The acquisition of an almost-new hotel complex in the Music City is a sweet melody for the largest lodging real estate investment trust in the U.S.
In conjunction with the release of its first-quarter earnings, Host Hotels & Resorts confirmed it acquired the 215-room 1 Hotel Nashville and 506-room Embassy Suites by Hilton Nashville Downtown for $530 million in an all-cash deal. Host bought the hotels from Starwood Capital Group, Crescent Real Estate and High Street Real Estate Partners. The complex opened in 2022.
The hotels are adjacent to one another and sit near the Music City Convention Center and Bridgestone Arena. They are located just blocks from Nashville's Lower Broadway district of bars and live music. Combined, the 1 Hotel Nashville and Embassy Suites Nashville Downtown have 721 guestrooms, seven food-and-beverage outlets, a spa, two fitness centers, a yoga studio and 33,000 square feet of shared meeting space.
During the earnings call Thursday, Host President and CEO Jim Risoleo said the deal for the Nashville hotel complex was something the Bethesda, Maryland-based REIT had pursued before the hotels opened in 2022.
"We have been scouring the market and actually had reached out to our friends at Starwood Capital and Crescent before the 1 Hotel and Embassy Suites even opened when it was in the construction phase," Risoleo said. "We're not terribly keen on being a developer, but that was one deal that I really wanted to see if we could participate in when it was coming out of the ground. And that was a non-starter for the development team. So we've been following it for a long time."
The macroeconomic uncertainty over the past 18 months didn't keep Host from making the deal, Risoleo said.
At the time the hotels opened in 2022, there wasn't "a clear view at that point in time with respect to how the macro picture was going to play out," he said. "Whether we were going to really have a hard landing and end up in a serious recession or the Fed was going to engineer a soft landing. We elected to just watch the property over '23 and keep the dialogue going. ... Our cost of capital is a fluid metric we look at over time and it adjusts from from time to time, and as we engaged in this transaction earlier in this year, as you know, the equity markets were in a different place."
Risoleo admitted that Host was "underrepresented" in Nashville given its meteoric rise as a market.
Before its acquisition of the 1 Hotel Nashville and Embassy Suites, Host opened the 255-room Hyatt Place Nashville Downtown in 2013 as part of a joint venture with hotel owner, developer and operator White Lodging. As a select-service brand, Hyatt Place is different from the upper-upscale to luxury hotels and resorts that comprise the majority of Host's portfolio. But Risoleo said the Hyatt Place Nashville Downtown has continued to outperform the company's expectations and "we refinanced it two or three times along the way."
"Nashville is really just getting started as a market," he said. "Honestly, there are so many good things happening in Nashville. That is a market of the future. It's the No. 2 convention market in the United States behind Orlando."
He also cited the expansions to Nashville's airport that will drive more visitor levels as well as companies such as Amazon and Oracle growing their businesses in the city.
But what's not a concern to Host in Nashville is any big boom in new hotel construction, Risoleo said.
"When you layer higher construction costs in with a higher cost of debt and lower proceeds from a construction loan perspective, the deals just aren't getting done," he said. "As a matter of fact, there was a Ritz-Carlton planned for quite some time and that transaction got completely pulled by Ritz because the site was tied up and nothing was happening on it."
Further, the hotel development that is happening in Nashville won't be a direct competitor to Host's new acquisitions, Risoleo added.
"There will be some select-service [hotels] come online in the marketplace; we've taken that into consideration in our underwriting," he said. "But in terms of full-service, upper-upscale luxury hotels — if and when it happens — it's probably three or four years out, best case scenario."
The Larger Hotel Transactions Picture
More broadly, the wave of hotel transactions hasn't materialized so far this year. But Risoleo said that without a doubt, some hotel owners are feeling the crunch to sell and aren't in a position to refinance.
"There was a a fair amount of anticipation among the brokerage community that we would see a pickup in transaction activity as the Fed moved to lower interest rates. We haven't seen that happen yet because of where the Fed is sitting," he said. "However, I believe that there are some owners out there who will be sellers now because they just can't afford to wait any longer — for a lot of reasons. They haven't invested in their assets over the course of the pandemic. They may have loans coming due and they're gonna have to refinance them into a higher interest rate environment. So we're hearing a little bit of chatter that we might see a more active [mergers and acquisitions] market in the second half of the year."
Risoleo didn't rule out additional acquisitions for the REIT in the remainder of the year, but added "we don't have to go to the debt capital markets to get a deal done."
"We don't sit around at Host and wait for marketed opportunities. We really prefer to continue to work with our longstanding partners [and] relationships that we have. And that's how we got the Nashville deal done," he said. "You may recall that we also bought the 1 Hotel South Beach from Starwood Capital [in February 2019]. We're very happy that Starwood Capital and Crescent have the confidence and faith in Host as an owner to to give us this [Nashville] deal on an off-market basis.
"We're talking to a lot of other folks out there and I'm hopeful — certainly not assured — but hopeful that over the course of the year that we'll be able to get additional transactions completed."
By and large, Host has been a beneficiary when the markets tighten and hotel owners are forced to trade their assets. Host ended the first quarter with total available liquidity of $1.7 billion and $1.3 billion available under its revolving credit facility.
"I think there will be opportunities over the course of the year where you have certain private equity firms who might be coming up on end-of-fund issues with respect to certain assets that they have to trade," Risoleo said. "They waited for the Fed to cut rates, but they're out of time.
"A couple deals that we did in 2018 and started with the 1 Hotel South Beach, that was an end-of-fund issue with Starwood Capital — they had to trade that asset. Same with the Four Seasons Orlando, another instance where that deal was at the end of fund life as well. I can tell you that neither owner of those assets really wanted to part with them because they're just terrific properties. And I hope we're going to be able to find some additional opportunities in that vein as we work our way through 2024."
Earnings Highlights
In the first quarter, Host's revenue was $1.47 billion, up 6.5% over the first quarter of 2023, according to the REIT's earnings release.
Host's net income during the quarter was $272 million — which was down 6.5% year over year — and adjusted earnings before interest, taxes, depreciation and amortization for real estate was $483 million, up 8.8% from a year ago.
The company's portfolio achieved first-quarter revenue per available room of $215.37, which was down 1.2% year over year. Average daily rate was $314.65, which was a 1.3% decrease from the first quarter of 2023. Hotel occupancy was flat at 68.4%.
As of publication time, Host's stock was trading at $18.54 per share, down 5.8% year to date. The Nasdaq Composite Index was up 7.3% for the same period.