After months spent offloading a portfolio of non-core, extended-stay hotels, Service Properties Trust briefly pivoted into buying mode early in the second quarter, spending $165 million to purchase the Nautilus Hotel in South Beach Miami.
Now executives at real estate investment trust, which is focused on hotels and net lease retail, say that deal could be its only hotel buy of 2023 as the transactions market has dried up and fundamentals don't add up.
On Service Properties Trust's second-quarter earnings call, President and Chief Investment Officer Todd Hargreaves said buying hotels might not be the best use of capital at the moment.
"We are looking at potential acquisitions but obviously have other uses for that cash, whether it's [capital expenditures] into the hotels or these debt maturities that are coming up in 2024 and 2025," he said. "The Nautilus was a very unique opportunity in a market that we felt we were underexposed in and a critical gateway market for a hotel company of our size to have something."
The Nautilus will undergo a significant renovation and rebranding to a James hotel, a brand owned by affiliated hotel branding company Sonesta International. It is operating as the Sonesta Nautilus South Beach until the conversion is completed.
Hargreaves said it's been hard to find deals that pencil in the way that acquisition did.
"It's challenging to find an opportunity that kind of worked for SVC, given our cost of capital and our yield hurdles," he said.
In general, there's not much on the market that can generate significant yields, he said.
"You're not seeing a lot of distressed sales," Hargreaves said. "I think a lot of owners are looking at their portfolio and saying, 'You know, we've made it through the worst of it. I don't want to sell something for 70 or 80 cents on the dollar.'"
He added that it's hard to predict just how many deals get done in any given year, and Service Properties executives will remain active in evaluating potential deals, but it's unlikely they do much more.
"It could very well be that the Nautilus is the only property acquisition SVC makes in 2023," he said. "I think it's either zero, or one or two [more], most likely."
Second-Quarter Performance
For the second quarter, Service Properties reported a 2.8% increase in revenue per available room to $97.07, fueled mostly by rate increases as demand stayed mostly flat. Earnings before interest, taxes, depreciation and amortization for the company's hotel portfolio grew 7.5% to $93.4 million.
For the quarter, the company reported an $11.3 million net loss with total adjusted EBITDA for real estate of $185.3 million.
The only other transaction activity in the quarter other than the Nautilus purchase was the sale of two net lease properties for $620,000 total.
As of publication time, Service Properties' stock was trading at $8.68 per share, a 21.3% increase year to date. The Nasdaq Composite was up 33.3% for the same period.