Executives at real estate investment trusts explained during recent earnings calls their plans for reinvesting and selling off hotels in their portfolios.
REPORT FROM THE U.S.—As the hotel industry cycle appears to be nearing its end, executives at real estate investment trusts are evaluating how they are managing their portfolios.
During recent fourth-quarter and full-year 2019 earnings calls, REIT executives shared with analysts their plans for reinvesting capital into their current properties and selling off those that no longer meet their needs.
Jon Bortz, chairman, president and CEO, Pebblebrook Hotel Trust
“As you're aware, we recently announced a contract to sell the InterContinental Buckhead and Sofitel Washington D.C. for $331 million.
“The buyer of the two hotels have significant hard money down and assuming the sale closes, we will have sold 15 hotels for a total of $1.664 billion at a combined (net operating income) cap rate of 5.6% and a combined (earnings before interest, taxes, depreciation and amortization) multiple of 15.3 times 2018 operating numbers, all since we closed on our corporate acquisition at the end of November 2018.
“Our sales metrics are clean and do not add in required capital by the buyers even though most of the properties sold need very significant capital. Of these sales, two are from the Pebblebrook legacy portfolio and 13 are from the acquired portfolio. The NOI cap rate on the $1.426 billion of acquired properties sold or being sold equals 5.4% and the EBITDA multiple equals 15.8 times.
“As a reminder, we acquired the entire company with all corporate and property transaction costs at 5.9% NOI cap rate. Our sales of these less desirable properties have certainly been accretive to value. Our total disposition target for 2020 is $375 million including the two properties currently under contract.”
Raymond Martz, EVP and CFO, Pebblebrook Hotel Trust
“Shifting now to our capital reinvestment programs. During 2019, we invested $162.8 million in our portfolio completing major renovations at several hotels including W Boston, Mondrian Los Angeles, Sofitel Philadelphia and Skamania Lodge. For 2020, we anticipate investing an additional $165 million to $185 million to slightly higher than last year and it includes eight major redevelopments.”
James Risoleo, president and CEO, Host Hotels & Resorts
“In addition to the Marriott (International) transformational capital program, we are also implementing multiple value-enhancing (return-on-investment) projects across the portfolio. We categorize these as product development, operational projects and energy efficiency or sustainability projects. Product developments include developing a 165-key AC by Marriott on excess surface parking at The Westin Kierland in Scottsdale and adding 19 new two-bedroom luxury villas at the Andaz Maui. Operational projects include adding meeting space at the Orlando World Center, converting underutilized lobby space into grab-and-go marketplaces, repositioning (food-and-beverage) office and adding keys at several properties. Additionally, we have multiple energy efficiency projects which are an important part of our industry-leading corporate responsibility program and include major systems overhauls, LED retrofit and solar panels, among others. …
“To conclude with capital allocation, let me briefly review our execution over the last two years within the context of our long-term strategic vision for Host. Since 2018, we sold $3.3 billion of relatively lower quality and lower total (revenue-per-available-room) assets in our portfolio. We have invested $1.6 billion into iconic assets with 2019 total RevPAR with more than double that of the assets we sold. All four of our acquisitions are in excellent condition, with limited near-term capital needs. We achieved higher blended cap rates and EBITDA multiples on our acquisitions than on our dispositions and have thereby minimized dilution to earnings while significantly upgrading the quality of our portfolio. In addition, we have bought nearly $610 million of stock since mid-2019, amounting to nearly 5% of our weighted average share outstanding.”
Leslie Hale, president and CEO, RLJ Lodging Trust
“Following the strong execution of our 2018 disposition program, we do not expect to sell any hotels this year. As we enter 2020, a strong balance sheet and a carefully prune portfolio, we are focused on redeploying capital to activate catalysts. This year, we are focused on five key areas: first, maximizing our operational performance in the current lodging environment; second, executing ROI initiatives; third, finalizing the plan for the Wyndham conversion programming; fourth, redeeming the FelCor (Lodging Trust) bonds, which have a 6% coupon; and finally, remaining active with our share repurchase program.”
“We are well-positioned to execute on these initiatives, given our in-house expertise and significant capacity. We have already made progress on a number of these priorities. In terms of our ROI initiatives, throughout this year, we anticipate investing up to $50 million among a number of projects, including space reconfiguration, brand conversions and operational opportunities. We are pursuing several space reconfiguration projects, such as the conversion of underutilized meeting space to new rooms in Emeryville, which is currently underway. And also the addition of new rooms in Atlanta and San Jose.”
“As it relates to the Wyndham repositioning, we remain excited by the high-quality rebranding opportunities available and are currently in active negotiations with multiple brands. We are prioritizing the repositioning of the Wyndham Santa Monica and The Mills House in Charleston, which we expect to complete by mid-2021.
“Additionally, we anticipate repositioning two more Wyndham properties by the end of next year. We will provide updates throughout the year as we make progress. In early June, we put in the call, a $475 million FelCor balance. We will optimize the arbitrage between the coupon and current interest rates, which will generate significant interest expense savings and simplify our balance sheet. Finally, we continue to view share repurchases as a highly accretive tool to return capital to our investors. Year-to-date, we repurchased approximately $24.5 million of shares. For the full year, we expect share repurchases at levels similar to 2019, subject to market conditions.”
John Murray, president and CEO, Service Properties Trust
“So far, we’ve gotten portfolio bids, multiple portfolio bids, I should say, on each of the subsegments. And a number of the bids have offered hard money deposits upfront because of a number of bids where we’re very close to one another. We went back for second round offers and all of the bidders stuck with the deals. And as of just last night, we’re seeing bids increase, and we’re seeing portfolio bids on everything that we were calling for offers on. And it’s a private equity—smaller private equity shops, high-net-worth individuals, some bidders from the Asian American Hotel Owners Association, just a mix of buyers.”
Tom Baltimore, Jr., president and CEO, Park Hotels & Resorts
“We remain focused on recycling capital for the goal of continuing to improve the quality of the portfolio. We recently announced the sale to Hilton San Paolo for total proceeds of $118 million and a gross multiple of 14.9 times, completing our exits from international markets after having disposed of 14 non-U.S. hotels in just three years, an impressive accomplishment. We're also closing the sale of Park Embassy Suites DC for $90 million or 14.8 times forward EBITDA. Both sales are part of our broader program to sell approximately $550 million of non-core hotels to reduce leverage styling our acquisition of Chesapeake. With these latest transactions, we have nearly reached our goal with $470 million sold following Chesapeake acquisition. Looking ahead, we expect to remain active sellers with another $250 million to $350 million of potential future sales by year end 2020.”
Douglas Kessler, president and CEO, Ashford Hospitality Trust
“I think we've been extremely skilled in selling what we sold and going about it the way we've done it. We've sold over $400 million of assets. We've sold assets that were priced at much better multiples, much higher multiples collectively than where our portfolio trades, which I think highlights the intrinsic value of our assets that we contain still in our portfolio. These were assets that we sold also that were at materially lower RevPAR overall than our portfolio. So that benefits us by elevating the RevPAR of our remaining portfolio, but also shows that the trading prices of some of these perceived lower-quality assets should indicate the value that we have with our remaining assets that are, perhaps, better located, more strategic, higher REVPAR. And we also sold assets that required some more CapEx that we really didn't think we might get a return on.
“There are a lot of reasons why we decided to sell those assets. But in making that decision, we also evaluate a lot of things. What is the impact on EBITDA? The ability to improve our balance sheet through the reduction of debt or additional pay downs related to specific asset sales. Obviously, taking into account market considerations and the future CapEx spend on those assets, and then what we would use the capital for redeployment. Given our current share price, the acquisition forecast is absent finding external third-party capital to help us grow accretively and to improve our balance sheet. It's pretty challenging in the market right now given the price that we're trading at. And so we're not inclined, as I said in the prepared remarks, to be anything other than very prudent with looking at acquisitions. There is a market for assets today. We think we've got high-quality assets. We think the sales that we've demonstrated point to the demand for the assets that we have in our portfolio.”