SPOTLIGHT ON, Jonathan Falik, Founder & CEO, JF Capital Advisors

The luxury hotel sector in perspective, how inflation will influence market recovery and thoughts on a recession.

What is your view on the luxury hotel transactions market right now? How are investors viewing the sector?

Over the last two years and currently, luxury hotel transactions are getting valued on a per-key basis and less so in relation to any kind of in-place or near-term cash flow metrics. It is more of a per key valuation than a cap rate or EBITDA multiple. The transactions occurring tend to be in leisure-oriented markets and resort markets where there has been very strong ADR and quick rebound driven by the leisure transient customer.

It is worth noting that luxury hotel transactions get a lot of press and media attention and are often talked about, yet put into perspective, luxury hotels are a very small component of the market, as there are 451 luxury hotels out of almost 62,000 and on a rooms basis represents only 2.4% of available rooms nationwide.

Separately, the major issues impacting valuation and transactions right now apply to all hotel types and not just luxury. The issues impacting investor underwritten returns are a substantial increase of over 2.0% – 3.0% point increases in interest rates, the widening of credit spreads, and the resulting cost and availability of debt, fears of a national and global recession, and a meaningful economic slowdown driven by the federal reserve. All of these issues make it difficult to underwrite deals as a buyer or lender effectively.

Are independents gaining traction over branded properties? Why do you think we are seeing this?

Independent hotels in many markets are gaining traction over comparable branded hotels. Technology has leveled the playing field for independents. Digital marketing, combined with a wealth of information available to customers through online reviews via TripAdvisor, Google, and other sources, gives prospective customers a much greater sense of security than they might have when booking an independent. This does, however depend heavily on the strength, experience, and capabilities of the independent management company. Independent operators do not to market in a specific and targeted manner as they are competing directly against the major brand reservation systems and loyalty programs, which drive meaningful amounts of business.

Luxury independent hotels have also been more nimble and quicker to change during the pandemic than you would find with a more traditional brand such as Four Seasons, St Regis, or Ritz Carlton.

Jonathan Falik, Founder & CEO, JF Capital Advisors

How will inflation and supply chain issues influence market recovery? What are your thoughts on a possible recession?

Inflation is very problematic right now. This is not just from a customer perspective, but it is also extremely challenging for employees as their cost of living has escalated substantially. Supply chain issues are also creating a sense of uncertainty for both renovations and improvements, as also day-to-day operating issues. As an example, many weddings are booked a year or more in advance with a defined menu (may include Chilean Sea Bass and Filet Mignon) – but when the purveyors do not have the filet to deliver, or they do, but the pricing has increased 45% over the past year, that decimates the banqueting and catering margins and meaningfully harms customer satisfaction.

Based on the economic data I consume, we are likely already in a recession (which is only declared so after the fact). The federal reserve acted about a year late in raising rates and cooling the economy. Now the impact is being felt in a blunt way in the equity and debt markets and a resulting decimation in consumer confidence.

Are you working on any projects at the moment?

Most of the projects that I work on are complex, with many moving pieces, and the transaction timelines may stretch over anywhere from 4 months to 10 years. This includes capital raising, asset management, repositioning, and restructuring. While I can’t name most of the exciting projects due to confidentiality concerns, I have projects that I am actively working on covering 23 hotels and mixed-use projects. This includes repositioning and recapitalizations of luxury hotels in Miami Beach, New York City, Austin, Seattle, and several in Los Angeles, Colorado, and Jerusalem.