Hospitality Properties Trust traditionally has invested in more select-service and extended-stay hotels, but recently has shifted its acquisitions toward full-service hotels. CEO John G. Murray told investors during a third-quarter earnings call that HPT’s focus hasn’t changed.
NEWTON, Massachusetts—Long-term, successful relationships with the brands in its portfolio drove Hospitality Properties Trust’s acquisition activity in the third quarter of 2016, CEO John G. Murray said during an earnings call Wednesday with investors.
The real estate investment trust confirmed agreements to acquire full-service hotels in Addison, Texas, (for $9 million) and Chicago (for $86.7 million), according to its Q3 2016 earnings release. Combined with another $52-million, full-service hotel acquisition announced in July in Milpitas, California, the total value of the three transactions is approximately $147.7 million. HPT plans to add the Addison property to its Carlson portfolio, the Chicago property to its InterContinental Hotels Group portfolio, and the Milpitas property to its Sonesta portfolio.
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Strategy or opportunity?
An analyst pointed out that this activity seems to be a shift for HPT, which traditionally has invested more in select-service and extended-stay hotel properties. Asked if that shift is strategic or opportunistic, Murray said it’s a combination of both.
“We’ve been making some acquisitions with IHG recently that have been full-service hotels, and we have a very good and long-term successful relationship with IHG,” Murray said. “So when there are opportunities to work with them to help grow their brands and help us grow our portfolio, we’re interested to do it.”
Murray said one goal has been to improve the diversity of the Carlson portfolio, which is one of HPT’s smaller portfolios.
“So when we had discussions this summer with Carlson and they asked if we would consider working with them on this Addison property, we were willing to do so,” he said, “really because we have a good structure and a good relationship with Carlson and would like to see that grow.”
But in general, HPT’s big-picture strategies haven’t changed.
“It wasn’t so much a decision about wanting full-service or select-service hotels,” Murray said. “Overall, we prefer extended-stay and select-service hotels, like the Courtyards and Hyatt Places that we own. They have lower fixed costs and steady revenue performance. The cash flow has been fairly predictable and secure. In the ordinary world, that’s still our preferred type of hotel to invest in.”
As far as the market in general, Murray said transaction activity has been robust.
“The sellers range from some of our competitor REITs to some of the private equity funds to just hotel owners from other walks of life,” he said. “Some of them are portfolios of select-service hotels, and a lot of them are individual assets.”
Does that bode well for investors? Yes and no, Murray said.
“We feel like the number of bidders may be shrinking in transactions, and that prices may be moderating a little bit,” he said. “But the closer you get to strategic markets or very strong performing markets, the more likely you are to run into foreign capital coming in to buy. So the prices haven’t moderated in those situations as much as you might hope or expect.”
With most acquisitions come some degree of necessary renovations to meet brand standards. For the property HPT is acquiring in Milpitas, California, the capital needed to complete renovations was higher than expected, which led the company to renegotiate the price down from $52 million, Murray said.
The time and cost of renovations also affect the company’s bottom line. HPT recently completed renovations on 11 hotels that it acquired—nine in June 2015 and two in February 2016—and converted to Sonesta ES Suites. Those were added to its initial Sonesta portfolio of 22 hotels, for which renovations took longer than expected, Murray said.
“We hoped we would see improved cash flow earlier than we did,” he said. “But we are pleased to see the hotel portfolio continues to ramp up. … So we’re expecting to see good (revenue per available room growth) as well as bounce back from renovation impact.”
Despite that, HPT outperformed industry averages in RevPAR growth for the 15th consecutive month, Murray said.
Systemwide RevPAR increased 3.8% to $101.77 in Q3 2016 compared to the same period last year, driven primarily by rates. During the quarter, average daily rate grew 3.3% to $126.58, and occupancy rose 0.4% to 80.4%. Total revenue was $543.5 million, a 6.2% increase over Q3 2015, while operating income fell approximately 5% to $93.5 million.
“It was another strong operating quarter for HPT, which reflects the continued execution of our strategy to own a diverse portfolio of well-maintained travel centers and hotels,” Murray said.
The company projects full-year 2016 RevPAR growth between 3.5% and 4.5%.
HPT’s stock value was up 3.5% year to date as of press time. The Baird/STR Hotel Stock Index was up 3.6% for the same time period.