With an environment that makes buying hotels more difficult, some real estate investment trusts are opting instead to invest in their own portfolios through renovations and ROI projects.
REPORT FROM THE U.S.—A challenging macro-environment and perceived undervaluation in public markets have kept some real estate investment trusts from being as active in buying hotels as they have in the recent past. Instead, they are opting to invest in their existing portfolios through extensive renovations and return-on-investment projects.
Here is what some hotel REIT executives had to say about those projects during third-quarter earnings calls.
Jim Risoleo, president and CEO, Host Hotels & Resorts
“We have been actively investing in value-enhancing ROI projects across our portfolio. We are constructing a 165-key, premium select-service AC by Marriott Hotel on excess surface parking at the Westin Kierland in Phoenix. We expect to spend a total of approximately $36 million on this project, which remains on budget and on schedule to complete construction by late May 2020 and to open around midyear.
“We have also begun site development on 19 villas at Andaz Maui, which will be added to the 11 villas owned or rented within our hotel program. The existing villas in the rental program achieved a RevPAR of approximately $1,700 and exhibit strong demand throughout the year. We expect to invest a total of approximately $52 million and to complete construction by March 2021. This expansion was not a part of our underwriting when we acquired the asset last year, and we are pleased to be capitalizing on another opportunity to create value for our shareholders.
“Lastly, we have continued to focus on enhancing the value and profitability of our portfolio through utility and water-saving ROI projects, an important part of our award-winning and industry-leading corporate responsibility program. Year to date, we have underwritten and approved over $19 million to be invested in energy and water savings sustainability projects. Over the four-year period ending 2018, we completed over 650 projects with sustainability attributes totaling $210 million. We recently published our second corporate responsibility report available on our website where you can see additional information on this important program.
“In aggregate, we expect to invest $107 million in these value-creation projects combined and to generate stabilized cash-on-cash returns in the range of 11% to 13%. Now to an update on the 1 Hotel South Beach, which we acquired earlier this year. The hotel is performing better than our underwriting on (earnings before interest, taxes, depreciation and amortization), and the beach club ROI project is well underway with completion anticipated by year end. We expect to spend approximately $7 million and achieve a low teens stabilized yield on cost.
“Finally, we have made significant progress on the Marriott transformational capital program, with work underway or expected to be completed on 13 of the 17 properties by year end. As we have previously disclosed, three of four Marriott transformational capital projects, Coronado Island Marriott, New York Marriott Downtown and the San Francisco Marriott Marquis are now complete with the final project the Santa Clara Marriott completing in another week or so.
“An additional nine projects are underway. Importantly, we are close to completing nearly 40% of the total estimated spend by year end and are currently under budget for the program. The timing of the Marriott transformational capital program is highly beneficial to our shareholders. Completing these renovations in a low-RevPAR-growth environment minimizes the impact of the disruption and leaves us well positioned to achieve meaningful RevPAR index gains and accelerate EBITDA growth at stabilization and when RevPAR growth improves.”
Jon Bortz, chairman, president and CEO, Pebblebrook Hotel Trust
“We’re forecasting that this repositioning capital will generate on average a 10% return on investment upon stabilization, which we typically get to between three years and four years following completion. In addition to these eight projects, we anticipate commencing an additional seven repositioning projects by the end of next year or early in 2021 with the majority of the work and investments occurring over the 2020 to 2021 winter, and one last project in the summer of 2021.
“As previously discussed, some of these projects will involve us making operator or brand changes as part of the value-creation process. All told, we’re currently forecasting that these 16 major repositioning projects will represent a total investment of approximately $260 million. With roughly two-thirds of the total amount projected to represent ROI projects, which we underwrite to generate an increase in EBITDA equal to a 10% return on investment upon stabilization.
“In addition to taking advantage of the opportunity to drive higher average room rates and RevPAR at these properties as a result of their repositioning’s, many of these major projects include creatively improving the real estate to generate opportunities to drive an increase in food-and-beverage revenues through the upgrading of expansion or development of new experiential venues.”
“Not only will these projects allow us to drive significantly higher ADRs, non-room revenues and EBITDA, but they are a key part of creating unique experiences that will make each property much more attractive to group and transient business, both business and leisure customers.”
Sean Mahoney, EVP, CFO and treasurer, RLJ Lodging Trust
“Our full-year capital program remains on track and on budget. We continue to expect $90 million to $110 million in 2019 renovations and expect full-year renovation-related displacement of 40 to 50 basis points.”
Leslie Hale, president & CEO, RLJ Lodging Trust
“If you think about the span of ROI projects that we have, we've identified a number of projects that we've classified as $150 million to $200 million. And they span from conversions … but also the space reconfigurations, operating ROIs and energy ROIs. And so if you think about space reconfiguration, taking a pool, which is a nonrevenue-generating space, and converting it into a meeting space, there's no risk in that because it wasn't generating any revenue before. So anything incremental will create value. Thinking about it from an operation perspective and adding parking, limited risk associated with that because you weren't charging before and now you're charging for it. And also from an energy perspective, you're going to continue to have energy costs regardless of where we are in the cycle.”
Tom Bardenett, EVP of asset management, RLJ Lodging Trust
“One of the biggest areas for capital allocation is some of these reimaging of our Embassy Suites, which is allowing us to try to change the mix based on what we're doing with our lobby evolutions by gaining more space and having that opportunity to get more group business, which we think will help us ultimately change the mix a little bit and get a higher-rated as well as catering per occupied room to be able to provide more profitability. … We have really changed the elevation to be able to be one elevation, where people can utilize the space throughout, and then created public-private space to … bring our restaurant or beverage space out into the lobby so people want to spend time there and be more transactional. … In addition to that, when you change that elevation, you actually add meeting space. So for instance, if an Embassy has 300 keys with 7,500 square feet, you could in the past, probably service and maintain that group by using your ballroom or your breakout space. Now with the open-area atrium, you're now serving lunches, receptions and using that space as additional meeting space so you can actually book two groups in your ballroom and then use the atrium for that additional space.”
Douglas Kessler, president and CEO, Ashford Hospitality Trust
“We believe our portfolio is currently realizing the benefits from our recent CapEx spending, which is evidenced by the outperformance in our operating results.
“As we stated earlier this year, going forward, we anticipate our CapEx spending will be more consistent with our long-term historical levels. Our approach focuses on how to best capitalize on lodging and financial market opportunities, while at the same time being fluid in our strategic efforts. For example, despite the attractive features of our enhanced return funding program, we currently do not plan to add to our portfolio unless we can transact accretively without increasing our leverage. While we strongly believe the ERP improves our projected investment returns, we're prepared to be patient before accessing more ERP capital for new deals given the current stock price.
“Additionally, disciplined capital recycling is an important component of our strategy. When we evaluate asset sales, we take into consideration many factors such as the impact on EBITDA, leverage, CapEx, RevPAR, et cetera. Towards this end, during the third quarter, we sold the 251-room Marriott Plaza San Antonio in San Antonio, Texas, for $34 million. The sales price is inclusive of the buyer’s estimated CapEx represented a trailing 12-month cap rate of 4.9% on net operating income and a 17.1 times hotel EBITDA multiple as of 30 June 2019.”
John Murray, president and CEO, Service Properties Trust
“For the fourth quarter of 2019, we expect 17 hotels to be under renovation compared to 38 last year. While we are seeing positive lift this year from the 49 hotels that completed the renovations in 2018, operators are contending with new supply coupled with stagnant or declining demand in many markets.”