Officials with Host Hotels & Resorts are confident about the long-term performance of a set of three Hyatt-branded properties they plan to purchase and believe high-quality assets will be hard to come by going forward.
BETHESDA, Maryland—Through the course of 2017, Host Hotels & Resorts was successful in its efforts to sell off hotels in low-growth markets with heavier capital needs. And when the company saw a chance to invest a comparable amount of money into more attractive assets, officials jumped at the opportunity.
The company announced plans Thursday to invest $1 billion into the purchase of a three-hotel portfolio of Hyatt Hotels Corporation-branded hotels. Hyatt officials disclosed plans to sell the properties during their own earnings call a week ago.
“We sold $900 million in assets over the course of 2018 at relatively low cap rates,” said James Risoleo, Host’s president and CEO, during the company’s fourth-quarter and full-year 2017 earnings call. “When this opportunity presented itself, we said, ‘Wow, this is a really terrific opportunity to recycle capital.’”
The three hotels in the portfolio are The Andaz Maui, The Grand Hyatt San Francisco and The Hyatt Regency Coconut Point in Bonita Springs, Florida.
Risoleo said there is a lot to like about each of those hotels, adding he’s “bullish on these markets and assets.”
“These hotels are exactly the types of assets we’ve been targeting,” he said. “Supply outlook (for the markets they are in) over the next several years, and in-market growth is stronger than our broader portfolio and the country as a whole.”
Risoleo described Maui and San Francisco as “two of the fastest-growing markets” due to increasing airlift to Maui and increasing business investment in San Francisco, which will also see a boost from the reopening of a renovated Moscone Center. He said he’s also excited about the long-term prospects of western Florida markets like Bonita Springs.
Risoleo said he expects the deal with Hyatt to close by the end of the first quarter, but it could be completed early in the second quarter of 2018.
He said the capital-expenditure requirements for each of those properties will be relatively minimal since Hyatt invested heavily in them during its ownership, but he did say there will be opportunities to make some targeted, ROI-focused improvements.
Host is buying the portfolio at a 5% cap rate, he said, but ultimately sees it stabilizing around 6% after improvements in operations.
“Once we have the ability to get into the properties and bring our enterprise analytics to the table and our asset-management expertise, we will take a fresh look at how the hotels are being run,” Risoleo said.
Hyatt will retain long-term management of each of the hotels. Risoleo said a tangential benefit of the deal is a deepening of the relationship between Host and Hyatt, which he described as “great.”
“We are excited to build on a strong relationship with Hyatt,” he said, noting he values that company’s “expertise.”
In other transaction news, Host closed on the sale of the Key Bridge Marriott—located in Arlington, Virginia—for $190 million in January and is under contract to sell the W New York, also for $190 million, in a deal expected to close in the second quarter.
Performance and guidance
For full-year 2017, Host saw comparable hotel revenue per available room increase 1.3% year over year on a constant currency basis to $180.14, and RevPAR increased 2.2% to $175.52 for the fourth quarter.
The company saw adjusted earnings before interest, taxes, depreciation and amortization increase 1.9% for the year to $1.5 billion and increase 6.8% for the quarter to $375 million.
For 2018, Host officials are projecting comparable hotel RevPAR to increase between 0.5% and 2.5%. Net income for the year is expected to be between $547 million and $616 million, and adjusted EBITDA is projected between $1.46 billion and $1.54 billion.
Risoleo noted during the called that the first quarter of 2018 is expected to be the most difficult of the year, largely due to tough year-over-year comparisons with the strong Washington, D.C., performance tied to the 2017 presidential inauguration and Women’s March.
He noted January performance was demonstrably better than the company’s internal expectations, but he believes it’s too early to say what that means for the full year.
“That combined with some signs of life from business transient customers certainly gives hope for 2018, although it’s too early to call for a breakout just yet,” he said.
As of press time, Host’s stock was trading for $19.10 a share, a year-to-date decrease of 3.8%. The Baird/STR Hotel Stock Index was up 2.6% for the same period.