Mit Shah on strategy, post-election scenarios

ATLANTA – Hotel
Investment Today talked to Mit Shah with a U.S presidential election some 60
days away and came way “enthusiastic.”

He referenced more manageable inflation, a Federal Reserve
Bank making decisions in the best interest of the U.S. economy and investment
bankers who are generally more excited about commercial real estate’s prospects.
So, I guess it’s no surprise Shah sees post-election upside for the hotel
industry.

Watch and listen to our interview with the founder and CEO to
learn more about Noble Investment’s overall business philosophy and current approach
to development, M&A and more.

Complete video transcript

Hi, I’m Jeff Weinstein, editor in chief of hotel investment
today, and this is On the Money.

I’m excited to have as my guest today, Mit Shah. He is the
founder and CEO of the Noble investment Group, an institutional real estate
investment manager, specializing in travel and hospitality sector based in
Atlanta.

Mit provides overall strategic guidance for the Noble
organization and heads its investment committee.

With a track record spanning 30-plus years, Noble has
invested in more than 175 hotels, equaling some $6 billion in assets. It has
funded seven investment vehicles and has some $3.3 billion in assets currently
under management.

Mit, thanks for being here today and welcome.

Mit Shah: Jeff. It’s always great to see you. Thank you for
inviting me.

Jeffrey Weinstein: Our pleasure. So, let’s jump in. Let’s
talk about your perspective, your strategy, your personal approach to
investing.

We all need to reset, refresh. We need to just take another
look at how we’re doing business. What’s your method for refreshing?

Shah: We’ve had a number of conversations over the years.
And I think what is has been very formative for me and for the organization is
really the journey over 30 years, and seeing what takes place relative to
consumer behavior and their want and desire to travel for experiences. I think
once we give people the ability to have mobility, they want to go and utilize
it.

Date back to where we’re all in the office on Saturdays and
Sundays because that’s the only place and only way we could actually go do
work. Then we all got a laptop, and we could be other places other than that. And
then the Blackberry came out and we were able to get instantaneous email, and
so forth, and so on. So, now just the fact that we, you and I, instead of being
face-to-face, which I enjoy so much, we can have a virtual conversation. It is
not new, but it’s normative and it allows us a flywheel.

So, I think part of what your question really addresses is
that this is a journey of learning and learning that people do want to have
these kinds of experiences, and mobility offers us the ability to have them.

The other thing that I would say is that we’re always paying
attention to a number of different external factors – none of which are really
in our control… Present day is no different. We’re in an election year, and
there’s a number of different external factors that could derail the strength
and the positivity of the economy, and obviously for travel.

Understanding when things go in a direction you’re not expecting what are the things that matter the most? So, quality real estate in markets that have growth momentum, I think, is fundamental to all real estate. But the best brand partnerships and hotels that can operate very efficiently when things do turn bad.

Mit Shah

But it’s oftentimes the things that you’re not really
thinking about that actually happened. So, in 1998, we weren’t thinking about
Russia defaulting on their bonds… In 2000, we did not think the market would
get impacted by all the new Internet dot coms that were taking place. And,
certainly, the tragedy of 911, Zika SARs, the great financial crisis, a global
pandemic.

So, what I’d say that what I think about as it relates to
our investment strategy that has really been developed – and I think a key to
our success over time beyond just the people that you surround yourself with –
is really understanding when things go in a direction you’re not expecting what
are the things that matter the most? So, quality real estate in markets that
have growth momentum, I think, is fundamental to all real estate. But the best
brand partnerships and hotels that can operate very efficiently when things do
turn bad.

So, I’ll go back to our portfolio. We had actually been very
fortunate being able to sell the majority of our portfolio in 2018-2019 before
the pandemic. But we still had a significant portfolio and never in the history
of how we budget every year do you say, ‘hey, what happens if RevPAR goes down
You beyond 5%, 10%, 15%, 20%’ because the impact of the GFC was about 20% at
peak to trough.

Well, you know, nowhere is that number 50, which is what
happened during the global pandemic. But what we learned going through all of
that is that we could actually keep our hotels open, all of them, the entire
portfolio, we kept open even during that period because we had the ability to
flex operationally in order to get that done. So, that was a learning piece.

The other learning piece that we’ve learned over time is
leverage. And, you know, when interest rates are 2% it’s pretty compelling to
put as much leverage as you possibly can on a hotel. Well, for the majority of
our organization, historic interest rates have been 5% to 6%. And I think long
term, if we look at that, it’s probably going to be… We’ll enter into a world
in the next 12 to 18 months, we believe where the cost of borrowing will be 6%.

Well, you know, if that’s the case and we’re buying 8 cap hotels
and we’re trying to work to make them 10 cap hotels, 6% leverage is pretty
good. But also having 6% finance is pretty good, but also having prudent
leverage – no more than like 60%, 65% at the most so when these kinds of things
happen, you’ve got the benefit of a yield-oriented business, an efficient
operation as well as prudent leverage.

Weinstein: There are
so many things that cause the market to evolve, that make certain asset classes
more in vogue than others. Talk about how Noble looks at the market right now
when it comes to asset classes. You’ve been really focused on a lot of full-service
hotels over the years. Is that still the case? Or do you have interest in
emerging asset classes or different asset classes based on where we are in the
cycle and how the market’s evolving?

Shah: I would say that actually over 90% of our investment
strategy over three decades has been limited-service hotels. The substantial
majority is in that for the same reasons that I mentioned to you – efficient operations.

You’re not dealing with multiple different kinds of revenue
streams. It’s a rooms-driven operation. I still believe that asset class
represents the great opportunity because of the innovation that has continued
to take place in those kinds of hotels. In many ways, they represent the best
quality product that would exist in a marketplace and something that consumers
desire.

But I think we’re all paying attention to what’s happening
in terms of how people want to travel, what they value in that travel
experience. And it’s no surprise that Marriott is now in the cruise business,
and they’re now in the apartment business through Apartments by Bonvoy and
obviously Ritz on cruise lines. It’s no surprise that Hilton is now in the
glamping business. And it’s also no surprise that Hyatt has really created a
strategy very bespoke. And if you think about just kind of how they think about
their loyalty members at the top end and the unique experiences.

I actually am very, very enthusiastic about the post-election cycle where we now have that in the rearview mirror and we can now go back to thinking about growth and the continued evolution of our economy, and what that can mean for all of us.

Mit Shah

I continue to pay attention to those because, ultimately,
these branded companies are all about finding the kinds of products and
experiences that drive the loyalty of their members. And it’s going to be a
different landscape if we think about five years from now, 10 years from now,
15 years from now than exist today. You’ll find these brands in the resort, residential
space. What do I mean? Not just condos on top of a Four Seasons, but residences,
second homes as a part of a hub of hospitality. And you know again, I just
mentioned multifamily and cruise, as well.

So, I believe that evolution is actually incredibly valuable
for our business because it’s an ecosystem going back to just innate desire of
people to travel, to consume experiences and to have the trust and ability of
where they go for those experiences, I think, is very valuable.

So, I think about the Noble platform in the organization,
and we continue to grow substantially our business and our platform in a number
of different verticals. I think that’s a very compelling way to think about
opportunity and scale as this business continues to evolve.

Weinstein: So, we have an election at hand. I’m curious. Considering
the two potential outcomes, what is the potential scenario for hotel values, M&A
and performance given either side being in the White House next year

Shah: You know, Jeff, I think that every time that there’s
an election – and it clearly is becoming each election cycle feels more
polarizing than the one before with sides that are really on different sides of
the spectrum. But I think what is incredibly valuable about our system and our
democracy is that, yes, we will elect a president. But there will also be a
Congress and a House and a Senate. That will regulate I think things that could
take us down paths that feel very, very uncomfortable for some.

And so, I don’t think about our election, and everybody kind
of has maybe a candidate, maybe they don’t. Maybe they’re a little bit more
agnostic. Maybe they’re tired of all this. But I do believe that whatever side
is elected, we will have the ability for checks and balances in which to occur.
I think the biggest part of all of this is clearly we’ve got to have a set of
global policies that work.

The world needs an 8% return… Now, of course, everybody wants as much as they possibly can without taking a whole lot of risk. That’s me personally, and the world as well. But you know there’s a magic to that 8%. And so, hotels being able to trade in that level against that cap rate should spur a significant amount of transaction opportunity.

Mit Shah

Clearly, there is going to be investment in infrastructure
in the United States controlling our supply chain. Ensuring the fact that we’ve
got positive immigration that’s valuable to our country, and of course I’m a
direct beneficiary of those laws and regulations that have taken place in
places. My parents immigrated to the United States. And so I do believe that
whatever the outcome is the innate desire of people to have mobility into
travel, the checks and balances that exist in our government, the spending that
will occur relative to infrastructure and growth within our borders, the
continued evolution of how we want to deal with tariffs and global policy – I think
those things are fundamental now… Taxation and a lot of different things. You
hear a lot of rhetoric around that. But those have been sound bites that we’ve
heard for a long time. I think, this year, if you just look at the public
markets and the hotel REIT stocks that the performance has not been as strong
as one would think, and especially against other real estate classes because I
think investors are thinking very short term.

I actually am very, very enthusiastic about the post-election
cycle where we now have that in the rearview mirror and we can now go back to
thinking about growth and the continued evolution of our economy, and what that
can mean for all of us. It does appear that inflation is now at a level that
feels more manageable. And certainly, the Fed will continue to make decisions I
think that they feel are in the best interest of our economy.

So, I think all of that could create significant momentum
going forward. I’ve talked to a number of investment banks just over the last
few weeks and there is a substantial amount of enthusiasm for commercial real
estate… and what the next 12 months and beyond could be for all of us.

Weinstein: So, one last question – kinda piggybacking on
what you just discussed. There’s been constant discussion about when the deal
spigot is finally going to start flowing. Given what the Fed is expected to do
over the next 6 to 12 months, your enthusiasm for the economy post-election –
what’s your prediction on deal making for next year?

Shah: Jeff, as you know, we’ve been quite active ourselves.
We bought 50 hotels, $2.5 billion of assets over the last two years. And, if
you just think about what interest rates could look like 18 months from now,
and all-in cost of borrowing for hotels circa 6% — again not just my
prognostication. If you look at the forward SOFER curve, and you kind of look
at where spreads could be at, that makes sense. So, if you’re selling hotels at
7.5 caps, you’re being able to manufacture a double-digit cash-on-cash return.
The world needs an 8% return… Now, of course, everybody wants as much as they
possibly can without taking a whole lot of risk. That’s me personally, and the
world as well. But you know there’s a magic to that 8%. And so, hotels being
able to trade in that level against that cap rate should spur a significant
amount of transaction opportunity.

And the reality of the debt markets are what they are, and
people have to make a decision. Do you refinance at a certain rate? Do you
renovate the hotels – put more money in? Or do you sell it at a cap rate off of
a pretty good earnings stream? And so, I believe that the forward 12 months
starting next year and into 2026 are going to be some very, very strong
transactional years.

Weinstein: Mit. It’s always great to listen, talk to you,
and get your perspective. It’s always so informative. I appreciate you being
here today, and I look forward to seeing you down the road somewhere soon.

Shah: Jeff, it’s always great to speak with you. Thank you.