Investors who sat in on earnings calls for hotel real estate investment trusts over the past few weeks might have heard a common theme: share repurchases. In fact, the majority of the hotel REITs reported stock buybacks for the second quarter of the year.
The reason for this isn't exactly surprising, said Michael Bellisario, senior research analyst at Baird Capital, but the scale is notable.
"Stock prices are down, sentiment is down, multiples are low, so cost of capital is elevated," he said. "The bid-ask spread for transactions is wide. Therefore, the management team is saying, 'What do we do with our capital?' And for the most part, these REITs are buying back stock."
Bellisario added that the only REITs that didn't repurchase shares in the second quarter were Park Hotels & Resorts, Pebblebrook Hotel Trust, Ashford Hospitality Trust and Braemar Hotels & Resorts. Park and Pebblebrook announced buybacks in the first quarter, but Ashford and Braemar didn't repurchase shares in the first half of the year.
But last quarter, Summit Hotel Properties bought back stock for the first time in the company's history.
“Given the significant dislocation we experienced in the stock price early in the second quarter, our Board of Directors approved a $50 million share repurchase program to opportunistically return capital to shareholders," Jonathan Stanner, CEO of Summit, said on the call, adding that the company repurchased 3.6 million shares for $15.4 million in the second quarter.
Share repurchasing appeals to investors, said C. Patrick Scholes, managing director of lodging and leisure equity research at Truist Securities.
"Investors haven't been overly enthusiastic the last couple of years when hotel REITs have bought actual hotels, but have been much more enthusiastic when they bought shares," Scholes said. "It goes back to shares tend to be accretive to earnings, where many of the asset acquisitions have been dilutive. So it's about making the investors happy."
Part of the motivation for REITs to repurchase shares is optics and perception, Bellisario said.
"No one wants to sit on their hands and do nothing. And everyone thinks their stock is cheap, but they're cheap for a reason," he explained.
"If you're not buying back stock, is that suggestive to the market that you don't think your stock is cheap?" he added.
Buying back stock signals to investors that the REIT has the funds to spend and sees the current price as a discount, not what the stock should be valued at. An alternative use to capital is asset transactions, but the transaction market has been stagnant due to a drop in hotel demand amid macroeconomic uncertainty.
Justin Knight, president and CEO of Apple Hospitality REIT, said on the company's second-quarter earnings call that their share repurchasing sets them up to transact quicker when the time comes. Apple has repurchased approximately 3.4 million of its shares for an aggregate purchase price of approximately $43 million between the start of the year and through June.
"While our long-term goal is to grow our portfolio, when our stock trades at an implied discount to values we can achieve in private market transactions as it has for the past several months, we will opportunistically sell assets and redeploy proceeds primarily into additional share repurchases, preserving our balance sheet so that at the appropriate time in the cycle, we can act quickly on attractive acquisition opportunities,” Knight said.
While REITs buying back their own stock can convey a positive message to investors, Bellisario said there are other not so positive factors to consider.
"REITs are capital intensive businesses, and they issue stock to grow. Investors want to own companies that are growing, and if hotel REITs are not growing, the multiples compress further, which makes the stocks cheaper," Bellisario said. "And then when companies buy back stock, you sort of get trapped into this valuation discount purgatory — then, how do you get out of it?
"They don't want to do nothing. There's optics. There's perception," he continued. "Yeah, they all want to do transactions, and there's not a lot of transactions to do. So, they say the best transaction is to invest in your own portfolio."
But doing nothing — or at least not repurchasing stock — might have a benefit, he added, if you're willing to wait.
"It's very hard for a hotel REIT to create value via share repurchases," Bellisario said, pointing to challenges with timing buybacks, dividend payout requirements, leverage considerations and more. "Sometimes the best thing to do is do nothing and just deliver the balance sheet and wait for a rainy day. But you could be waiting for a long time."
Both Scholes and Bellisario agree that stock repurchasing for REITs, which began kicking up in earnest last year, isn't going anywhere.
"And I would suspect — given where the stocks trade, as far as their valuations — [we will] continue to see share repurchases as the preferred return of capital and use of balance sheet, etc. [after dividends]," Scholes said.