DALLAS—For Ashford Hospitality Trust, the current hotel recovery is market specific.
During the first quarter of 2013, the real estate investment trust with direct investment in 94 hotels found success in Key West, Florida, but struggled in Washington, D.C.
Revenue per available room across Ashford’s entire portfolio increased 4.3% during the quarter. But the overall number isn’t as telling as what happened in specific markets.
Key West and deals
Ashford earlier this week acquired the 142-room Pier House Resort and Caribbean Spa in Key West for $90 million in an all-cash deal. The purchase price equates to a trailing 12-month cap rate of 6.2%.
The hotel recently underwent a $12-million renovation and will require little capital improvement form Ashford. In 2012, the hotel achieved RevPAR of $275, with occupancy of 83% and an average daily rate of $333, according to Ashford executives.
Remington Lodging, Ashford’s affiliated management company, will take over management of Pier House.
Doug Kessler, president of Ashford, was optimistic about the market.
“Key West is one of the toughest markets to build hotel rooms in; there are tight restrictions on growth,” he said.
Monroe County, Florida, has a Rate of Growth Ordinance, which has not allowed a new hotel to be built in Key West in 17 years, according to David Kimichik, Ashford’s CFO and treasurer.
“It’s an incredible little jewel in the U.S. that benefits from demand in all seasons,” Kessler said. “Key West’s historical performance has been solid even in the worst of times. When overall RevPAR was down 16% across the board, Key West was only down 6%.
“Key West is keeping supply constrained with increasing demand by all means of transportation.”
Kessler said the Pier House bidding process was competitive but Ashford prevailed because of the cash on its balance sheet and its knowledge of the market.
“The bottom line of this asset will even better over time,” he said.
Kessler said Key West falls just short of New York in RevPAR performance. “If this were any other city you’d expect to see growth,” he said.
Ashford hadn’t purchased a hotel in two years, since it acquired the 28-hotel Highland Hospitality portfolio in a foreclosure sale for $1.3 billion in March 2011.
Kessler said the REIT has been looking at the market and even placed some bids on properties over those two years but never felt comfortable pulling the trigger.
“It’s just that we’re very disciplined,” he said. “We all own so much of the company that we want transactions to be accretive. Some of the multiples just didn’t really make sense.”
Kessler said today’s hotel transaction market is still below what he believes is “a normal pace of transactions.”
“We probably won’t get back to the heyday of 2007 levels, but the level it’s at now still feels below where it should be at this point in cycle,” he said. “Buyers are out there looking, but similarly sellers are reluctant to sell. There just doesn’t seem to be the pressure to dispose of assets.”
Ashford will continue to look for opportunities to buy full-service hotels in urban markets, Kessler said.
Washington and group
Although Ashford hotels don’t rely heavily on group business, certain markets are feeling pain from lagging group demand more than others. The company has three hotels in downtown Washington, D.C., and another dozen or so in outlying areas around the nation’s capital.
Typically, 6% to 8% of Ashford’s business is government-related. As that demand dries up because of cutbacks and the sequester, Ashford has communicated to its managers to move away from government demand and replace it with other group business, such as associations.
“Long term, we remain very bullish on (Washington, D.C.),” Kessler said. “Obviously we’re seeing some minor impact and some potentially near-term softening from the sequester. But long term we remain bullish.”
Jeremy Welter, executive VP of asset management for Ashford, said general government spending cuts have had a larger impact than the sequester. He sees bigger cuts in 2014 as furthering the threat, but those cuts will be spread out over 12 months as opposed to over seven months as they were this year, he said.
“Group, as a percentage of our portfolio, is smaller than our peers,” Kessler said. “We have very few hotels I would consider to be big group houses.”
Even in D.C., Ashford’s managers were able to grow group rate, Welter said.