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  Hotel Owners Adapt Portfolio Strategies to Changing Market Conditions

Excerpt from CoStar

Companies Reinvest in Hotels, Optimize Properties for Sale

During a general session at the Americas Lodging Investment Summit, hotel owners explained how they have adapted their portfolio strategies, such as reinvesting capital or preparing hotels for sale.

Changing market conditions across the U.S. have opened and closed deal opportunities for hotel owners trying to take advantage of travel demand as costs continue to rise.

During an Americas Lodging Investment Summit general session on building, buying and selling hotels, hotel executives said that they’re still able to make deals, but it’s more difficult to make all the factors necessary align. As they continue to review new development projects and potential acquisitions, they’re also reconsidering their portfolio strategies for reinvestment or sales.

Investment Strategy

Over the last decade, Apple Hospitality REIT has identified some meaningful economic and demographic shifts through the U.S. that were accelerating even before the pandemic, President and CEO Justin Knight said. The trends were moving away from high-cost markets to lower-cost markets, such as tech companies expanding in Boise, Idaho; Salt Lake City, Utah; and Austin, Texas, outside of the Pacific Northwest.

“We’ve worked overtime to adjust our portfolio to benefit from those trends,” he said. “Certainly, part of the reason I think for the quick rebound of our portfolio was our heavy concentration in Sunbelt states, which has not been our exclusive focus but has been a meaningful focus.”

Throughout the pandemic, Apple REIT continues to further adjust and pursue hotels in markets with diverse demand generators and a good balance between great potential and likely cost structures, he said. It continues to focus on high-density suburban and smaller urban markets, but there may be an appropriate entry point into something larger that has historically been more expensive to enter.

KHP Capital Partners started investing in drive-to leisure destinations starting back in 2015, co-founder and Managing Partner Ben Rowe said. The thesis behind it was the growing demand coming out of major cities as well as the constraints on supply growth in some of these destinations. The company still likes these investment opportunities, but they became more popular in the wider industry during the early days of the pandemic, and the competition for those properties drove up the pricing.

“We have struggled somewhat more recently to define opportunities that we think are compelling,” he said.

While drive-to leisure destinations still hold long-term investment opportunities, KHP is focusing again on some urban markets, Rowe said. Historically, the company has invested in properties experiencing some levels of distress.

“As we come out of COVID, now that’s compounded by pressures from the capital markets,” he said. “These assets can still be purchased at a significant discount to where they were valued pre-COVID, and, at the right circumstances, they are very compelling.”

Before the pandemic, Omni Hotels & Resorts decided to move its brand closer to the luxury segment after operating in the upper-upscale level, Chairman Peter Strebel said. The company is always on the hunt for trophy assets, but those are trading at prices that even during the pandemic were too high.

“We’ve taken the strategy of investing and building our own,” he said, adding the company’s last acquisition was about eight years ago in a deal for six resorts from KSL Capital Partners.

The strategy has allowed Omni to invest in its own real estate to grow and elevate its existing resorts and hotels, Strebel said. He cited the $140 million renovation and restoration project currently underway at the Omni Homestead Resort in Hot Springs, Virginia.

“We're really not out there growing as much, and [we’re] building our own and developing our own, but if there is a good deal out there … we'll be out there,” he said.

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