LaSalle Hotel Properties saw revenue per available room decline in both Q4 and full-year 2017, with little hope for better performance in 2018. Company officials warned that if weak metrics persist, a reduction in the company’s dividend is expected.
BETHESDA, Maryland—LaSalle Hotel Properties survived a difficult 2017, which saw drops in revenue per available room and earnings before interest, taxes, depreciation and amortization along with hurricane disruption at two Key West resorts.
During a call with analysts and investors to discuss full-year 2017 and fourth-quarter performance, EVP and CFO Kenneth Fuller said the company will likely have to scale back its shareholder dividend if those trends continue.
“If the (2018) base case materializes as expected, we’re likely to reduce our annual dividend to a level that will continue to meet our REIT requirements, which we currently estimate to be approximately $0.80 to $0.90 per common share,” he said.
President and CEO Michael Barnello noted that decision will ultimately fall to the company’s board of trustees, and they expect to use the money saved with the reduced dividend to repurchase shares.
Ultimately, this projection is based on the company’s “base case” projections of $68 million in net income for full-year 2018 with a RevPAR drop of 2%, a 2% increase in expenses and $291 million in adjusted EBITDA. Barnello told analysts he couldn’t be sure when a final discussion would be made or announced regarding a change in dividend.
“It’s (to be determined) as we go through the year and see performance in our hotels and markets,” he said. “The second part is what our outlook is for the second half of the year. A lot goes into (the decision), but we felt it was appropriate and responsible to give a likely scenario if the base case materializes.”
Performance and expectations
The company saw RevPAR fall 2.6% for the full year at all properties, including several undergoing renovations and two resorts in Key West—Southernmost Beach Resort Key West and The Marker Waterfront Resort—that suffered business interruptions due to Hurricane Irma. If the Key West properties are removed from the equation, the company saw RevPAR for the year fall 1.8%.
For the year, the company’s revenue fell 10% to $1.1 billion, and adjusted EBITDA fell 14.5% to $339.4 million.
Barnello said the company faced many headwinds, including supply growth and relatively weak performance in the large urban centers much of LaSalle portfolio exists in—notably Chicago and San Francisco—along with hurricane impacts and a larger-than-usual wave of renovations across the portfolio. He added the upside of the renovations is much of the investment is ROI-focused and should ultimately be a benefit to the company.
But as the company’s guidance indicates, a bounce back isn’t expected in the near term, and LaSalle executives expect supply-related issues to persist at least through 2019.
Barnello said many issues the companies face aren’t specific to LaSalle but are seen across upper-upscale properties in the company’s key markets.
He said a potential bump to business travel stemming from recent corporate tax cuts in the U.S. would be welcome, but the company isn’t baking that into its expectations for the year.
“We’re hopeful it turns into a benefit, but it’s more responsible to be cautious at this point in the cycle,” Barnello said.
Cost containment has been a focus for the company as top-line revenue has dropped, he said, but labor costs are expected to continue to grow as both low unemployment and the opening of several hotels in LaSalle’s key markets makes it more difficult to compete for talent.
“We want to retain the top people,” he said. “It’s a competitive environment.”
One issue Barnello specifically called out is a problematic transition for Kimpton Hotels & Restaurants on to InterContinental Hotels Group’s reservation systems. He said the transition has “caused a lot of issues at the hotel level,” including properties being “disconnected from distribution channels.”
“We estimated that year to date we’ve lost about $1 million in rooms revenue,” he said. “That number does continue to grow. We knew there would be noise (related to the transition), but it hurt a little more than we expected.”
Investors seem to have reacted negatively to LaSalle’s performance numbers and the possibility of a dividend cut, as the company’s stock dropped 10.2% since opening Wednesday to $25.37 a share. That stock price also marks a 9.6% drop since the beginning of the year.
The Baird/STR Hotel Stock Index is up 2.6% over the same time period.