions : jump in now because prices are likely to only accelerate for the foreseeable future .
Patel : Bid-ask spreads remain highly scattered on transactions , which vary based on multiple factors , including pre-COVID performance , asset vintage , “ market story ,” required going-in capital and speed to recovery .
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