Host Hotels & Resorts and Strategic Hotels & Resorts have both announced acquisitions, as the REIT model looks increasingly strong.
Host, which is to acquire the 1,625 room Manchester Grand Hyatt San Diego for $570m, also reported a 6.2% increase in fourth-quarter revpar. Strategic, meanwhile, has made an acquisition despite its high levels of debt and has in fact cut its overall debt ratio through its most-recent deal.
Strategic is to buy two Four Seasons hotels from The Woodbridge Company, neither of which are carrying any debt, paid for by issuing 15.2 million shares, valued at $95m to Woodbridge. It will also then sell another eight million shares to Woodbridge for $50m. In the act of making the group larger, it has made its debt proportionally smaller.
Jeff Donnelly, Wells Fargo Securities analyst, was quoted in the Wall Street Journal as calculating that, in addition to plans by Strategic to pay debt incurred restructuring the Hotel Del Coronado, its debt-to-value ratio would fall to 59% from 65%. Strategic has asset managed the two hotels on behalf of Woodbridge for the past two years.
The deal makes Woodbridge the group's largest shareholder, with 13.2%. Laurence Geller, CEO, said: "This … adds two high-quality, unencumbered assets to our portfolio, deepens our ownership within the Four Seasons brand, and will welcome a sophisticated and successful investor into our stock."
The exit from Europe for Strategic continued with the sale of the leasehold interest in the Pairs Marriott Champs Elysees for Eu26.5m to an undisclosed buyer. Strategic also expects to receive a further Eu13.2m related to the release of a leasehold guarantee and other adjustments.
Host's deal was more traditional, and followed a year in which it closed approximately $500m in acquisitions by purchasing the W New York Union Square, Westin Chicago River North, the Meridien Piccadilly in London and the JW Marriott Hotel Rio de Janeiro, and announced acquisitions in New York, New Zealand and San Diego totalling more than an incremental $1bn, which CEO and president Ed Walter described as "some exciting transactions" at the group's earnings call.
"History has demonstrated that early cycle acquisitions tend to add the best value, and we are acting on that premise," he added. "We have a strong pipeline of acquisition opportunities and expect that we will purchase additional hotels during 2011." During the quarter, the group raised approximately $248m under its continuous equity offering programme to fund future acquisitions.
The group ended the quarter with over $1.1bn in cash and cash equivalents and, after closing on all of the acquisitions, will have an excess of $200m in cash and $542m of available capacity on its credit facility. Host also announced a strong quarter's trading, with revenue rising to $1.49bn from $1.33bn a year earlier and a net loss of $6m, compared with a loss of $72m last year.
Strategic sold its Prague hotel at the end of last year in an effort to cut its exposure to Europe and Host too has aspirations to sell properties, however, Walter said that the difficulties in buyers raising debt had meant it had not sold any sites. It anticipated the market improving as the year progressed.
HA Perspective: The turnaround at Strategic is extraordinary. At the depths of the recession most bets would have been placed on the company going bust but it has come roaring back to health.
While the U-turn in Europe does not look very strategic it has at least been executed well. And there seems no compelling reason why Europe is a market that does not work in general, even if specifically for Strategic it no longer makes sense.
Certainly Host's joint venture in Europe is blooming. Revpar in 2010 was up 8.5% in constant Euros and an increase of between 5% and 7% is expected this year.
The market for luxury and upper upscale hotels was always going to show the sharpest recovery given that it was the hardest hit in the downturn. Nonetheless, the pace of recovery is impressive and tax advantaged REITs are set to be big beneficiaries of the low leverage future.
Alongside this is the shifting of sands in favour of owners at the expense of operators. A clear example of this is a titbit that came out of the Host conference call which saw the company confirm that it had received key money from Starwood for the forthcoming New York Westin.
All told, for well capitalised owners of upscale and luxury hotels, the recovery is shaping up nicely, particularly if you can factor in tax advantages too.