Third-quarter earnings reports are trickling in from real estate investment trusts in the lodging sector and the results are clear: the ill-defined global economy is resulting in a challenging operational environment.
A majority of analysts note that hotel REITs are, indeed, on the sidelines and not acquiring properties at a time when the delta between new supply and demand is shrinking.
The data are clear: transactions are down. According to research firm Real Capital Analytics, there were $12.7 billion worth of hotel transactions in the first half of 2016, down 55 percent from the year before. And the deals that are getting done are single-asset sales and not portfolios.
“REITs are out and we definitely feel the impact,” Kevin Mallory, managing director with CBRE Hotels, told National Real Estate Investor.
Lodging REITs continue to sell hotels in favor of buying back shares, a strategy that began in the latter part of 2015 and is continuing through 2016.
Uphill Climb
New hotels coming online are also putting a strain on operators charged with driving revenue-per-available-room gains. "Pricing pressure from corporate customers continues to be the primary headwind for our portfolio in the second half of 2016,” said James Francis, president and CEO of Chesapeake Lodging Trust. “Although our operators have been able to hold occupancy levels at our hotels at historically high levels, ADRs have been pressured more than expected, which in turn has impacted our operating results and margins."
Chesapeake, which owns 22 branded hotels composing 6,694 rooms, had a poor Q3. Its RevPAR decreased 0.7 percent over the same period last year, total revenue was positive but down from a year prior and while occupancy was up 90 basis points from the same period last year, ADR clocked in at $233.9, down 1.7 percent.
FelCor Lodging Trust, which owns 37 hotels, a bulk of which are Embassy Suites, faced similar difficulty. Like Chesapeake, FelCor's RevPAR for the quarter also decreased 0.7 percent compared to the same period in 2015. Corporate transit demand declined 2 percent and leisure transit demand declined 3 percent, while corporate and leisure ADR were flat to slightly down. Group demand declined 8 percent, "which was the largest demand shift we saw in segment," said Troy Pentecost, FelCor’s president, interim Sr. executive officer and COO. (Rick Smith, FelCor's former president and CEO, retired in September and the Board is now engaged in searching for a replacement).
"Our room revenue was impacted negatively this quarter by a combination of softer demand, tropical storms, and aggressive discounting programs offered by some of our brands," Pentecost went on to say.
Sunstone Hotel Investors and Pebblebrook Hotel Trust felt similar pinches.
Host Hotels & Resorts, the largest lodging REIT in the U.S., was one REIT that showed gains in the quarter, buoyed by its international operations. RevPAR at the company’s international properties increased a robust 29 percent in the quarter and 14.3 percent year-to-date. During the quarter, Host's Canadian and Brazilian properties had strong results with RevPAR increases of 14.8 percent and a whopping 105 percent, respectively, with the performance in Brazil driven by the Olympic and Paralympic Games.
At the same time, Host is looking to drive shareholder value via capital allocation. Host's strategy is to dispose non-core assets in markets where it expects lower growth or higher capital expenditure requirements. Proceeds from the sales have been used to buy back stock, among other things.
During the third quarter, Host disposed of its final two properties in New Zealand for $31 million and recognized a gain of $10 million. For the 10 properties disposed of in 2016, the combined average 2015 RevPAR was $109 compared to the company’s year-to-date 2016 comparable RevPAR of $179.
Broadly speaking, many of the forces that have been a drag on publicly-traded hotel companies, such as Hilton Worldwide, are having the same deleterious impact on lodging REITs. Namely, pressure from new supply in top MSAs, enervated corporate demand and a stronger dollar making international travel less attractive.
What's to Come in '17
Looking forward, expect an uptick in transactions next year. Overseas investment, especially from China, should continue, especially on trophy properties and via M&A, as we saw with Anbang's acquisition of the Strategic Hotels & Resorts portfolio.
In addition, as the National Real Investor smartly points out, "private equity funds that bought hotels near the start of the recovery in 2012 may now be nearing the end of their typical five-year hold period. Also, many 10-year CMBS loans will come due next year, prompting some owners to seek exit. “There is a relatively robust pipeline of transactions—2017 can be a good year,” said Daniel Peek, senior managing director and head of the hospitality practice group with capital services provider HFF.