Leaders from Apple REIT Hospitality, KHP Capital Partners
and Omni Hotels & Resorts shared their unique takes on the state of
development and acquisition.
Omni Hotels & Resorts Chairman Peter Strebel, KHP
Capital Partners Managing Partner Ben Rowe and Apple Hospitality REIT CEO
Justin Knight were all feeling predominantly bullish about their company’s
prospects as they took to the stage for a session at ALIS 2023 to discuss whether
to buy, build, sell or hold assets. While all own assets with plans for further
growth and recycling of capital, where they differed was on their strategies
and methods for realizing that growth potential.
Strebel said Omni witnessed a strong rebound with 2022
RevPAR up 17% over 2019. Looking forward he added that Omni isn’t seeing signs
of a recession and group pre-sell for 2023 is going well. While rate growth ahead
is more muted, he said it does continue to grow.
Privately held Omni also plans to try to reposition itself
more directly into the luxury segment, according to Strebel, and is always on
the hunt for trophy assets. But, unfortunately, Strebel added, those better
assets are trading at prices Omni still doesn’t want to pay. “So, basically we’ve
taken the strategy of investing in and building our own assets,” he said,
adding that while Omni continues to look at acquisition targets its last
acquisition was 10 years ago when it purchased six resorts from KSL.
Omni has four major projects in the ground right now – two
close to opening, including a golf resort in Frisco, Texas, and another resort
in Tempe, Arizona. Fort Lauderdale, Florida, is also under construction and Omni
is preparing to break ground near Punta Mita, Mexico.
On the renovation side and keeping good on its strategy to
move into the luxury space, Omni’s Homestead resort in Hot Springs, Virginia,
is going through a top-to-bottom $140 million update.

It feels like there’s more compelling opportunities to acquire existing, undercapitalized hotels in need of renovation to a new standard – but then be all in at a cost basis.
Ben Rowe
Like Omni, KHP’s Rowe said its leisure assets performed
really well in 2022, exceeding 2019 performances – not just on the top line,
but in NOI and profit margins. Their urban properties were a bit of a “mixed
bag,” Rowe said, adding that markets like West Hollywood, California, and
Chicago surprised on the upside. “We expect to see continued significant growth
in those [urban] assets this year,” he added.
Looking ahead, Rowe said while he continues to like KPH’s long-term
thesis that drive-to leisure with supply constraints is a strong play, prices
for such assets have been driven up to the point where they don’t look quite as
attractive. He hopes as performance starts to normalize, values will come down
a bit, making them more attractive. “But we also have started to focus again on
some of these urban markets that we’ve invested in historically, where in some
cases properties are still at some level of distress,” he said. “And now that’s
compounded by pressures from the capital markets. So, these assets can still be
purchased at a significant discount to where they were valued pre-COVID. “With
the right set of circumstances, they are pretty compelling.”
Rowe also said KHP isn’t currently focused on new development
due to escalating costs. “It. feels like there’s more compelling opportunities
to acquire existing, undercapitalized hotels in need of renovation to a new
standard – but then be all in at a cost basis,” he said. “That’s well below
what it actually costs to build new, at least in the markets where we’re
looking.”
That said, Rowe also stated that on the buy side, it is
harder to make these deals work. The combination of lower leverage and higher
interest rates means these assets are worth less, and it is particularly true
for transitional assets where the debt market is thinnest and where spreads
have widened the most. “I don’t think seller expectations have necessarily
fully adjusted to that,” he said.
Rowe added that KHP is spending a lot of time with its
relationship lenders trying to make sure they understand what fits for them and
what those terms look like. “We also are spending time with regional lenders
and other groups that we haven’t transacted with before to see if they are a
better source of capital, a cheaper source of capital in some of these
situations. It’s about making sure that we understand how to underwrite these
opportunities, what to prioritize, and if we’re going to pursue something, we
want to be confident that our debt assumptions are achievable.”

Throughout the pandemic, we looked to further adjust, and I think continue to do that, pursuing assets in markets with diverse demand generators and a really good balance between rate potential and likely cost structure.
Justin Knight
Apple Hospitality’s Knight was also happy the way 2022
transpired, especially during the second half when business and group business
began to pick up, boosting mid-week occupancy as their 220 hotels across 80
markets.
Knight said Apple Hospitality has been tracking demographic
trends that show more movement into lower-cost markets like Boise, Idaho, Salt
Lake City, Utah, and Austin, Texas, as well as cities in Florida and the
Carolinas. “Part of the reason for the quick rebound of our portfolio was our
heavy concentration in Sunbelt states, which is not our exclusive focus, but
had been a meaningful focus,” he added. “Throughout the pandemic, we looked to
further adjust, and I think continue to do that, pursuing assets in markets
with diverse demand generators and a really good balance between rate potential
and likely cost structure.”
Looking ahead at further acquisitions, Knight said Apple
Hospitality will continue to focus on high density suburban and smaller urban markets,
but not exclusively. “Over time, there may be an appropriate entry point for
some of the markets that historically have been more costly to enter. We’ll
evaluate those opportunities as well.”
Selling opportunities?
On the sale side, Knight added that Apple Hospitality
continually watches market shifts, especially with assets that might need
reinvestment, and look to optimize their exits and redeploy proceeds in either
the new development deals or into our existing portfolio in ways the track the
greatest returns. “I think it’s true, overall, on average, that real estate
appreciates over time,” he said. “But it’s not necessarily true for every
specific asset…Often we sell to buyers who have a concentration in a market or
who have different investment thesis, and those investors do very well. We will
continue to be active when the market supports both buying and selling.”
Strebel said as Omni tries to elevate its market position,
assets in certain markets will no longer fit the brand profile. “A lot of the
markets are so saturated with limited-service or midscale that the rate are too
low,” he said. “So, we got rid of five assets in markets that really didn't
make sense for us. They were good hotels making good EBITDA, but they didn’t
fit the profile, and it didn’t make sense for us to put in $20-$30 million per
hotel because there wasn’t the upside on the rate.”
Rowe said KHP, a PE firm that typically holds five to seven
years, was looking to sell some of its leisure assets before the capital markets
shifted to avoid downside risk as travel patterns started to normalize. But for
now, he added, KHP is not considering selling any additional properties. “And I
don’t expect that we will in the in the near term.”