Host Hotels & Resorts recently closed on the acquisition of 1 Hotel South Beach for $610 million from an affiliate of Starwood Capital Group, and President and CEO James Risoleo said the company remains focused on buying similar assets with high returns.
BETHESDA, Maryland—Host Hotels & Resorts is continuing on its trek of adding unique, iconic assets to its portfolio with the 14 February purchase of the 1 Hotel South Beach for $610 million.
President and CEO James Risoleo said on the company’s fourth-quarter and full-year 2018 earnings call with analysts that his company remains disciplined with underwriting and balance sheet disposition when thinking about future capital allocations, and has no plans to acquire large-scale portfolios.
“Given the $1.2 billion of cash on hand, and three times being the high end of our leverage target range, we have total investment capacity of $2 billion to $2.5 billion,” he said. “We do not intend to move higher than our targeted leverage range nor do we intend to invest beyond that capacity.
“As there has been recent speculation about Host, I want to be clear that while we are always opportunistically looking at value-enhancing assets, we are not focusing on pursuing large-scale portfolio acquisitions at this time. We are very happy using our current investment capacity to make smart, targeted add-on acquisitions like the 1 Hotel South Beach we announced today.”
Host has reached a total of $1.6 billion in acquisitions since the beginning of 2018, which includes the 1 Hotel buy, as well as the acquisition of hotels in Hawaii, San Francisco and Florida, according to the company’s earnings release. SH Hotels & Resorts, an affiliate of Starwood Capital Group that manages the 1 Hotel South Beach, will continue to manage the property.
Risoleo said Host has confidence in the performance of the 1 Hotel South Beach because Miami Beach is “the second best-performing (revenue-per-available-room) market in the country.”
“We’re very bullish on the Miami Beach market (and) there are multiple demand drivers that drive business for that market,” he said. “For the 1 Hotel in particular, it’s a mix of high-rated leisure business and high-rated corporate group. The segmentation is roughly 75% leisure, 25% group. It’s a terrific hotel, and we would expect the market to continue to exhibit growth.”
The reopening of the Miami convention center in late 2019 “should drive additional demand into the South Beach market and into our hotel in particular,” he said, adding that the company is developing a beach club at 1 Hotel South Beach that should “enhance top-line revenues.”
Other capital allocation projects
At the beginning of last year, Host formed an agreement with Marriott International to “execute a portfolio of transformational capital projects,” which began with the San Francisco Marriott Marquis and will continue with other properties in the selected portfolio until 2021, Risoleo said.
The goal of the project is to enhance long-term performance for the hotels targeted and push them to “No. 1 in their competitive sets,” he said.
“Marriott will provide operating profit guarantee as protection for the anticipated disruption associated with the incremental spend and increased priority returns on the agreed-upon investment, which will result in reduced incentive management fees,” Risoleo said. “We believe this is a great, high-return use of shareholders’ capital as transformational capital projects have typically resulted in meaningful increases in RevPAR yield index, which translates to strong improvement in (earnings before interest, taxes, depreciation and amortization).”
He added that the REIT is working with Marriott on additional transformational projects and with Hyatt Hotels Corporation on “assets that may need to be repositioned.”
Host is expecting to see some challenges in terms of group business this year because of obstacles, such as fewer city-wide events in Boston, but Risoleo said total group revenue pace is up 1.4% for 2019, and he’s not expecting that to change much.
“If anything, and this is not baked into our forecast for the year, we really like the way we’re positioned, and in those markets where we might have targeted (holes), we believe that given the corporate group that we saw in the fourth quarter and over the course of 2018, that gives us some terrific opportunities in the upside,” he said. “I might also add that after the third-quarter call, I said our total group revenue pace was flat, and now it is at 1.4%. We feel good about that.”
Aside from buying hotels, Host disposed of $2.2 billion in non-core assets in 2018, which included the sale of properties such as The Westin New York Grand Central for $302 million to reduce the REIT’s exposure in New York.
In the fourth quarter, comparable RevPAR on a constant dollar basis improved 2.3%, which was driven by a 2% rise in average room rate and an increase of 20 basis points in occupancy, according to the earnings release. RevPAR increased 2% for the full year, average room rate rose 1.2% and occupancy increased 60 basis points.
For full-year 2019, total comparable hotel RevPAR is expected to range from flat to 2%.
As of press time, Host’s stock was trading at $19.70 per share, up 18.3% year to date. The Baird/STR Hotel Stock Index was up 11.5% at the same time.