Perseverance pays off, and hospitality specialists should not be too fazed by market cycles, Jon Gray, president and chief operating officer, Blackstone, told the NYU International Hospitality Industry Investment Conference in New York on Tuesday.
“Cyclical things happen in the world, but if you own a good business, you should just stick with it,” Gray said in conversation with Jonathan Tisch, executive chairman of Loews Hotels & Co. He added: “Often as investors we get obsessed over a difference of a few million when buying an asset but at the end of the day, it’s all about the right location. Having a global business that is asset light and focused on quality will pay off.”
Lessons in hospitality
Gray recounted how one of his earliest – and biggest – lessons in the hospitality industry had been Blackstone’s acquisition of Hilton on the eve of the global financial crisis (GFC).
Blackstone famously took Hilton Worldwide (then Hilton Hotels Corporation) private in an all-cash leveraged buyout deal worth $26 billion, of which $20.5 billion was debt, in July 2007. Just over a year later, the highly leveraged Lehman Brothers collapsed, dragging down Wall Street with it.
Said Gray: “In the 18 months after the deal, things went really badly. Earnings were down, RevPAR plummeted. By March 2009, we were massively overleveraged and had written the company down by 71 per cent. There was a terrible article in the WSJ about us losing our money. I said to Chris [Christopher J. Nassetta, Hilton CEO] that things can’t get worse than this.”
Gray was right. Blackstone ended up investing another $800 million in the company, pushed Hilton Garden Inn into Asia, Europe and the Middle East, and rationalised the business, moving it to North Virginia. He adds: “We ended up making money on our investment. We stuck with it, we had an amazing leader in Chris and a wonderful company. Our biggest error was probably selling our shares – we should have stuck with it.”
Travel megatrends
Looking to the health of the hospitality industry today, Gray added: “Lodging has a cyclicality. But global travel is a megatrend. A great neighbourhood with powerful long-term demand will be resilient.” Citing the impact of 911 and the GFC, Covid and subsequent geopolitical conflicts, even the rise of Airbnb, he noted that hospitality had recovered every time. “The underlying demand is very strong, trends are very strong. This business will continue to recover.”
On the subject of further geopolitical risks, and the wave of elections worldwide in the second half of the year, Gray added: “I’m an optimist. We have seen a couple of awful conflicts start in the last couple of years, but the aggressors haven’t seen an awful lot of rewards. People are recognising that conflict doesn’t pay dividends, and hopefully that means that tensions will come down and will not spiral.”
Looking at macroeconomic risks, he cited “large fiscal deficits” as an issue. “In this country, we have so many positives in terms of innovations, we just have to be mindful about how big these deficits could grow, with inflation forcing rates to grow at higher levels. Getting a bit more restraint fiscally would help our country be on a better footing.”
He concluded: “We have seen a tough pathway in recent years with inflation and the higher cost of capital. These things can look better in the future and that should be good for this industry.”
Prior to the conversation, Gray was awarded the inaugural Jonathan Tisch Active Citizenship Award for his charitable work.