Execs outline changes in asset strategies during Q3
Execs outline changes in asset strategies during Q3
17 NOVEMBER 2017 8:53 AM

Talk of strategies for either shedding or acquiring assets filled several company and REITs’ third-quarter earnings calls this year, and executives provided insight on what benefits they expect to see from the changes.

REPORT FROM THE U.S.—Several hotel companies and real estate investment trusts moved assets around during 2017, whether it was transitioning to an asset-light model to increase franchise business or acquiring select-service hotels to further demand generators, executives on third-quarter earnings calls detailed the strategies.

Here’s a roundup of what executives had to say.

Mark Hoplamazian, president and CEO, Hyatt Hotels Corporation
“To accelerate this shift toward fee-based earnings, we've recently aligned on a plan to supplement our asset recycling program with a targeted reduction in our owned real estate portfolio that is expected to generate approximately $1.5 billion in gross cash proceeds over the next three years. The targeted amount and the timeframe assume that the economy and capital market conditions are stable and that industry conditions are healthy. We believe this asset disposition program will unlock shareholder value: First by monetizing lower yield, higher multiple assets, whose cash flows are not fairly valued by investors; second, by providing substantial funds for future growth investments and return of capital to shareholders; and third, by accelerating the evolution of Hyatt's earnings profile towards more fee-based earnings.

“The size of the asset disposition program will achieve a meaningful reduction in our owned real estate portfolio, while preserving balance sheet capacity to fuel ongoing growth through disciplined asset recycling efforts. While the asset disposition program is incremental to our ongoing asset recycling, we will be managing our tax exposures across all of our transaction activity. Our recent sale of the Hyatt Regency Scottsdale and Royal Palms Hotels is our first step toward our staged disposition effort and we expect to be very active on this front in 2018. We intend to discuss all of this in further detail in an expanded fourth quarter earnings call in February of 2018.”

James Risoleo, president, CEO and director, Host Hotels & Resorts
“Moving to capital allocation, we continue to selectively prune what we believe to be the most geographically diversified portfolio of iconic and irreplaceable hotels in the sector. We sold one non-core asset during the quarter, the Sheraton Indianapolis Hotel at Keystone Crossing, for $66 million. This was the previously unidentified asset we disclosed on our last call.

“You will recall that we also closed on the sale of the Hilton Melbourne South Wharf for $184 million in the third quarter, which ended our investment activity in Australia and New Zealand. On a smaller scale, we also sold the land at the Chicago O'Hare Marriott for approximately $10 million. By carving out this excess land when we sold the property in 2015 and going through the rezoning process ourselves, we were actually able to increase the purchase price of the hotel while harvesting value from a previously unutilized space.

“On the same topic but on a much larger scale, we are very excited about the pending sale of the Key Bridge Marriott in Arlington, Virginia. We worked very long and hard to acquire the fee simple interest in this property, which is ideally located on the Potomac River overlooking Georgetown in Washington, D.C. The buyer has the property under contract for $190 million including the (furniture, fixtures and equipment) reserve at a sub-5% cap rate and with $12 million at risk. The hotel is the oldest in the Marriott system and is in need of significant capital investment. However … that has potential for residential, office and retail redevelopment. This is a great example of how we are mining the portfolio to opportunistically create and drive real estate value for stockholders. We anticipate that the deal will close by either late 2017 or by the end of the first quarter 2018.

“Our 2017 guidance does not contemplate any additional acquisitions from what we have already disclosed this year. We have begun to see several assets that would fit our target profile come to market this fall. However, we remain disciplined in allocating capital to new investments and continue to deploy our rigorous underwriting requirements, particularly focused on the fact that we could be in the later stages of the cycle.”

Greg Mount, president and CEO, RLH Corporation
“On 3 October, we closed on the sale of our entertainment business, allowing us to crystalize the value of this business and continue on our mission to simplify business as we move closer to a fully asset-light model.

“On 5 October, we also announced the listing for sale of the majority of our remaining owned hotels. Our ultimate goal through the sale of these assets is to significantly reduce our long-term debt, reduce our future maintenance capital spending, grow our cash balance to grow our franchising business and optimize the market dynamics. The successful sale of these hotels should allow RLH to accelerate its evolutions towards operating primarily as a franchise company. Our franchise business requires less capital to grow our brand network, provides higher-profit margins and allows us to better leverage our excellent infrastructure and highly skilled employees over a larger franchise base.

“Based on our review of the markets for the 11 hotels listed for sale, we estimate the aggregate value between $165 million and $175 million. We expect to look for opportunities to market the remaining hotels we own in joint ventures as those properties stabilize to higher levels of profitability over the next 12 to 18 months.

“We are confident that these organizational changes will allow us to further expand our franchise adjusted EBITDA margins. We expect that the disposition of our entertainment business and the anticipated sales of our hotels will reduce adjusted EBITDA in the near term over the next 12 to 24 months. But our intentions are to replace the adjusted EBITDA through a focus on the more aggressive growth franchise business.

“We plan to strategically target upscale and mid-scale segments for growth because franchise agreements in these segments have longer durations and higher revenue base of royalty fees. We expect to further supplement our unit growth with more aggressive acquisitions through a targeted, strategic plan and careful due diligence process. We anticipate that our acquisitions will also focus on upscale and mid-scale hotel systems.”

Douglas Ludwig, EVP, CFO and Treasurer, RLH Corporation
“We expect the sale of the 11 hotels should allow us to eliminate $73 million of consolidated debt associated with those assets and, thus, significantly reduce our long-term debt.

“I think we’re prudently planning that this will be a one-by-one (sale of assets). So it’s going to naturally take a little bit longer than if we could find a couple of groups to take the assets. I don’t think it’ll be harmful to the overall value. … think we’re going to see a prudent but not too slow of a process, if I can put it that way.”

Keith Cline, president and CEO, La Quinta Holdings
“On our owned side of our business, we have disposed a total of 23 properties and approximately 50 are undergoing a significant repositioning. Either these hotels come out of the construction phase of repositioning in the third quarter. Each of these eight properties is now in the process of being reintroduced within (each) local market. Early results show a very positive response with significant improvement in (net promoter scores) and guest satisfaction scores.

“These strategic investments and selective dispositions are vitally important to delivering a consistent product for our La Quinta guests.

“(In 2018) we will begin to see the benefit of the significant repositioning that many of our owned hotels are going through and we’ll also be in a position where we’re kind of lapping the ramp up period on some of the investments that we’re making and the guest experience that are really part of the success story here and driving kind of incremental NPS, product to service quality as well as our gains in RevPAR index share.”

Stephen Holmes, chairman and CEO, Wyndham Hotel Group
“We are moving quickly and remain on track for completion in the second quarter of 2018. The board and I remain confident that the spin-off of our hotel business that leaves our Wyndham Vacation Ownership and RCI Timeshare Exchange businesses under one umbrella is the best structure to unlock shareholder value and enable strong long-term growth across the businesses. The transaction is expected to increase the fit, focus and strategic flexibility of the two post-spin companies. The separation will allow each company to concentrate on growing its core business and facilitate future capital raising. In addition, we will maintain the synergistic blue threads, such as Wyndham Rewards between the businesses.

“… The shareholder value principles that drive us at Wyndham Worldwide will also guide the new companies. These are first a focus on fee-for-service business models that produce consistent reliable earnings growth and generate strong free cash flows. Second, a capital structure that is efficient without taking on undue risk. Third, a capital allocation philosophy that invests in the business and returns excess cash to shareholders. Fourth, a disciplined mergers-and-acquisitions approach that results in acquisitions that are both strategically and financially attractive. And finally, a fundamental belief that we work for the shareholders and that the best way to deliver for you is to maintain an innovative and inclusive culture that fosters employee engagement and delivers excellent value for our franchisees, partners, owners, and consumers.

“As a result, we are optimistic about this process. With that being said, you should expect that it will take several months before we have something more definitive to say about the outcome of these efforts.”

Ross Bierkan, president and CEO, RLJ Lodging Trust
“Our expanded platform allows us to more proactively optimize our portfolio. We have recycling opportunities in both the FelCor and legacy RLJ portfolio. We have identified seven non-core hotels, which include boutiques, resorts and luxury properties in the FelCor portfolio that do not meet our investment strategy. We expect to be able to sell this pool of assets in aggregate for at least a 14 times EBITDA multiple, which not only would be highly creative to our shares today, but would reduce the effective multiple paid for the FelCor portfolio, by at least a full turn.

“Although, we expect that asset sales within this specific non-core group will be staggered over the next 12 to 18 months, we are pleased by the various stages of contract negotiations underway on a number of these. We will provide further updates as these asset sales materialize.”

Justin Knight, president and CEO, Apple Hospitality REIT
“We are pleased to have recently acquired four hotels each consistent with our corporate strategy of owning high-quality, select-service hotels in strong markets with diverse demand generators.
These acquisitions expand our reach into new markets and in so doing expand our geographic footprint and further diversify demand generators for our portfolio.

“In each case, these acquisitions are in markets with trailing and projected RevPAR growth exceeding national averages. Each hotel is well located within its respective market and benefits from a variety of business and leisure demand generators. We continue to pursue similar opportunities that we believe improve the quality of our portfolio and increase shareholder value.

“As I have mentioned in previous calls, we have also been working to reduce our ownership of full-service assets and redeploy proceeds into our core product where we believe we can generate stronger, more stable returns for our shareholders over time.”

Richard Stockton, president and CEO, Ashford Hospitality Prime
“Turning to our strategic plan, in January of this year we announced a revised strategy with a focus of investing solely in the luxury segment. Evidence has shown the luxury segment has had the greatest RevPAR growth over the long term, which can translate into superior shareholder returns. We believe that clearly aligning our platform with this segment will differentiate us relative to our REIT peers. Additionally, as part of our revised strategy, we identified four hotels—the Courtyard Philadelphia, Courtyard San Francisco, Renaissance Tampa and Marriott Plano—that were designated as non-core to the portfolio. We stated that our intent was to either reposition or opportunistically sell these hotels. We've made considerable progress in this area.”

Leeny Oberg, CFO, Marriott International
“We remain disciplined in our approach to capital investment and share repurchase. 2017 investment spending could total $550 million to $650 million, including about $175 million in maintenance spending.

“We've already recycled more than $1.1 billion of assets since closing the Starwood acquisition, including the sale of the Sheraton Toronto for roughly $270 million and the receipt of a $65 million loan repayment early in the fourth quarter. We remain comfortable with our estimate of $1.5 billion of asset recycling proceeds since the closing of the Starwood acquisition to year-end 2018, but expect few additional proceeds will be recognized in the fourth quarter of 2017. With our success in asset recycling, we've already returned over $2.7 billion to shareholders through dividends and share repurchases through last week, and expect we will approach a record $3.5 billion returned to shareholders for the full year.”

Thomas Baltimore, chairman, president and CEO, Park Hotels & Resorts
“As we discussed on last quarter's call, we have started the marketing process for a group of non-core hotels accounting for $40 million to $50 million of EBITDA. The pool of assets consists of a portfolio of international hotels, a portfolio of Embassy Suites and several one-off hotels, which simply do not fit our long-term strategic goals. These assets are in lower-growth markets, at below average RevPAR, are (capital-expenditure) intensive and remain a drag on corporate resources.

“Furthermore, the average RevPAR for the portfolio being marketed is just $111, which is nearly 32% below the portfolio average of $162, while margins are 430 basis points lower than our portfolio average.

“As we look to redeploy sales proceeds, I want to assure investors that we do not anticipate a material drag on earnings once proceeds are fully reinvested. Additionally, our capital recycling efforts will help to materially improve operating metrics, including portfolio RevPAR and margins, while ultimately reducing our (general and administrative) expense as we shrink our footprint abroad and produce CapEx savings well in excess of $100 million.

“It is too early to report on price expectations, and we caution we are still early in the process and there is no guarantee that we will transact on all of these assets. We will update you in the coming months as the process unfolds.”

John Murray, president and COO, Hospitality Properties Trust
“In August, we acquired two Crowne Plaza hotels—in Columbus, Ohio, and Charlotte, North Carolina—and added them to our management agreement with IHG. The 419-room Crowne Plaza & Lofts hotel, acquired for $49 million, has 8,400 square feet of function space, one food-and-beverage outlet and is attached to both the Columbus Convention Center and Nationwide Insurance’s company headquarters. The last portion of the hotel will be converted to IHG’s Indigo brand. The 300-room Crowne Plaza Charlotte Executive Park, acquired for $44 million, has 15,500 square feet of function space and two food-and-beverage outlets. As of 30 September, the IHG security deposit had reached its cap of $100 million. In September, we acquired 14 extended stay hotels, with 1,653 suites located in 12 states, for $138 million. We rebranded these hotels to the Sonesta ES Suites brand and added them to our management agreement with Sonesta.

“Turning to dispositions, in August, we sold a 159-room Radisson in Chandler, Arizona, for $9.5 million and a 143-room Country Inn & Suites in Naperville, Illinois, for $6.6 million. In September, we sold a 209-room Park Plaza in Bloomington, Minnesota, for $8.5 million. These three transactions resulted in a gain on sale of $9.3 million. As previously announced, the net proceeds from these sales will be used to fund renovations at our remaining hotels in the Carlson portfolio. In addition, we have agreed to provide up to an additional $35 million for renovations if requested. HPT’s minimum returns will not be reduced in connection with these sales, but will increase to the extent the new $35 million of renovation funding takes place.

“Looking ahead, we and our hotel operators remain cautiously optimistic. Our managers are projecting that, for the rest of 2017, we will experience increased rate growth and occupancy growth versus earlier in 2017 as demand improves and recently renovated portfolios continue to ramp up. For the year, our managers are, for the most part, maintaining their forecast for hotel occupancy rate, such that comparable RevPAR growth for 2017 may be 0.5% to 1% with GOP margins in the flat to down-50-basis-points range.

“… We are looking at the portfolio right now, and we are seeing a lot of headwinds from supply growth—not just supply that remains to come on in 2018 and 2019, but many markets are still absorbing hotels that were built this year or last year. That makes underwriting more complicated. We are being a little more conservative about how we invest, and we are being careful about who we invest with. We think the prices we’re investing at on a per-fee basis and in terms of the going-in yields are conservative. We think they’re going to be attractive after we’ve completed our renovations. We’re only looking at a couple of potential acquisitions currently, and we’re not sure that they’ll even necessarily go forward. But we are dialing back our acquisition pipeline. We’re seeing a lot of activity in potential transactions, but we have a lot of renovations … that we’re going to be working on during the course of next year, related to the pretty healthy level of acquisitions we made this year. So I think that we’re going to take a little bit more of a wait-and-see on where the hotel industry is going.

“… For us, especially on select-service assets, we really have a strong preference for portfolio growth. And … with well over 300 hotels now in over 45,000 hotel rooms, it’s hard to move the needle with a couple of small acquisitions. We like select-service assets that have 125 to 175 hotel rooms. When you get into the smaller markets, we start to see a lot more of what I would consider … small franchisee-sized hotels that tend to be more in the 75- to 100-room (count), and we think that you want to be a little bit bigger. So, we see portfolios in those markets. We don’t object to being in some of (those) markets … but we … haven’t specifically targeted them, and I don’t think we are going to in the near-term.”

Bill Blackham, CEO, Condor Hospitality Trust
“During the quarter, we completed the acquisition of two of these hotels for $38.8 million, the Fairfield Inn & Suites El Paso and the Residence Inn Austin Airport. We expect to close on the third asset, the Town Place Suites Austin Tech Ridge, early in the first quarter of 2018.

“We were also successful in the continued disposition of our legacy assets. During the third quarter, we sold two legacy hotel assets, the 81-room Quality Inn Morgantown, West Virginia for $2.6 million and the 176-room Days Inn in Bossier City, Louisiana, for $1.4 million. These two closings brought the number of legacy hotel dispositions to seven since the beginning of 2017.

“Our portfolio is now primarily comprised of young, high-quality assets in attractive markets. Since the beginning of 2015, we have sold 49 legacy hotels, generating over $140 million in gross proceeds. Commencing in the fourth quarter of 2015, we have closed or placed under contract 13 high-quality assets, for a total purchase price of approximately $260 million.

“We have only six legacy assets remaining, including one which is now under contract subsequent to the end of the quarter and three which are listed and actively being marketed for sale. It is clear that the quality of our portfolio has greatly improved. The average age of our new investment hotels is just four years and are of the quality and style that is highly appealing to the modern traveler.

“I am extremely proud of the progress we have made transforming our portfolio. We maintain a robust pipeline of opportunities, and we remain focused on expanding our portfolio with young, high-quality select-service hotels with premium flags in attractive secondary markets. We are extremely disciplined in which acquisitions we pursue, but remain confident in our ability to continue to find attractive assets to add to our portfolio. This portfolio transformation is supported by the ongoing enhancements we have made to our capital structure, which positions us very well going forward. Subsequent to quarter end, we successfully refinanced $26 million of mortgage debt, using proceeds to reduce our floating-rate revolving line of credit and further enhancing our balance sheet to provide us with the support to pursue our growth strategy.”

Ashish Parikh, CFO, Hersha Hospitality Trust
“Our franchise model and close relationship with our primary operator allows us to quickly realign our staffing model and restructure our personnel across various departments including sales, revenue management, accounting and engineering to maximize the benefits of our clustering strategy. As the lodging industry continues further along in this cycle, we view our ability to react quickly to market conditions and cost pressures essential to drive EBITDA growth at our assets."

Sean Mahoney, EVP and CFO, DiamondRock Hospitality
“We benefited from successful asset-management initiatives in response to the challenging group environment in Chicago and Boston by shifting demand (to) business transient, our highest rated segment. In particular, our Chicago hotel successfully grew business transient revenues by 34% in a quarter where citywides were down. Our business transient also benefited from the continued post-renovation ramp up at Worthington Renaissance where third quarter business transient revenue grew over 75%.”

Marcel Verbaas, chairman and CEO, Xenia Hotels & Resorts
“As discussed on prior quarterly earnings calls, we entered the year with significant investment capacity and a portfolio and balance sheet that was strengthened considerably through our activities in 2016 a year during which we were a significant net seller of hotels. As such our expectations was that our portfolio and activities in 2017 will be more balanced between dispositions and acquisitions. With buyers towards being a net acquire based on the opportunities we were seeing in the market.

“As you will recall, we executed on this strategy earlier in the year through the disposition of seven assets on the lower end of the portfolio. While effectively replacing these assets through the acquisition of Hyatt Regency, Grand Cyprus and Orlando. We remain excited about this acquisition and are making good progress and executing the improvement plans we have previously outlined for the hotel.”

No Comments

Comments that include blatant advertisements or links to products or company websites will be removed to avoid instances of spam. Also, comments that include profanity, lewdness, personal attacks, solicitations or advertising, or other similarly inappropriate or offensive comments or material will be removed from the site. You are fully responsible for the content you post. The opinions expressed in comments do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Please report any violations to our editorial staff.