Summit Hotel Properties CEO Dan Hansen provides some insight into the real estate investment trust’s capital acquisition and recycling strategy.
AUSTIN, Texas—While everyone in the U.S. hotel industry continues to prognosticate the coming downturn, there are still deals to be made, and Summit Hotel Properties is looking for them.
In mid-June, the publicly traded real estate investment trust closed on its acquisition of the 181-room Courtyard by Marriott Charlotte City Center for $56.3 million.
Summit executives recognized Charlotte, North Carolina,* as a good diversified market with a strong blend of business and leisure demand, said Chairman, President and CEO Dan Hansen. It only took time to find the right asset in the market, at the price that made sense for the company, he said.
“We were very deliberate in what we’re trying to find,” he said. “We thought it would be a great value-add for the portfolio.”
The company also recently announced it closed on the purchase of a five-hotel portfolio from Xenia Hotels & Resorts for $163 million, coming to about $201,000 a key. The buy comprised the 203-room Courtyard Fort Worth Downtown/Blackstone; the 123-room Courtyard Kansas City Country Club Plaza; the 182-room Courtyard Pittsburgh Downtown; the 116-room Hampton Inn & Suites Baltimore Inner Harbor; and the 188-room Residence Inn Baltimore Downtown/Inner Harbor.
Hansen said he and the other executives like branded upscale hotels in what they deem “markets that matter”—those with multiple demand generators with a strong mix of business and leisure travelers.
The Xenia Hotels purchase included excellent locations, he said, and the historic buildings will allow the company to be more creative in the renovation process. Each one will have its own capital needs, he said, with the Fort Worth property probably requiring the largest amount of work.
Every time Summit purchases a hotel, he said, it typically goes above and beyond what the typical ownership renovation would be, while still meeting brand requirements. For example, that could mean a different lobby experience or a refinement of the food and beverage offering, he said.
“With these locations, I think they can compete well with full-service and even boutique hotels,” he said.
Summit had been in the process of selling off 26 properties over the past few years. On 2 June, it sold the 90-room Courtyard El Paso Airport hotel in El Paso, Texas, for $11.2 million, completing its strategic recycling of capital.
“The large amount of capital recycling we’ve done over the past couple of years, from a size and scale standpoint, is larger than we would typically go through,” Hansen said.
The capital recycling created the opportunity to shift to markets executives felt had strong growth profiles that better aligned with the company’s longer-term strategic objectives, he said. He doesn’t expect to see that magnitude of capital recycling again in the near future, he said.
As of the closing on the Xenia five-hotel portfolio, Summit has a portfolio of 81 properties comprising 11,608 guestrooms in 24 states.
One of Summit’s core beliefs is diversification, Hansen said. The company limits the earnings before interest, taxes, depreciation and amortization of its portfolio to no more than 10% in any market, he said, and no more than 5% in any one asset.
“Diversification is a big part of our philosophy and then also having a conservative balance sheet with a maturity ladder,” he said, adding that should allow the company to weather a downturn or demand shock even while it’s growing.
In the near future, Hansen said he expects Summit to be a net buyer, but it shouldn’t come as a surprise to see the company sell a few assets over time.
“We definitely would be deliberate in how we acquire and dispose of assets,” he said. “Capital recycling is a big part of our strategy. Where there are opportunities for growth, we’re certainly interested.”
When considering properties for acquisition, he said, the company is market agnostic. Historically, it’s been a bottom-up-focused underwriter, he said. In general, the company doesn’t pay a lot of initial attention to individual markets, he said, as it has more of an asset-based focus.
The company is mostly focused on properties under Marriott International, Hilton, Hyatt Hotels Corporation and InterContinental Hotels Group flags, he said. They are the brands company executives feel are the most committed to the “upscale institutional quality in the hotel space,” he said. Within those brands, he said, the company is agnostic and looks to create the greatest amount of return.
Though Summit focuses on branded properties, Hansen said he wouldn’t say never to an independent asset. The company owns a few full-service properties and upper upscale hotels with 300 rooms or fewer, he said, with limited meeting space and an efficient F&B operating model.
“We’re always open to opportunities,” he said. “We want to make sure we’re true to our core beliefs and expertise, which is operating efficient, high-value upscale operating models with good growth potential.”
The company is selective about new developments, Hansen said, and any would likely be a one-off opportunity. It has participated in joint ventures and mezzanine loans in the past that allowed opportunities for new and freshly converted properties, he said.
Thoughts on the industry
Consolidation has been a popular topic discussed every year at every conference he’s attended, Hansen said.
“I’ve said before that when all is said and done, more is always said than done,” he said.
Though he wouldn’t be surprised if there were one or two more consolidations, he said, he thinks ultimately there will be more lodging REITs than there are today. New REITs can come from a variety of sources, he said, such as spinoffs and, in other sectors, private equity taking portfolios to market.
“Quite frankly, there are some owners that continue to amass size and scale that see the strong valuations and great long-term value for the liquidity the public markets provide,” he said.
At this point in the cycle, Hansen said he hasn’t seen the green shoots that would give him confidence that revenue per available room is accelerating. The market continues to be challenging, he said, and there are few markets that don’t have some level of supply affecting them while demand remains “a bit stubborn.”
“We think well-located, high-quality assets can weather the storm of new supply, and we continue to position our portfolio as such,” he said.
*Correction, 28 June 2017: A previous version of this story listed the wrong state as the location of the city of Charlotte.