The Great Pandemic Hotel Deals That Never Showed Up for Investors

What would typically be a normal downturn in the economy sparks an investor feeding frenzy among those waiting to pounce on deals in industries facing tough times.

But nothing about the ongoing global pandemic is normal.

We’re barely halfway through hotel earnings season, and major companies like Hilton and Marriott all report losing hundreds of millions of dollars last year. Some are closer to billion-dollar losses than they are to breaking even.

With the ingredients all there for disruption, transactions, and dealmaking, we decided to launch a weekly briefing to give you the full story. A real estate sale often has greater implications. A brand acquisition can point to where the future of the entire hotel industry is heading. A developer’s television soundbite can send an entire industry scrambling to follow trends.

Join us every Monday, as you are now, for the Early Check-in. We’ll have a rundown of deals, transactions, and developments you should be following and how they will impact the travel industry and those who count on it. Now onto the news:

The Hotel Deals Already Flew the Coop

The CEOs of some of the world’s largest hotel companies are now adding to the emerging school of thought that the best days for finding a pandemic bargain on a hotel asset are behind us.

Hyatt took a $30 million loss when it sold the Hyatt Regency Baku in Azerbaijan last quarter for $11 million. While there were other hotel sales in the second and third quarter across the industry that were 20 to 30 percent below their pre-pandemic values, those kind of deals are “quickly evaporating,” Hyatt CEO Mark Hoplamazian said last week on an investor call.

While the hotel industry is years away from a full financial recovery from coronavirus, executives like what they see for the months ahead. Vaccine distribution continues to accelerate, and Hoplamazian even thinks group business and event travel may come back much faster than previously imagined.

But hotel owners don’t seem to care and are instead basing their own property values around what the industry will look like on its comeback.

“From where I sit, I’ll be surprised if there is a high volume of [sales] activity, because buyer and seller pricing expectations are still out of alignment,” said Tony Capuano — Marriott’s group president of global development, design, and operations services — on last week’s fourth quarter investor call. “And I think there may be some distress circumstances where transactions occur. But I do think that gap is significant.”

Never Say Never: Don’t completely rule out downturn bargains from the hotel sector. Investment groups like Bainbridge DXS and CGI Merchant Group are still scouring the market with hundreds of millions of dollars for hotel acquisitions in coming years.

“There will be some distressed deals out there,” said Richard Clarke, a senior analyst covering global leisure and hotels at Bernstein. “After 2009 [and the financial crisis] there was four years of churn of hotels closing and changing hands. We’re only 12 months in. It’s too early to say we’re in a state where there aren’t opportunities.”

Optimism Doesn’t Pay the Bills

An upbeat outlook on the hotel industry’s recovery is one thing, but it doesn’t help a hotel owner keep the lights on. However, multiple rounds of stimulus coupled with lender flexibility does.

Many hotel owners have tapped into forgivable, federally backed small business loans through the roughly $953 billion Paycheck Protection Program. The latest relief measure, passed in December, enabled businesses to take out a second loan.

As many as half the owners in Choice Hotels’ portfolio are expected to tap into a second PPP loan, the company’s CEO, Patrick Pacious, said last week.

A Cash-Packed Life Raft: The investors flush with cash waiting to pour into the hospitality space even seem to signal they aren’t expecting a massive wave of property transfers. Instead, they want to work with experienced, albeit struggling, hotel owners.

Commercial real estate financial firm ACORE Capital announced a $1 billion hotel rescue capital fund last week aimed at providing existing hotel owners the liquidity necessary to stay in control of their property.

“We are here to say, ‘We like the rebound characteristics of your asset. We want to provide you with the recovery capital to get you to the other side,” Warren de Haan, managing partner at ACORE, told Bloomberg.

Hotel owners considering one of these deals just need to remember the tale almost as old as time, or at least as old as banking: There’s no such thing as a free lunch … and certainly not a free rescue package.

The ‘Grave Dancer’ Sees Hotel Comeback

Billionaire investor Sam Zell, known as the “grave dancer” for his tendency to profit from distressed real estate, says the pandemic isn’t the end of the hotel industry. In an appearance late last month for the Harold E. Eisenberg Foundation, the Equity Group Investments founder doubled down on what hotel executives want to hear.

“I think we’re going to go back to conventions, back to people creating relationships,” Zell said, according to a report in the real estate publication Connect Chicago. “I don’t see that changing, though it will restart slowly. There’s also a huge buildup of tourism demand. People have been locked up for almost a year now.”

People tend to listen to Zell’s opinions, which many times are right. His $39 billion sale of an office portfolio in 2007 just before the Great Recession remains a tale of legendary timing in commercial real estate circles.

Don’t Sugarcoat It: Hotel analysts should also remember Zell is known for a few whoppers when it comes to investments, too.

His play for the media industry ended with the Tribune Co. in bankruptcy after a disastrous move to take the company, owner of the Chicago Tribune, private in 2007. Zell then poured $300 million into an Argentinian real estate deal in 2018 while expecting the country to once again become a stable place to do business.

That idea appears to have dimmed when the country voted out Mauricio Macri, the leader Zell viewed as a stabilizing force, the following year.

Bigger Not Always Better

Don’t count out the little guy. The Curator Hotel & Resorts Collection, a federation of independent hotels, added last week 11 new properties to its portfolio.

“We couldn’t be more pleased,” said Pebblebrook Hotel Trust CEO Jon Bortz, whose lodging trust along with six U.S.-based hotel operators launched Curator last fall. “It’s beyond what we’ve expected so far.”

The incoming 11 hotels, owned by Portland-based hotel developer and Curator founding member Provenance, are concentrated in the Pacific Northwest as well as Nashville, New Orleans, and Palm Springs. Bortz indicated Curator is in talks with other groups on adding roughly 100 additional hotels in coming months.

Conversion activity was up 30 percent last year at Hilton, company leaders said last week on an earnings call. Most in the hotel industry expect the trend to continue at all companies during a time when lenders aren’t as willing to sign off on new construction.

Membership agreements are on a 12-month basis, and Bortz reiterated, without giving specifics, Curator’s fees are much smaller than a hotel company’s franchise fees. Traditional branded agreements are usually multi-year contracts and take percentages of revenues seen at each franchise.

“It’s a whole different comparison,” Bortz said of the comparison between Curator and bigger brands. “Do you want to survive? Do you want to remain independent, or do you want to lock yourself into this other arrangement?”

Hotel Cleaning Enforcement Heading to the Stock Market

It’s increasingly easier to answer the question what isn’t going public via a special purpose acquisition company, or SPAC. Now it’s time for a company that may end up producing the Michelin Guide equivalent for hotel cleanliness.

Digital health company Sharecare, which counts Oprah Winfrey as an early investor, and Falcon Capital Acquisition Corp. announced earlier this month plans for a merger that values the combined company at nearly $4 billion.

“What’s missing between what hotel companies say they’re doing and what’s actually being done is that single point of verification — a system that goes into each hotel and interacts with the management team and asks all the right questions and asks them to confirm that, indeed, everything is in place,” Hermann Elger — president of travel, hospitality, and entertainment at Sharecare — told Skift late last year when the company began to push into the hotel sector.