Host unloading NYC assets; execs see supply headwinds
Host unloading NYC assets; execs see supply headwinds
09 AUGUST 2018 8:22 AM

Host Hotels & Resorts finalized a $190-million sale of the former W New York in the second quarter and plans to sell the W New York – Union Square for $171 million during Q3. President and CEO James Risoleo said the assets' profitability declines and New York City’s market headwinds led to the sales.

BETHESDA, Maryland—Host Hotels & Resorts is continually reshaping its portfolio of what President and CEO James Risoleo calls its “iconic and irreplaceable assets,” and during the second quarter the company sold one property in New York and is close to selling another in the Big Apple.

In May, Host closed on the sale of the former W New York—now renamed The Maxwell New York City and positioned in Marriott International’s Tribute Portfolio—for $190 million. Risoleo confirmed on Wednesday’s earnings conference call that the real estate investment trust has a deal in place to sell the W New York – Union Square for $171 million, and that sale should be completed in the third quarter of 2018.

Following the sale of the W New York – Union Square, Host will have four properties remaining in New York City, which through the first six months of 2018 has shown a rebound in revenue-per-available-room growth. Does that mean Host executives see the resurgence in New York City’s hotel performance as only temporary?

“New York generally as a market is always going to be a good hotel market,” Risoleo said. “Clearly it’s the highest RevPAR market in country. … For the near term, I think New York is going to have supply headwinds. We’re obviously very in line with what’s happening with leveling the playing field from the Airbnb perspective, but New York is still going to have a lot of supply for the next two or three years in our opinion. It’s a high-cost market in which to operate.”

Risoleo said the two sales equal a combined cap rate of 1.3%, and added Host will continue to “upgrade the quality and the profitability of the portfolio.”

“We’re taking steps to reduce our exposure to profitability-challenged hotels, and those (NYC assets) are hotels with high expense ratios, high expense loads and expense inflation, and hotels that are in need of CapEx,” Risoleo said.

When pressed if Host had exhausted all alternatives for the two W properties, Risoleo said he and his team were satisfied with the decision to sell.

“We look at all options that are available to us on every asset, and we are keenly familiar with New York and the current legislative landscape and what you can do and what you can’t do,” he said. “That’s all been taken into consideration, and we were very comfortable and very happy with the pricing we achieved.”

Risoleo refused to specifically comment on one analyst’s question about an anonymous report, which surfaced in June, that Host was looking to unload more than $2 billion of assets from its portfolio.

But during the call, he did outline the company’s broad asset strategy.

“If iconic and irreplaceable assets are not available, or if it would make economic sense and be accretive to shareholders to buy back stock or reinvest in our portfolio, those are always levers we have to create shareholder value,” he said. “… There are two ways we can build out the iconic and irreplaceable portfolio: We can do it by buying those types of hotels, or by selling hotels that don’t fit that portfolio. From a sales perspective, everything we do starts with disciplined review of each asset.”

Several of Host’s peers, including Pebblebrook Hotel Trust, DiamondRock Hospitality and Ashford Hospitality Trust reported on their earnings calls that the integration of the sales teams of Marriott and Starwood caused revenue declines at a handful of legacy Starwood properties, particularly those that were brand managed. Host EVP and CFO Michael Bluhm said his company’s properties haven’t experienced similar performance declines.

“We have not seen any measurable impact from the sales integration,” Bluhm said. “In fact, the RevPAR index for our legacy Starwood portfolio actually outpaced that of our Marriott legacy portfolio in the quarter. Furthermore, we continue to reap the benefits from the Marriott-Starwood revenue and cost synergies.

“In particular we continue to accrue benefits from reduced (online travel agency) charges, procurement, credit card, reward and centralized system costs. We will continue to monitor and work with Marriott to ensure a smooth transition, but we are very pleased with what we have seen to date.”

Q2 performance and outlook
Host’s comparable hotel RevPAR rose 2.8% during the second quarter to $196.80, which was the result of 0.1% occupancy increase to 83.8% and a 2.2% increase in average daily rate to $234.85. The company’s adjusted earnings before interest, taxes, depreciation and amortization increased 6.7% in Q2 to $476 million.

“We finished this quarter with 84% occupancy in our hotels; we have not seen that occupancy since 2000,” Risoleo said. “Going into the balance of the year, our hotels continue to remain full, 95% of our group (business) is on the books for this year. … We see the leisure traveler as being particularly strong, no signs of any weakness on that front. We’re encouraged that corporate group is coming back and we’re encouraged that the business traveler has returned. I am confident that over time, assuming those trends hold—which we have every reason to believe that they will—we will be able to increase rates.”

The REIT raised its full-year 2018 RevPAR guidance from 1.5% to 2.5% growth to 1.75% to 2.5% growth.

Host’s share price closed Wednesday trading at $20.55, up 3.5% year to date. The Baird/STR Hotel Stock Index was down 4.2% over the same period.

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