Acquisitions: A Key Growth Strategy for Lodging REITs

Recent Acquisition Trends

Lodging REITs are actively expanding their portfolios through strategic acquisitions. Apple Hospitality REIT acquired seven hotels and a parking garage, yielding approximately 9% after improvements. Host Hotels & Resorts integrated three new properties, achieving significant yield index gains. RLJ Lodging Trust acquired Wyndham Boston Beacon Hill, while Xenia Hotels & Resorts highlighted recent acquisitions like W Nashville and Hyatt Regency Portland for potential earnings growth.

"Recent acquisitions, including the seven hotels we acquired since June of last year, together with the parking garage adjacent to our downtown Salt Lake City hotels are yielding approximately 9% after capital improvements on a trailing 12-month basis through March of this year, with meaningful upside from projected market growth and improvements in operations driven by the transition of management companies at five of the seven assets." --- (APLE, earning call, 2024/Q1)

"But, we certainly are more focused today on integrating these 3 great properties that we acquired into the Host system, into our asset management and enterprise analytics platform.And we will continue to invest in our portfolio generally because we are very happy with the results that we've achieved from the 24 total transformational innovations that we've completed to date, where the 14 properties that have stabilized operations have picked up 7 points in yield index well above our underwriting and we think that positions us great going forward.And we'll also consider buying back additional stock." --- (HST, earning call, 2024/Q2)

"During the first quarter, in addition to delivering RevPAR growth and growing our RevPAR index, we executed on a number of fronts, including making progress on our next wave of conversions, expanding our pipeline of conversions with the acquisition of the Wyndham Boston Beacon Hill, executing multiple high return ROI projects, and taking steps to further ladder our debt maturities." --- (RLJ, earning call, 2024/Q1)

"As we have previously outlined, we believe we have significant embedded earnings growth potential within our portfolio, primarily through our recently renovated properties, our hotels that primarily cater to group and business transient customers, and our two most recent acquisitions, W Nashville and Hyatt Regency Portland at the Oregon Convention Center." --- (XHR, earning call, 2024/Q1)

"We’re incredibly pleased with the quality of our portfolio and the recent additions to it through new acquisitions." --- (APLE, earning call, 2024/Q1)

Strategic Rationale Behind Acquisitions

Host Hotels & Resorts is currently prioritizing ROI projects and share repurchases over acquisitions in the near term. However, they continue to explore potential acquisitions, which would be funded primarily through hotel sales, equity offerings, OP unit issuances, or available cash.

"I mean, you mentioned acquisitions are unlikely in the near term and pivoting instead to deploying capital through whether ROI projects or as share repurchases." --- (HST, earning call, 2024/Q2)

"We continue to explore potential acquisitions and dispositions. We anticipate that any such future acquisitions will be funded primarily by proceeds from sales of hotels, but also potentially from equity offerings of Host Inc., issuances of OP units by Host L.P., or available cash." --- (HST, sec filing, 2024/Q1)

Financial Performance Post-Acquisition

Lodging REITs use EBITDA and FFO to evaluate and compare financial performance post-acquisition, removing impacts of capital structure and asset base. Effective management transitions also drive improved topline and bottom-line performance, highlighting the importance of operational efficiency in post-acquisition success.

"We consider EBITDA useful to an investor in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization expense) from our operating results." --- (RLJ, sec filing, 2024/Q1)

"We consider EBITDA useful to an investor regarding our results of operations, in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results, even though EBITDA does not represent an amount that accrues directly to common stockholders." --- (XHR, sec filing, 2024/Q1)

"Management believes EBITDA provides useful information to investors regarding our results of operations because it helps us and our investors evaluate the ongoing operating performance of our properties after removing the impact of the Company's capital structure (primarily interest expense) and its asset base (primarily depreciation and amortization)." --- (HST, press release, 2024/07/31)

"That said, this is one of the assets where we transition management. And then, new management team has done an exceptional job both in driving topline performance for the asset and flowing the topline performance to the bottom line." --- (APLE, earning call, 2024/Q1)

"The Company believes that the presentation of FFO provides useful information to investors regarding the Company's operating performance and can facilitate comparisons of operating performance between periods and between real estate investment trusts ("REITs"), even though FFO does not represent an amount that accrues directly to common shareholders." --- (RLJ, press release, 2024/08/01)

Market Conditions Influencing Acquisitions

Economic uncertainties, geopolitical developments, constrained transaction volumes, and delayed rate cuts are key market conditions influencing acquisitions. Companies adjust strategies opportunistically to market shifts, with some seeing conducive economic conditions for growth, while others highlight the desirability of their assets within their markets.

"These risks include, but are not limited to: risks that we may not be able to close the transaction based on failure of either party to meet required closing conditions; general economic uncertainty in the Oahu market and the possibility that future growth in this market will not meet current expectations or the stabilized results we expect to achieve; other factors such as natural disasters and weather that will affect occupancy rates at the property and the demand for hotel products and services; the impact of economic and geopolitical developments on lodging demand and the Oahu market in" --- (HST, press release, 2024/05/29)

"Overall volume for the transaction market still remains constrained. While it's improving, it's still not -- it's still slower than we expected because rates have -- rate cuts have been sort of pushed out. Dori Kesten: Okay. Thank you." --- (RLJ, earning call, 2024/Q1)

"But I think as we look across the portfolio, our assets are really desirable within their markets." --- (XHR, earning call, 2024/Q1)

"And in today’s environment and again the market shifts quickly and we adjust our strategy accordingly to be opportunistic." --- (APLE, earning call, 2024/Q1)

"Outlook While there were portfolio-specific challenges in the first quarter of 2024, we continue to see economic conditions conducive to year-over-year growth for the lodging industry." --- (HST, sec filing, 2024/Q1)

Competitive Landscape and Acquisitions

Higher interest rates are influencing seller expectations and transaction volumes, creating a competitive M&A landscape for lodging REITs. Companies like APLE and HST are navigating these changes, while RLJ focuses on acquiring hotels with efficient operating models and high returns. HST highlights unique acquisition opportunities, emphasizing strategic positioning.

"And then, wanted to hit one on the transaction landscape. Justin, given kind of the evolving interest rate environment or interest rate expectations, maybe have you seen any changes in seller expectations and sort of the volume of opportunities that are coming to the transaction market?" --- (APLE, earning call, 2024/Q1)

"And then maybe just on the overall M&A landscape, with rates seemingly higher for longer." --- (HST, earning call, 2024/Q1)

"We believe these types of hotels have the potential to generate attractive returns relative to other types of hotels due to their ability to achieve RevPAR levels at or close to those achieved by traditional full-service hotels while achieving higher profit margins due to their more efficient operating model and less volatile cash flows." --- (RLJ, sec filing, 2024/Q1)

"We think that, that property has a lot of run room. We haven't taken into consideration in our underwriting, any incremental EBITDA generated from the residences that are currently being developed by another developer on the site as well as our 49-acre parcel of land. So it's a once-in-a-lifetime opportunity to acquire that hotel and we're in a unique position to do it." --- (HST, earning call, 2024/Q2)

Integration Challenges Post-Acquisition

Integration challenges post-acquisition for Lodging REITs include marketing efforts, logistical issues like airlift, and renovations impacting guest experience and revenue. Host Hotels & Resorts and Xenia Hotels & Resorts highlight these difficulties, emphasizing the significant impact on operations and financial performance during the integration phase.

"And we think good progress is being made along those lines.Additionally, we are working with other hotel owners on Maui and Hotel Association to put in place a coordinated marketing campaign to sell the island, and we’re taking steps individually at our 3 assets, the Hyatt Regency, the Andaz as well as the Fairmont Kea Lani to start marketing those assets, again, mid-September on going forward.One of the other challenges that we’re going to have to overcome is airlift into Maui." --- (HST, earning call, 2024/Q2)

"The biggest challenge here for the next two quarters, really the second quarter and the third quarter, is working our way through these public spaces and the lobby and all the F&B offerings, and that's obviously very impactful to the guest experience." --- (XHR, earning call, 2024/Q1)

"The renovation and transformation of all of these components will continue to displace a significant amount of revenue and EBITDA as the overall guest experience is meaningfully impacted." --- (XHR, earning call, 2024/Q1)