A REIT, PE fund and brand walk into a bar…

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

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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

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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.”