U.S. hotel real estate investment trusts either stood pat or pursued a few acquisitions or sales during the second quarter, but executives said they remain vigilant as deal opportunities become available.

During the quarter's conference calls with analysts and investors, executives spoke about the state of the hotel transactions market for the rest of the year and whether a recession might happen in the near term.

Here's a roundup of the commentary REIT executives shared about hotel mergers and acquisitions.

"We've sold or disposed of 40 hotels for over $2 billion since the spin. ... There has been some heavy lifting; that's in addition to getting rid of some self-operated hotels as well as laundry facilities, which aren't included in those 40. So really proud of the work and all the effort and continuing to reshape the portfolio.

"We've sold, I believe, eight hotels over the last 15 months, plus or minus, for about $435 million. We are constantly in discussions, but we're not a distressed seller. We're going to have to maintain price discipline. Tom Morey, our chief investment officer, and his team are working hard and we've got a number of active listings right now. And as we said, we're confident that we'll get somewhere between that $200 million to $300 million.

"We'll use those proceeds to pay down debt on a leverage-neutral basis, certainly buy back stock. And obviously, the best investment we can make right now is buying back our stock at this kind of discount, and you can certainly expect that we'll be looking at that in the future."

“There seems to be a tremendous amount of money on the sidelines, several hundred billion dollars of private equity that's interested in real estate that is poised. There's a lot of potential buyers that are sitting there. From the seller's perspective, a lot of them are sitting on the sidelines feeling like that's going to get more efficient and cheaper six, 12 months from now, so why would I bring my assets to market?

“Volume is low. It's hard to know what changes value. Obviously, the fading and some of the performance of the resorts — there's going to be some valuation change there. But they still remain in the conversation of the private equity fund. It still remains one of the most interesting theses in leisure and hotel investments. Generally, people still believe it's going to be the place to be over the next five to seven years.

“And remember, these assets, unlike buying a hotel in, let's say San Francisco, these assets have great trailing cash flow, even 6%, 7% compared to zero percent in a market like San Francisco or San Jose right now. They're still financeable."

"It seems to have shifted very quickly, the mindset of doom and gloom to saying 'OK, the soft landing has happened.' It's probably a little too early to declare total victory there, on the soft landing. We still have to see how things play out over the next few months and quarters. But as we're seeing on the ground, we really haven't seen any drastic changes as it relates to the acquisition environment or any of those kind of things.

"Clearly, we still have the same expectation, which is we are in a much higher interest rate environment than where we have previously been, which is going to create some potential opportunities as it relates to acquisitions moving forward. Because certainly there are going to be people that are not going to be willing or able to refinance out of some of their debt that they currently have in place. We do still believe that's going to be create opportunities going forward.

"Our fundamental view on that hasn't changed. And as it relates to the business on the ground, we obviously, spoke about our results in July. And I certainly wouldn't ascribe those results to all of a sudden the economic climate has changed. But we're certainly encouraged by what we're seeing short term and at least where the results for July came in."

"We've taken a sort of a balanced approach with regard to share repurchases in general. When you look at the return profile for that versus on buying back debt, obviously, there's a different risk and certainty around each one of those. We look at those uses of capital just like we look at renovation spending acquisition spending or anything else.

"There's no set formula. It's a decision we're making kind of real time based on what we're seeing in the business, other capital needs and uses — potential uses of capital. It's a bit more nuanced.

"With regard to the buyback, we certainly are mindful of that maturity in a couple of years. And chipping away at it in one way reduces that maturity. But frankly, we also think it's just a good use of capital given the coupon on that debt relative to the yield we can generate on the cash and the fact that there aren't as many near-term opportunities at least with regard to acquisitions."

"We've got four assets in the market right now. We've got a three pack of limited-service assets and a full-service asset that are ... in the second round or getting towards the end of those processes. ... It'll be in a couple of months before those probably close. ...

"You'll likely see us get a little bit more aggressive here in the next few quarters on some asset sales in order to clean up the portfolio.

"You'll see potentially some additional assets coming to market that are non-core. But you may have some assets that are assets that we like and that are solid assets, but that have some equity value in them in order to generate some proceeds. Those are still decisions we're looking at internally in terms of the right way to move forward on those. But we do see asset sales as a crucial part of what we're doing over the next couple of years in order to get the portfolio and the capital structure where we want it."

"Obviously, the cap rates are a result of a much more analytical decision a buyer makes as to why they buy a property and what kind of total returns they're looking for. ... We look at five-year cash flows. We look at five-year IRRs. We look at price per key. We look at comparison to replacement cost. There are a lot of different things you look at in a market when you're underwriting.

"We don't use cap rates to determine decisions in the markets nor do we think buyers frankly use cap rates. They do look at yields overall and the growth in yields over time and those changes. But unlike maybe some other property types, cap rate is not a methodology for determining value.

"One of the things that I think has become more challenging in the public markets is the public market shareholder has become far more short-term-oriented than they were when we started Pebblebrook.

"They're less willing to look at long-term potential value creation within the asset portfolio than they were 13 years ago when we started the company. It becomes harder for a public company like us in our space to buy in markets where there's a lack of yield. And therefore, I don't know that we would as a company be buying there.

"If I had the opportunity personally, which I unfortunately do not, so just keep that in mind, but if it were me personally with a long-term horizon for my investment returns, I think it's a great time to be buying in these markets. I think they're incredibly cheap. The discounts to replacement cost, which is an indicator of when supply can be economically justified in a market, I think that discount is much bigger than it was back in 2010 and 2011 when we started buying. I think it's a great time.

"If you have the right time horizon, you can live with expensive debt in the near-term with low yields. And so personally, I'd be buying, or if somebody had a long horizon, I think it's a great time. But I think for us as a public company, it's more challenging."

"We are looking at potential acquisitions. But we obviously, have other uses of that cash, whether its [capital expenditure spending] to the hotels or these debt maturities that are coming up in 2024, 2025. [Buying the Nautilus South Beach in Miami] was a very unique opportunity in a market that we felt we were under-exposed in and a critical gateway market for a hotel company of our size to have something. But we looked very hard at 10 to 15 hotels in different areas of Miami and South Beach, but also Brickell and Coral Gables in Coconut Grove, and they're there.

"It's challenging to find an opportunity that works for SVC, given our cost of capital and given our yield hurdles. The Nautilus was something we could get in there, do a renovation, reposition that hotel and get an outsized yield, especially for that specific area of South Beach.

"But frankly, we're not seeing a lot of opportunities like that. We didn't see a lot of other opportunities like that in South Beach. We're also looking ... in Southern California, other destination-type markets. And especially with the hotel recovery, [we're] not seeing a lot of distressed sales. 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.' Financing markets are tough.

"We're being very aggressive and looking at opportunities, but we're not finding a lot of things that make sense and we're not going to force it. We have other other needs for that capital. ... It could very well be that the Nautilus is the only property acquisition SVC makes in 2023. I think it's either it's either zero or one or two most likely."

“During the second quarter, we remained active acquiring and selling hotels despite the overall slower pace in the transaction markets. In May, we closed on the previously announced sale of four wholly owned non-core hotels totaling 467 guestrooms for a gross sales price of $28.1 million, eliminating more than $20 million of near-term capital needs as a result. The sale price represents a capitalization rate of 4.3% on the hotel’s collective trailing 12-month net operating income prior to sale and 2.4% when considering the estimated near-term capital expenditures.

"In June, our joint venture with GIC, we redeployed a portion of those proceeds with the acquisition of two hotels for $42.7 million — the previously announced 120-guestroom Residence Inn Scottsdale North, and the 47-guestroom Nordic Lodge in downtown Steamboat Springs. Residence Inn was acquired for $29 million or approximately $240,000 per guestroom. Located directly across North Scottsdale Road from our Courtyard and SpringHill Suites, the Residence Inn creates meaningful cross-selling and complexing opportunities that are expected to enhance the performance of all three hotels.

"The purchase price equates to an expected 2023 net operating income yield between 8% and 8.5% on a stand-alone basis prior to factoring in the effects of the numerous potential operational synergies. The Residence Inn received a transformative renovation in 2019 and will require minimal capital investment over the next several years. We also recently acquired the 47-guestroom Nordic Lodge Hotel in downtown Steamboat Springs for $13.7 million. The independent hotel is located on nearly a full acre on downtown Steamboats Main Street, and consistently ranks as a top hotel in Steamboat on TripAdvisor.

"The hotel’s lean operating model is expected to generate hotel EBITDA margins of approximately 60%. And the purchase price results in an estimated capitalization rate of approximately 10% to 10.5% on our underwritten 2023 net operating income prior to realizing any potential synergies with our Residence Inn owned within the joint venture and located just down the street.

"The Nordic Lodge has been well maintained and is expected to require minimal capital investment in the near term. However, the underutilized site plan, high barriers to entry, notable recent supply reductions, and exceptional demand in the market create a variety of long-term opportunities to develop a one-of-a-kind experience in downtown Steamboat, through thoughtful reimaging expansion or redevelopment of the property.

"We expect that Nordic Lodge will also benefit from its proximity to our Residence Inn through various cost-sharing and cross-selling strategies. Our conviction in the Steamboat market has grown tremendously since our acquisition of the Residence Inn, which is currently running an annual RevPAR of more than $215 and an EBITDA margin of over 50%. Today, the Residence Inn hotel’s EBITDA is approximately 65% above our underwritten resulting in a yield on our total investment of nearly 14%.”

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