Competition for assets, along with concerns about the length of the cycle and increasing costs, are making the outlook for buying hotels a bit hazier, said Hospitality Properties Trust President and CEO John Murray.
NEWTON, Massachusetts—Hospitality Properties Trust has bought two hotels so far in 2019, but the company’s chief executive said market conditions are making acquisitions difficult for his company and other real estate investment trusts.
Speaking during the company’s first-quarter earnings call, HPT President and CEO John Murray said his company will continue to be an active buyer, but there are some obstacles to getting deals done.
“We’re in the 10th year of the cycle; unemployment is so low and the economy apparently continues to be fairly strong,” he said. “There’s a lot of pressure on wages and benefits. A lot of times in some markets, it’s just very hard to fill all your open positions. You need to go to agencies in some cases, which is a very expensive way to run a hotel. So we’re nervous about—or cautious, I maybe should say—about being late in the cycle and feeling margin pressures particularly from wages and benefits. But insurance and real estate taxes are also creeping up.”
Murray noted the company missed out on “a couple of properties” that it bid on, and pointed to several sources of competition.
“We’re seeing some institutional investors, private equity, family offices and high-net-worth individuals,” he said. “My sense is that, except in unusual situations, most of the lodging REITs have taken the same approach as we are. They are being a little more cautious about where they invest and at what price.”
Murray said the company is being careful to not take on too much debt, while focusing a lot of its available capital on renovations, noting HPT expects to dedicate “a couple hundred million dollars” to improving its hotels in 2019.
“It will be more than a lot of REITs will invest in acquisitions in a year,” he said. “So I think the acquisitions we’ve done so far, coupled with our hotel renovations, we’ll probably will be happy with that for this year. Although I do expect that we’ll make additional acquisitions between now and the end of the year.”
The two properties the company has purchased this year are the 335-room Hotel Palomar in Washington, D.C., which HPT is adding to its management agreement with InterContinental Hotels Group, and the 198-room Crowne Plaza Milwaukee West in Milwaukee, Wisconsin.
The Crowne Plaza deal closed on 7 May for $30 million, and HPT and IHG are splitting the cost of a $6 million renovation at the property.
The Hotel Palomar deal closed in February for $141.5 million and was also added to the company’s IHG management deal.
Earlier in the year, the company announced a $308.2-million deal to sell 20 travel centers to TravelCenters of America, with plans to use the proceeds to repay debt and buy hotels.
HPT officials announced they’re currently in negotiations with Wyndham Hotels & Resorts to renegotiate the management agreement for the company’s 22-property Wyndham portfolio.
Revenue per available room fell 9.9% for that portfolio in the quarter, with a 4.2% decline in rate and a 3.8-percentage-point occupancy drop.
Murray said he’s hopeful the negotiations will allow his company to refine that portfolio to the point it is more successful.
“I don’t want to get into the details because we’re in discussions with them, and that always goes better privately done rather than on a conference call,” he said. “But I think it’s fair to say that both sides are considering the possibility of disposing of some of the weaker performing properties and maybe the addition of one or two properties to the portfolio.”
The company is also engaging with Marriott International to rework one of its three deals with that company. HPT currently owns 122 Marriott-branded hotels, and is looking to revisit the “Marriott No. 5” portfolio, which includes the Kaua’i Marriott Resort in Lihue, Hawaii.
“We’re still talking,” Murray said. “I wouldn’t say that there’s necessarily been progress, but hopefully by that time the second quarter rolls around, we’ll have more to share.”
Murray noted the company’s portfolio performed worse than the industry average during the quarter, in large part because of widespread renovations. RevPAR fell 3.1% year over year across the company’s portfolio for the quarter.
“The first quarter is generally our weakest quarter, and it was by design that we scheduled as many renovations into this period as we could to reduce negative impact during our seasonally stronger quarters,” he said.
Net income for the quarter was $225.8 million.
As of press time, HPT stock was trading at $26 a share, up 9% year to date. The Baird/STR Hotel Stock Index was up 16.6% during the same period.