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HPT to buy more conservatively, focus on renovations

Column: industry Tag: Hospitality Properties Trust,HPT,renovations Published: 2017-11-10 11:00 Source: Author:

Hospitality Properties Trust announced the acquisition of two full-service hotels in the third quarter, including the 300-room Crowne Plaza Charlotte Executive Park in Charlotte, North Carolina, for $43.9 million. (Photo: IHG)

NEWTON, Massachusetts—Hospitality Properties Trust continued an acquisitions-based growth strategy in the third quarter that added 16 hotels to its portfolios—on top of 18 that were added in Q2. But company executives said during an earnings call with investors that going forward, the strategy could change.

“We’re being a little bit more conservative about how we invest, and we’re being careful about who we invest with,” said HPT?President and COO John Murray. “We have a lot of renovations that we’re going to be working on during the course of next year, related to the pretty healthy level of acquisitions we made this year.”

Taking a big-picture view, he added: “We are looking at our portfolio right now, and we are seeing lot of headwinds from supply growth—not just supply aiming to come on in 2018 and 2019, but many markets are still absorbing hotels that were built this year or last year. That makes underwriting more complicated.”

As a result, he said, “I think we’re going to take a little bit more of a wait-and-see on where the hotel industry’s going.”

Murray’s comments were in response to an analyst, who asked about the thought process behind HPT’s deployment of capital for new deals and investments at a time when the company is seeing flat to deteriorating revenue margins.

HPT reported?a 1.1% decline in revenue per available room for all hotels to $101.85 for the quarter, which was a result of a 1% drop in occupancy and nearly flat average daily rate (-0.1% to $128.27), according to an earnings news release. Adjusted earnings before interest, taxes, depreciation and amortization was up 6.2% for the quarter to $223.5 million, while net income was $85.7 million.

Murray stood behind his company’s recent investments, and said he expects performance to turn positive in the fourth quarter, as the company realizes returns on renovations.

“We think the prices we’re investing at on per-fee basis, and in terms of the going-in yields, are conservative. We think they’re going to be attractive after we’ve completed our renovations,” he said. In the meantime, he added, “we’re only looking at a couple of potential acquisitions currently, and we’re not sure that they’ll even necessarily go forward.”

Q3 performance

Murray, who was joined by CFO Mark Kleifges on the call with investors, listed several factors contributing to weaker performance in Q3, “including room supply growth, market weakness due to convention center renovations in San Francisco and Miami, reduced occupancy in renovation hotels, holiday shifts, nonrecurring political conventions, hurricanes and western wildfires.”

He added that the concentration of hotels in Top 25 markets sometimes works against HPT properties located there or nearby.

“Specifically this quarter, we had 30 hotels, representing 7.5% of revenue on returns, in the quarter’s top-performing markets of Orlando, Tampa, Nashville and Detroit,” he said, “but 43 hotels representing 15.4% of our returns in the underperforming markets of Philadelphia, Minneapolis, New Orleans, Chicago and Dallas.”

Still, there were bright spots in the performance results.

HPT’s top-revenue-performing portfolios for the quarter were managed by Hyatt Hotels Corporation (+2.2% RevPAR year over year) and Wyndham Hotel Group (+0.4% RevPAR), according to Kleifges. The Hyatt portfolio benefitted from occupancy growth of 1.7% and average daily rate growth of 0.2% for the quarter, while Wyndham’s 2.8% increase in ADR was partially offset by a 1.8% decline in occupancy, he said.

“This improvement reflects improved performance at the recently renovated Hamilton Park hotel in New Jersey,” Murray said. “Additionally, our Wyndham Houston hotel benefitted from increased demand related to relief work following Hurricane Harvey.”

The company saw mixed performance from its full-service hotels. Murray cited “strong performance at our InterContinental hotels driven by post-Hurricane activity in Austin, Texas, and San Juan, Puerto Rico.”

But, he said, that was offset by “weaker performance at our Crowne Plaza hotels due to factors that included loss of high-rated group business at our Miami hotel (due to the Miami Beach Convention Center closing for renovation) and reduced demand from the Secret Service at our White Plains (New York) hotel (where agents were stationed to protect Hillary Clinton during her presidential campaign).”

Cautious optimism going forward

Murray told analysts that he expects “negative RevPAR will become a thing of the past” starting in the fourth quarter.

“We don’t expect to see that weak RevPAR and declining margins to continue,” he said.

“Looking ahead, we and our hotel operators remain cautiously optimistic. Our managers are projecting that for the rest of 2017, we will experience increased rate growth and occupancy growth versus earlier in 2017 as demand improves and recently renovated portfolios continue to ramp up.”

HPT managers are maintaining forecasts for full-year occupancy and rate, “such that comparable RevPAR growth for 2017 may be 0.5% to 1% with (gross operating profit) margins in the flat to down-50-basis-points range,” Murray said.

Q3 transactions

The company continued its growth strategy of being an active buyer with third-quarter acquisitions of two full-service hotels and 14 extended-stay hotels for a total of $231 million.

The full-service hotels acquired during Q3—the 419-room Crowne Plaza & Lofts in Columbus, Ohio, for $49 million; and the 300-room Crowne Plaza Charlotte Executive Park in Charlotte, North Carolina, for $43.9 million—will be added to the company’s InterContinental Hotels Group portfolio. The extended-stay hotels will join HPT’s Sonesta ES Suites portfolios.

HPT also touted the sale of three hotels from its Carlson Hotels Worldwide portfolio—the 159-room Radisson in Chandler, Arizona; the 143-room Country Inn & Suites in Naperville, Illinois; and the 209-room Park Plaza in Bloomington, Minnesota—for $24.6 million. Those sales netted a profit of $9.3 million that will be used to partially fund renovations to its eight remaining Carlson-managed hotels, according to the company.

As of Thursday morning, HPT’s shares were trading at $29.82, down 6.1% year to date. The Baird/STR Hotel Stock Index?was up 37.3% for the same period.

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