Host Hotels & Resorts President and CEO James Risoleo said the REIT expects temporary hotel closures in its top 20 markets to become permanent, but Host still has an appetite for deals.
BETHESDA, Maryland—Host Hotels & Resorts is anticipating permanent hotel closures for some hotels in top 20 markets because of the COVID-19 pandemic, and the real estate investment trust has the capital to spend on acquisitions for deals that make sense, company officials said on a call with analysts to report second-quarter earnings.
Host President and CEO James Risoleo said the real estate investment trust expects to see “record levels of permanent hotel closures due to the unprecedented level of distress” caused by the pandemic in its top 20 markets.
He added that the lodging delinquency rate rose from 2.7% in April to 19% in May and reached 24% in June. Host’s analysis indicates that approximately 30% of upper-tier hotels in Host’s top 20 markets are closed temporarily, he said.
Seven hotels in the top 20 markets Host has a presence in have reportedly closed permanently, Risoleo said, adding that more of the temporary closures are expected to become permanent. While Host is not permanently closing any properties, he noted closures will impact the supply-demand dynamics in those top markets.
Host expects to continue to see ongoing challenges until health concerns around the pandemic are addressed, but Risoleo said the company is encouraged by “our operators ability to adapt the operating model to record low levels of demand by reducing our hotel level operating costs by 72%,” and by “the resilience of lodging demand, which began to return as states and markets reopen and … would have been greater had infection rates continue to flatten rather than rise.”
CapEx and acquisitions
When asked by an analysts how Host is thinking about cash burn allocation and how comfortable the company is with pursuing capital allocation and acquisitions, Risoleo said “the way we’re thinking about the business today is quite simple: Liquidity is king.”
The REIT is being thoughtful with how it is allocating funds for CapEx and will cut back if the situation doesn’t improve, he said.
From a capital allocation perspective, Risoleo said the company has “the flexibility to invest in up to $1.5 billion of acquisitions with existing liquidity, subject to maintaining $500 million of liquidity.”
He said there aren’t many acquisition opportunities in the marketplace today, but he expects to see investment opportunities in the latter part of 2020 and 2021 “as special servicers and other lenders resolve issues with their borrowers.”
“In some instances, properties are going to come to market. In other instances, properties are going to be recapped, but it's the same thought process with respect to buying hotels at this point in time. We have to be comfortable that we're going to have the right amount of liquidity to ride through the crisis.”
Hotels in drive-to leisure markets such as Phoenix, San Diego, Miami and Jacksonville started the quarter with 1.8% occupancy and progressed to 17.4% by the last week of June, said Brian Macnamara, SVP, principal financial officer and corporate controller at Host.
“Although the portfolio was in negative territory in the second quarter, markets with relatively better performance include Jacksonville, the Florida Gulf Coast, New York, Houston, Los Angeles, Miami and Atlanta,” he said.
Macnamara added that markets in Florida, excluding Orlando, benefited from leisure demand during the quarter.
“The Ritz-Carlton Amelia Island outperformed TR upper-tier (revenue per available room) in Jacksonville by 600 basis points while our Miami hotels outperformed their STR piers by 250 basis points of RevPAR,” he said. “Our hotels in New York and (Los Angeles) benefited from medical-related business, as well as the closure of hotels within those markets.”
STR is the parent company of Hotel News Now.
RevPAR dropped 93% during the quarter to $14.31, according to the company’s earnings release.
Occupancy improved by 380 basis points from April to June and average daily rate improved 50% from $129 in April to $194 in June.
As of 30 July, Host had reopened 19 of its 35 hotels that had suspended operations as of 6 May.
As of press time, Host’s stock was trading at $10.78 a share, down 40.9% year to date. The New York Stock Exchange Composite was down 11% for the same period.