Do PE Managers Have Hospitality All Wrong?

The private equity strategy in U.S. hospitality of targeting distressed acquisitions fueled by CMBS maturities could be incorrect, says the former president and CEO of Strategic Hotels and Resorts, Laurence Geller

Privcap: Hotel investment has been trailing off after a blowout 2015. What’s happening?

Laurence Geller, Geller Capital Partners: In the U.S., REITs and public institutions have gone into a holding pattern. They are doing almost nothing. Private equity is wrongly looking for distress pricing rather than for rational pricing, thinking that there is a large amount of CMBS debt coming due and they are expecting monstrous defaults and buying opportunities.

But instead, there are plenty of rollovers going on. No one’s undergoing foreclosure in the prime lodging asset class. The private equity strategy is wrong. No one’s wiping out at deep discounts.

What should private equity be looking for, if not distress?

Geller: Private equity should be looking for willing buyers at prices that are not as frothy as they were a year ago. The economy is fairly strong, and banks don’t want to foreclose. They’d rather be working out problems. The lodging REITs are trading at a 9 percent or 10 percent cap, and they should be selling assets at a 7 percent or 8 percent cap rate and buying back stock.

Why are these players not recognizing that the market is stronger than they think it is?

Geller: It’s not a logical time, in part because there is volatility driven by the looming [U.S. presidential] election, and now by the Brexit. Everybody is saying, “Let’s take two aspirins and wait until that’s over.” But I don’t think the election outcome will matter as far as the economy is concerned.

Right now the hedge funds and private equity [managers] are looking for distress while the institutions are out of the market. So family offices and private equity funds are tailoring their opportunities to the money that is available.

What structure is that capital taking?

Geller: There’s no one answer to what deals should look like—each deal has to be bespoke [because] there’s so much money on the sidelines. However, if you have the reputation, the sponsorship, a belief in your program—[structure comes] down to the cost of money, and I don’t see any change to that.

What impact will Britain’s exit from the EU have globally?

Geller: As for the negative scenarios [regarding Brexit], I know all the arguments, but I haven’t seen them happen yet. I sat up all night watching the vote. I was stunned and heavy-hearted, but the next morning I phoned the chairman of JLL, and told him to find 10 properties to buy in London for my project creating Alzheimer and dementia care residences. My belief is that good things will happen from [Brexit].

Based on what?

Geller: Based on the quartiles that really define Europe. What are the Germans going to do—blow off their largest trading partner? And the U.S. needs the U.K. as well. Are all the financial institutions going to send their top executives to Frankfurt? London and Mayfair are going to figure out ways around the rules, and perhaps might send the back of house to Dublin.

So as you look to the opportunities in the U.S., what type of assets will you be targeting?

Geller: I’m going to aggressively look up and down the East Coast, focusing on major markets and big resorts. Resorts really appeal [to me] because of the demand for leisure blended with business. Returns aren’t going to look like a hockey stick these days. In the end, it’s not about cash flow but about cap rate—yours has to be 100 basis points better than the next guy’s.