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This is Bloomberg business Week inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Our Bloomberg opinion columnist Andrea Felstede. She put out a column today. She said that after three years of rushing to book trips in the wake of the pandemic era restrictions sharply higher fares, protests against tourism, fatigue from endless hour spent in airports, and income squeeze by inflation, tim are all taking their toll.
Okay, So let's check in with Kevin Jacobs about this. He's the president and CFO over at Hilton Worldwide. Holding's home to twenty three brands, including Hilton Hotels and Resorts, Waldorf Astoria, Hampton, DoubleTree, Embassy Suites, and new brands like Spark by Hilton and Lift Smart Studios by Hilton.
Kevin is in New York City. Kevin, great to have you here here on Bloomberg Business Week. So, as I mentioned, our Bloomberg opinion columnist, writing, she says travel demand is far from falling off a cliff, but there are signs that our wanderlust is downshifting from never ending to a more normal pattern. What are you seeing, you guys see a lot firsthand and welcome.
Yeah, first of all, Carol, Tim, thanks for having me on. We're not really seeing that. I mean, I think leisure travel has been normalizing off of kind of the boom that it had during COVID. But we're still seeing growing demand for travel, and in fact, most people expect the
summer travel season to be quite strong. And you know, business travel is coming back and group actually is leading the way, which wasn't the case during COVID, But you now have a lot of pent up demand for meetings and events that is fueling growth in our business as well. So we're still seeing trends. You know, certainly same store sales growth is not going to be what it was last year, but it's still going to be quite strong for this year going forward.
So where are you seeing the best growth, the biggest growth, Which portion of the of the hotel properties or which brands are seeing the best growth?
Well, if you think, I mean really all of the brands are seeing the best growth. The higher segments are growing better than the really lower segments at the moment, and our same store sales outlook as two to four percent for the year, and we think the US will be sort of at the lower end of that range, and everywhere else outside of the US will kind of
be at the higher end of that range. So international growth is still a bit stronger than the US but still growing, you know, reasonably well, like kind of low single digit same store sales growth, but.
You're seeing sort of the same growth. Whether we're talking sort of the budget lower end brands in the portfolio versus the high end brands in the portfolio.
Well, in our portfolio, we don't have a lot of budget.
We have a premium economy brand that you mentioned called Spark, and we're really not as distributed at the really low segments, which you know, they've been a little bit weaker, but that's a lot of that has to do with more difficult comparables to last year because they were quite strong, and there's a little bit of an effect of that consumer sort of feel slowing down a little bit, but mostly across our growth is pretty consistent across the segments that we operate, so.
Any signs of softness, you know, we kicked off this hour talking with our international Economics and Policy correspondent Michael McKee. There's a lot of economic data, including labor data, of course, throughout this week. But last week we saw, you know, some points of showing some softness when it comes to consumer spending here in the US. Any signs of softness or folks trading down at all.
We're not seeing trade down, and we're not really again, other than the really low end of the business, which is a little bit lower than where we operate, we're really not seeing the consumer pull back. The consumer still feels really solid.
All right.
We know you guys have a ton of properties, about seventy five hundred properties, including time shares. I think that was at the end of last year. I think when I was checking some of the data points, you own a small amount, you manage a bunch. The bulk, though, is franchise ease. What's top of mind for your French cheese.
They're not French cheese. That's like a grilled cheese. SWaCH.
Franchisee owners, I'm a little hungry, what are their stress points? And again, does the growth kind of mirror or the upside mirror what you are telling us that you've already kind of shared with us.
Yeah, I mean, like you said, you know, upwards of eighty percent of our hotels now, our franchises are you know, we manage a bunch of hotels and our ownership segment is quite small, but you know, their outlook is quite good. Our you know, our construction starts, you know, so new development. First of all, we think we're going to open will open nearly two hotels per day this year, right, so our prospects for growth are quite strong. Most of our
franchisees are seeing the same thing we're seeing. The prospects for development are quite good. Our construction starts, so new hotels going under development was up forty five percent in the first quarter. We think that will continue to be up this year. And we actually we think we'll start more rooms under construction this year than we did pre pandemic. So I think, you know, look it it's not equal everywhere. And you know, our franchises are looking at prospects for
revenue growth. They're thinking about their cost profile, right because with this great inflation that has fueled the revenue and our you know, there's cost inflation, so we're working with them to think about how to drive incrementals cost savings in the hotels. But generally speaking, our owners and franchises are quite fullish as well.
We want to talk a bit more about the cost equation, but I want to go back to that, you know, two new hotels every day. You guys had come out with some news today about expanding your lifestyle portfolio, doubling it to seven hundred hotels within the next four years. How come how and where? Like, where are you doubling? Where are you opening two new hotels every day?
Well, it's really across the globe and so yeah, we put out a press release this morning about our growth and lifestyle. We're celebrating our tenth anniversary in the lifestyle space. Fifty percent of the luxury the lifestyle segment broadly has grown fifty percent over the last five years, and it's been double the addition the additional hotel count and lifestyle hotels has been double out of the broader industry. So these are very popular type brands. We've been in the
space for a while. We recently acquired the Graduate brand and we entered into a joint venture with another group to bring the Nomad brand, which is a luxury lifestyle brand, into our portfolio. So we now have six great lifestyle brands. And yeah, we we think we can go from what we have three hundred and fifty lifestyle hotels today, we think we'll have seven hundred within the next four years and the growth will really be around the world.
So, Kevin, how do you make sure that the new properties that you add, as you mentioned two new hotels per day around the world, how do you make sure that the franchisees are geographically protected from competing with Hilton and other owners of Hilton when they're out there.
Well, yeah, I mean we're pretty careful. Look where the interests are aligned, right, one hundred nearly virtually one hundred percent of the capital for our growth comes from other from hotel and people investing in hotels, either building new hotels or buying hotels and affiliating with them in our brands. And we're invested in their success because if they're successful, then they will choose us for their next deals and
that that obviously enhances our growth rate. And so the way you do it is you're you know you're just very careful. We work with each on each and every new hotel deal. We work with our partners to find the right locations for the right brands, and we want and need each of our hotels to be successful. So it's sort of it's pretty self regulating. Interests are aligned, and none of us want to put a hotel, you know, on top of another hotel where they're going to compete
too much. And the reality is is we it's up to us to keep growing our customer base, having our brands be strong and driving that premium performance so that our owners make more money when they invest with us. And if they make more money when they invest with us, then they'll choose us for our next deals for their next deals, excuse me, which which enhances our growth rate?
Hey, Kevin, our Bloomberg intelligence team of analysts noting that you guys cleared your debt maturity schedule before twenty twenty five, the majority now do in twenty twenty eight and beyond cushioning it against sector headwind So it sounds like it really gives you, guys, really some you know, freedom to move around no matter what might happen in the economic environment. At least for a couple of years.
Is that fair?
Yeah, I think we remained. We're all we've always been focused on financial flexibility. So it's not just the ultimate quantum of our debt or the cost of our debt, which of course we care about a lot, but we're
always looking for opportunities to push maturity. We have one small maturity in twenty twenty five, and then and then we don't have maturities for a while, and that served us well in COVID, you know, and COVID when our revenues went to new year zero, we didn't need to abend our credit facility because we didn't have any near term maturities. We didn't breach any covenants, and so we've always been really focused on financial flexibilities. One of our one of the core tenants of our capitol.
All right, ten seconds, what's the hottest place? Where's everybody going? Real quickly?
Everywhere?
Everywhere?
Oh yeah, everywhere?
All right, all right, all right, Kevin favorite children, Kevin Jacobs, thanks so much, President CFO at Hilton Worldwide Holdings Holdings. Excuse me, you're.
Listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons. From two to five pm Eastern Listen on Apple car Play and then Brout Auto with a Bloomberg Business app, or watch us live on you Tube.
Just a bit of news in the world of commercial real estate in recent days. Common, once the largest co living company in North America, files for bankruptcy and it's going to liquid date after it was squeezed by overhead costs and rising interest rates. Also in other news, Rockefeller Center Plaza here in New York. It's what's known as a privately owned public space. It's set to get a fifty million dollar makeover.
Carol.
These are just a couple of the headlines from the world of commercial real estate in recent days.
There's a lot going on. You know, all of our listeners and viewers certainly know we like to talk about it. Let's get more on the space warrend To Han is CEO of a Core Capital. It is one of the biggest non bank commercial real estate lenders in the United States. The firm has offices in New York, LA, Miami, San Francisco, and Dallas. They've got about twenty billion dollars in assets under management. We're joining us here in studio in our interactive broker studio.
Welcome, welcome, Thank you very much, nice to be here.
It's great to have you here. We do like the real estate space.
I hate when we say how's it going, because it's obviously there's a lot of verticals to it in different areas. But look at the space, tell us how things are going, where's their strength, where there's weakness.
Look, I mean there's a lot of headlines around the negativity in commercial real estate today, and a lot of that really driven by this rapid increase in interest rates. I mean, really when lasted we see interest rates rise this rapidly, and commercial real estate is an interst rate sensitive investment, so by virtue of that, one would conclude
that there's going to be some issues. But the part that I think a lot of people are glossing over is the fact that fundamentals for commercial real estate are actually quite solid. And when I talk about fundamentals, just think about it in the context of what drives demand for a commercial real estate product, whether it's a hotel, whether it's an apartment building, whether it's an industrial complex, whether it's self storage, and the list.
Can go on.
What are those demand generators? And when we look at it and This is one of the reasons why I think this is in my career, twenty eight yr career, the most compelling time to be in commercial real estate, whether that coming in through the credit side like Acre does, or investing in this new vintage of equity. It's really that the fundamentals remain incredibly strong.
So demand is there for.
The products, but the fundamentals aren't strong across different sectors of commercial real estate. I mean, we talk a lot about different classes of office buildings, for example, and what we hear over and over again from folks is, okay, well, demand is strong when it comes to Class A buildings, but at the lower end you're not seeing demand for those.
I mean, that's true, but let's go up one level. So what drives demand the consumer? Okay, So the consumer, particularly the higher income owners, continue to spend, and they could spend a lot.
Take hotels as an example.
If you take a look at the high end sector of hotels, the average daily rates is higher than it was in twenty nineteen by a big margin, and continues to grow.
We just talked about it with the CFO of Hilton. Yeah.
Absolutely so, yeah, and they're seeing it.
They're also seeing expansion in the groups, meaning that the shrinking and the commercial risk state office sector is resulting in more folks wanting to go off.
Sites to do group outings.
So we've seen hospitality perform well, so the help of the consumer, right particularly higher end consumer. Secondly, corporate spending is rapid, and thirdly is government spending. In the United States, we have tremendous amount of stimulus going on through these various acts, whether it's the Infrastructure Act, the Chips Act, or otherwise driving trillions of dollars back into the economy. And all of this does is it drives the demand for commercial real estate product one way or another.
Okay, big picture, I get it right. That sounds like a long term perspective. But what's the state of play between real estate right now and banks? And I'm curious if there's still some leeway to extend and kind of wait for lower rates to happen, because you know, as you say, real estate very sensitive to higher rates, and so for some folks in a low rate environment in the real estate spase, no problem higher rates, or if they've got to rethink those loans or rework those loans,
that's a whole different story. And that's when you get into either problems defaults in some difficult situations.
You're absolutely correct, and this is the story and the focus now. Clearly, at the beginning of the year, there was a lot of optimism as the FED was pivoting effectively signaling that they were going to pivot. Resulted in a lot more transaction volume and a buildup of investment sales and optimism buyers wanting to come in and sell ers wanting to transact. With a reversal in that sort of behavior, things have slowed down, at least on the transaction volume side.
But coming back to the bank.
Issue, this is the big issue, and this is the secular change in behavior that we see in the capital markets. So the regional banks made up seventy five percent of all commercial estate learns in the banking sector. It's just simply math, is what I tell our investors too. The bank's cost of borrowing is significantly higher than what it was historically, whether it's through deposits or whether it's through
borrowing through the FED window or otherwise. And their assets, a lot of them are longer term assets at lower yield rates, resulting in margin compression for the banks. They have other issues to balance sheet, to relate issues. My belief is that we're going to see a lot more pain in that sector. You're also seeing an increased regulatory oversight of the regional banks. So them and the banks
are overweight commercial real estate loans. So what's happening to them is their ability to deploy new capital today is highly highly limited.
Now think about it, get it off their balance sheet.
Yeah, that's so, there we go.
So the question that I get asked a lot is, so, what is the investment opportunity in commercial real estate credit and how do.
You access it?
Think about it as four waves that are going to crest at a different point in time. There's half a trillion dollars of equity raised to invest in commercial real estates sitting on the sideline looking to invest. Secondly, you've got two and a half trillion dollars of debt coming due in the next four and a half years that needs to get refinanced. Thirdly, you have the banks to your point, sitting on a bloated ballanced sheets of commercial
real estate. Those loans, with the FED keeping rates where they are, and they of capitals staying hi, they're going to need to offload some of these assets.
So that's the third wave.
And the fourth wave is that not many people are talking about. Is with interest rates being as high as there are, there's not a lot of free cash flow available to invest in the commercial real estate properties. So from a debt perspective, the banks are going to pull back. The private lenders are going to step into the void and provide the capital for the commercial real estate sector.
But at the end of the day, your investors want to return, and in a higher interest rate environment, that might require a bit of patience. So I'm wondering about the patients that you guys have with real estate owners who borrowed perhaps a few years ago. Are you preparing for foreclosures as rates go up? Are you working with these borrowers? What's going on?
Yeah, it's a fantastic question. Every lender is doing their invest to work with a borrowers. Now, keep in mind, this wasn't a situation where borrowers were behaving badly. It's not even an oversupply issue for the most part. There's some oversupply in this sectors, but that isn't really the driver. It was simply that you had good borrows. You made a good loan, but when a rate cap expires and the interest rate goes from three to eight, they can't afford. There's no free cash flows.
So how patient are you?
Well, look, we try to be as patient as possible. Most of our capital is actually long term capital. Those that are those lenders are going to have bigger issues are those that have leverage short term leverage obligations on warehouse lines and otherwise, and they're going to be less patient with borrows.
So we're what's your long term So give me an idea of what long term is. They're taking five years, ten you We're like, what is it?
Oh for our capital, Yeah, it's long term capital. It's way more than five years. So we can on some assets we're taking back.
You can write it.
We'll write it through, you know. And we have a very large asset management team. So we're very focused on getting out in front of the issues, working with borrows and then trying to get to.
The other side.
But will there be foreclosures and where will they be?
There's going to be foreclosures that they're starting already now. Clearly we talked about office quickly. That is the eight underd pound Gorilla that is a secular change in demand driven by COVID. No one was expecting that. But you take a mid office building that is a B quality, a building that was no good to.
Go in the first place.
Yeah, that building is going to be riddled with problems. And there are a lot of those buildings in cities like New York, Chicago, Los Angeles and other places that are clearly having problems already. There's not it's very difficult. There's no real simple solution there. There's adaptive reuse. You can turn them into apartment buildings. That's tough, exactly, not easy, right, and and there's a bit of hope there. But there are things that Lenda's are going to take back that
there's no real reuse. But it's I would say, it's really isolated to office.
Is it just some office where there's going to be foreclosures? Is there other parts of the commercial real estate market where you where there might be some foreclosures?
And forgive us, we.
Said no, no, you're exactly So what's going to drive it? So we talked about fundamentals besides office. Right then you nailed it to im, talking specifically about the high end office buildings doing really well, well and out performing. But what are we facing today is an interesting thing. This isn't really a structural problem with commercial real estate. In other words, it's not necessarily an oversupply issue. It's not
really an over leverage issue. It's really a capital structure problem where rates ran up so quickly and people have been caught. No one was expecting to pay eight percent interest and buying it a three or four cap or a five cap would imply that you kind.
Of borrow it eight correct, you got to come back.
I feel like we could do.
You know, we love talking real estate.
We do love talking. Hopefully you come back.
I'm happy to come back.
We would love it.
Warnd de Hahn. He's chief executive officer of a corps. I think I said it incorrectly to begin with. But joining us here in our Bloomberg Interactive Broker studio.
Mark a journal, how about you let me drive?
No, no, no, honey, please, I'll do the riding.
I want to try.
It's a good question. This is the drive to the globe, well yelling on Bloomberg Radio.
Can you believe it?
Carol?
It's that time?
Which part it's that time?
I know?
Time flies when you're having fun time.
But flies when you are having fun.
You've got a big week.
I have a big week and jumping on a plane tomorrow.
But I'll be here tomorrow leaving me and my show.
Going to Nashville.
Baby, our show got a new song. I'm going to take it to the open old opry.
You're basically there for twenty four hours. When you're coming back to Yes, it might be the same plane when you come back.
You have done that before, you have done that.
Someday, Tim and I are going to write a story about our less than twenty four hours in Vegas because it was crazy.
Don't go to Vegas for that, Don't fly that far for such a short time. That's what I'll say. Hey, interesting market moves today.
Also, yeah, some volatility is Abigail was talking about coming back into the market.
And also you know, just some crazy trades.
It wasn't just the meme stocks, but also we're still trying to figure out what happened with some names like Chipotle, Berkshire, Abbot Labs.
It's a wacky Monday.
Yeah, And commodities under pressure, the price of oil tumbling following OPEC plus unexpectedly rolling out a plan to restore some production to the market this year. What does it all mean? Let's get to Adrian Yamaki, founder and financial advisor at Strategic Wealth Capital, based in San Francisco. The firm really is a specialty in high net worth individuals portfolio assets above five million dollars. Adrian joins us from the Bay Area.
How are you, I mean good?
How are you guys doing good?
It's good to have you back with us. I know you were back on with you were on with us just a few months ago. I'm wondering about the questions that you're getting right now. It's something that we've been asking a lot of our markets guests as we've seen the markets move over the last six weeks or so. What are the questions that you're getting from your clients right now?
Most of the questions, as you can imagine, are about what's going on with the election. And it's one of the most emotional elections that I can remember, especially from the standpoint of there are a lot of legal implications, social economic implications, and it's something that clients because it's a I mean, we look at the polls every week, having what you look at, but it looks fairly close. And the platforms, the economic platforms there each campaigning on,
are so different. Clients are quite honestly, really nervous economically and also from a very standpoint of what does this mean for legal decision making around I mean, you can imagine a lot of the socioeconomic topics that are being discussed. So that's definitely the first number one.
Well, so having said that, if someone says, listen, Adrian, you know we I'm wondering, do I need to start adjusting my portfolio because of what we think might potentially happen, you know, come November, or maybe I just want to play it safe and whatever or the outcome. I'm just somewhere where I can ride it out for a little bit until we kind of see how the desk settles.
I don't know, what do you tell them?
That is such a such a good question, because that's exactly that's twinny, That's exactly the sentiment that people have are having, which is essentially what does a sideline look like? The election cycles so fraught, We're tired about hearing about convictions and potential convictions and trade and what it means. Can we just sit out and wait and see what happens.
Really good question, parket in a two year and get like almost five percent?
Right, like, way, okay, why not? I'll say why not? And I'm not giving financial advice here, but the track record for timing the market just in general for normal people has not been good. I mean, I'd be hard pressed to find any person who manages money saying, you know, you should ever try to time the market. The whole idea is time in the market, not time the market.
No, one hundred percent, exactly tim That's exactly right, very well said. And it's funny because I think intellectually often clients know this, but they feel like anything anytime something is unknown. I mean, that's what effectively plays out in risk.
That's what risk is.
People want to be to separate from it. So in this case they separate from I think of the stock market and to some extent the debt markets. But just like Carl said, can you just sit on the sidelines? The thing is, in reality, there is no sideline, There is no completely neutral We're buffered from everything. The closest would be, say, putting it in a short term treasury bill, and treasuries are still yielding a lot the problem with thinking,
so that's its own deliberate decisions. So instead of saying sideline, we say, why don't we just sell what we have and put it in cash. And of course, just like Tim is saying you can't time anything, the danger of doing that, it's correct that if it's in cash, the upside is what the maturity of the treasury or the CD is. The problem is, if we look historically at what has happened after elections, it has very little, especially the first twelve months, it has very little bearing whether
it's Democrat or Republican and the specific candidate. It has very little bearing, in fact, so little as to not be something to make large financial decisions on, such as use at allocation, very little to do with how the
market performs. So if we look at, for example, the last two elections, there's fascinating research that shows deep red, deep blue parts of the country how they record their sentiment and what they plan to do for spending, career decisions, home buying, and if we look at the actual data underlying the decisions in those communities, they're completely at odds with what people feel they want they there, how optimistic they feel about the country, based on the candidate who won.
So we can say, if this party wins, I'm going to do this. I just I want to go to Canada. I want to I'm going to stop spending, but the actual spending and consumer behavior doesn't change.
Well, like if you have to buy a house, you have to buy a car, you have to do this, like you're just going to do it right, no matter what. Having said that, all right, and I guess the one thing I would argue is that maybe I'm not talking about timing the market, but capital preservation is an investment strategy as well. So holding on to your principle, even if it's for a little bit, can be an important strategy so that you don't lose some ground.
All right.
So elections having little bearing maybe at least the first twelve months or so when it comes to maybe the investment arena, FED policy though, can certainly impact things.
Got a FED meeting next week?
How are you thinking about that in the packed it might have on someone's portfolio right now? And just got about a minute left.
YEP, I think that's the right question. So last year the deficit was about one point seven trillion, so over six percent of GDP so this is one hundred percent. I'm glad you asked that. This is what I would focus on, which is whether or not the next So it takes a long path from candidate campaign promises to who's elected and then to what happens in Congress. So the thing that we're all thinking of is are the text cuts drawn back? Tax cuts going to be extended?
If they're not extended. In a sunset in a year and a half, six out of the top seven brackets go up. The long term trend and the macro trend is that taxes are going to have to be higher, whether it's the next president, the next term, in the future. The deficit, it's what it is, and it's eight and
unstoppable force. Of course, that's going to drive everything longer term, and that is the biggest For my clients who are fortunate and lucky enough to have saved, taxes are going to be the biggest issue, and I focus in then agree year and a half on what can you do to save on the taxes.
I think it's Carol, I think it makes sense. I think the political will to raise taxes, though, is really tough to find.
Not a good one.
That's for sure, Adrian, Thank you so much. Adrian Imaki, founder and financial advisor at Strategic Wealth Capital, joining us right now from San Francisco.
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