RLJ Lodging Trust plans to be active in the hotel transactions market as a buyer and seller of assets, company executives said during a quarterly earnings call.
BETHESDA, Maryland—RLJ Lodging Trust intends to be active in the hotel transactions market in the coming year, as a buyer and seller of assets. But a greater emphasis will be on the acquisition of hotels, company executives said Thursday during a third-quarter earnings call with analysts.
The company has closed on seven acquisitions so far this year, including one during the quarter and one following the end of the quarter. It has a purchase pipeline of approximately $150 million in hotel assets either under contract or with letters of intent. On the other side of the table, RLJ is marketing for sale 15 hotels it considers non-core.
Calling the company a “net buyer” of assets, President and CEO Thomas J. Baltimore Jr., said he and his executive team are “looking aggressively for opportunities, but we’ll be prudent, thoughtful and disciplined. It will be assets compliant with our investment thesis and with returns that make sense for us.”
He said the company targets upscale, focused-service properties in urban and dense suburban markets that have what he called “three legs of the stool: strong corporate business, a strong convention market and a leisure component.”
The company’s “strike zone” for acquisitions is in the $20 million to $40 million range, mostly in the top 30 markets. Baltimore said the company has a “coastal bias” and is looking for opportunities on the West Coast where barriers to entry are higher. Baltimore said the company prefers properties in the Marriott International and Hilton Worldwide brand families, but “we have a growing affection for Hyatt (hotels).”
The company’s most recent purchase was a 106-room SpringHill Suites by Marriott in the Portland, Oregon, suburb of Hillsboro. RLJ paid $24 million for the property, which the company said represents a forward capitalization rate of 10% based on the hotel’s projected 2014 net operating income.
During the quarter, the company bought a 78-room Residence Inn by Marriott in midtown Atlanta and disposed of a Courtyard by Marriott in Goshen, Indiana, through a foreclosure auction.
Later this year or early in 2014, the company expects to close on a $71.6-million acquisition of the 231-room Hilton Cabana Miami Beach. The property, a former hotel built in the 1950s, closed in 2007 and is being redeveloped. In late 2012, RLJ agreed to acquire the hotel upon its reopening.
Baltimore said while in the interim the company will probably stick to acquisitions of single assets or small portfolios, it is also “willing, ready and able to talk about a larger transaction.”
“Scale is important; we have it, but getting even larger would be a good thing,” Baltimore said. “We continue to believe passionately the industry should consolidate, and we want to be part of that dialog as a buyer or seller.”
Despite some difficult comparisons due to one-time events last year, such as the Republican National Convention, the company reported gains in operating performance during the quarter. Net income attributable to common shareholders was $36.5 million, up 140% over the same period in 2012.
Pro forma revenue per available room increased 5.4%, driven by a 3.6% rise in average daily rate and an increase in occupancy of 1.8%.
The company’s strongest markets were Houston and Austin, Texas, which saw RevPAR increases of 19.1% and 12%, respectively. Baltimore said seven of the company’s eight hotels in the Houston market posted double-digit RevPAR gains, with its Courtyard by Marriott in downtown Houston recording a 34.2% rise in RevPAR. RLJ will add another hotel in Houston in mid-2015 from the conversion of an apartment building into a 166-unit SpringHill Suites by Marriott.
RLJ’s Denver hotels, which benefitted from business generated by recovery efforts following September flooding in Colorado, produced an 8.9% RevPAR gain during the quarter. In New York, RevPAR improved 6.9%.
Lower occupancies in the Washington, D.C., market accounted for a 9.1% decline in RevPAR for RLJ hotels.
“It was a challenging quarter for the city,” Baltimore said. “Transient business was soft, and there was a lack of citywide compression. And the sequestration and volatility around the possible shutdown of the government had a significant impact on government demand and government-related business.”
Baltimore said he expects the challenging conditions in the Washington market to continue through the fourth quarter.