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IHIF 2020 Speaker Interview: Cody Bradshaw, Managing Director and Head of International Hotels at Starwood Capital Group

During IHIF 2019, Starwood Capital Group received The Hospitality Asset Managers’ Association (HAMA) Europe Asset Management Award in both the main category as well as the re-position strategy for their creation of The Principal Hotel Company. As we launch the equivalent awards process for IHIF 2020 and encourage submissions, we talked to Cody Bradshaw, Managing Director and Head of International Hotels at Starwood Capital Group about the vital role of asset management as a business function and the benefits to be gained from engaging in effective asset management.

1. What was been the predominant mood in hotel investment during 2019?

2019 was the first year since the 2016 Brexit referendum where the European hotel industry experienced a noticeable slowdown in overall transaction activity, primarily due to the political uncertainty in the UK. That said, structured deals involving leases showed no sign of slowing down and became a much greater percentage of overall transactions.

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The most active Propco purchasers, including publicly listed companies, pension funds and sovereign wealth capital, continued to pursue the relatively attractive yields and perceived stability from fixed or hybrid hotel leases in a world where the global stock of debt with sub-zero yields still remains at circa $7 trillion.

Meanwhile, many private equity investors turned their attention to other asset classes and/or regions in light of new supply, declining RevPAR’s and falling yields across many European markets.

2. What do you think are the top three trends that will define 2020?

New supply will continue to dominate the headlines as the low interest rate environment fuelled large levels of new supply growth in some markets, much of which is still set to open in 2020 and 2021. The majority of this supply was financed through structured deals for more passive investors driven by relative yield spread versus traditional real estate IRR’s. When coupled with significant operating cost inflation, this new supply is likely to lead to further deteriorating of fundamentals in a number of urban markets, particularly across Germany and the UK.

The resurgence of North Africa and Turkey as formidable holiday destinations (and corresponding pricing pressures across Spain and Portugal) will continue with consumers drawn once again to the region’s increasingly safe and highly affordable resorts. This trend is thanks in large part to the major wholesalers who are financially motivated to facilitate this shift in international arrivals as they will likely benefit from more profitable air/hotel package offerings given the region’s over-reliance on tour operators for year-round business and market recovery.

A continued decline in transaction volumes due to a shift in ownership profiles resulting from the on-going, sizeable shift away from early-to-mid cycle opportunistic/distressed investing with associated shorter hold periods towards a transaction market dominated by institutional investors seeking mid-single digit yields over much longer hold periods.

3. Sadly we don’t have a crystal ball, but we do have market research, data and some intelligent thinking that leads us to believe we are approaching the end on the cycle, increasing M&A activity is to be expected and the boundaries of hospitality asset classes are blurring. With all that in mind, can you explain the value and importance of asset effective management?

Occasionally you can get lucky on an acquisition at an incredible investment basis which provides a solid foundation for strong returns no matter how you perform during your hold period, but for every other deal it’s the asset management which makes or breaks your returns and ultimately defines your firm’s track record and long-term success.

In addition, the tailwinds that the sector enjoyed over the last few years led to “a rising tide lifts all boats” scenario, but as market fundamentals begin to fluctuate across a number of urban and resort destinations, we are now entering a period where effective asset management will separate the winners from the losers.

4. If you could change one thing about the hospitality industry, what would it be?

I wish the major brand companies were not under so much pressure to pursue asset-light strategies. It essentially disconnects them from the “other half” of our business, which is the real estate and investment side of things. Without a material stake in the physical real estate or bottom-line performance, the brands have less levers to pull to drive “same to store sales” and then ultimately shareholder returns. As they are predominantly public companies, this inherently makes them overly reliant on network expansion as a means for justifying higher EBITDA multiples to drive share price growth. This in turn creates a perverse incentive to create more brands and introduce more supply into their existing markets, often to the detriment of existing hotels, owners and ultimately our guests. Eventually there is a limit to how much more new supply can be introduced into their top growth markets, namely the U.S. and China, particularly if the financing markets dry up and construction costs continue to rise which seems to be happening at this point in the cycle. Thus, it will be fascinating to watch how this all plays out over the coming decade.

5. Finally, with the exponential advancements in digital connectivity, why is there still an importance to gather together, face to face, at conferences and events?

I remember thinking as a young analyst 20 years ago that I might need to consider another profession as video conference technology would likely kill business travel. I now realise nothing can replace the human connection of face-to-face meetings. At major conferences like Berlin, often all it takes is one or two new valuable introductions or meetings to make the trip worthwhile. Berlin is great in that it brings together over 2,500 industry leaders under one roof, which gives you countless opportunities to leave with valuable new connections that can transform your business. It’s a no brainer for us to attend every year.

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The HAMA Europe Asset Management Achievement Award recognises the best in class hotel project which has led the way in terms of providing innovative solutions and maximising the return on investment as well as growing the asset value on a particular asset located in Europe over a time period of the last 3 years. Submissions for the 2020 Awards are now open and must be received by noon GMT Friday 7th February, 2020. For further information on the HAMA Awards and the nomination form and process, please click here. The awards are co-presented by HAMA Europe and Questex Hospitality Group.

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