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Host Hotels execs cite NYC challenges in 2 property sales

Host Hotels & Resorts Inc. moved to sell two W Hotels-branded properties in New York in an effort to distance itself from the city's lodging market, but the 1.3% capitalization rate on the combined sales implies that the undisclosed buyers were willing to pay robust prices.

Host sold the W New York, on Lexington Avenue, for $190 million, and is in contract to sell the W New York Union Square for $171 million, President and CEO Jim Risoleo said on an earnings conference call, calling the hotels "profitability-challenged assets."

In general, the city's hotel market faces continued expense inflation and high levels of new construction over the next two to three years, which will hurt existing hotels' ability to raise prices, Risoleo said. Besides carrying high costs, both of the W properties are in need of capital expenditures, he added.

Still, the 1.3% capitalization rate the yield in net operating income that the buyers are expected to realize above the price they paid — could imply that the buyers see upside for the properties. Lower capitalization rates imply that buyers are willing to pay more for slimmer returns, and a capitalization rate below 2% is notably low even in New York City, where higher purchase prices are more common than in less competitive markets.

The low transaction yield, if it is based on the properties' current income, could imply that the buyers have a plan for improving their transaction yield by doing something with the hotels to generate higher returns.

Risoleo declined to discuss the buyers' plans, but said Host had itself considered "other options" for the properties before selling them. He recalled an earlier situation in which the company increased the sale value of one of its New York City hotels by eliminating a brand contract and purchasing air rights from neighboring property owners.

"I just say that by way of background, to let you know that we look at all options that are available to us on every asset," Risoleo said. "And we are keenly familiar with New York and the current legislative landscape, and what you can do and what you can't do. And that's all been taken into consideration, and we were very comfortable and very happy with the pricing we achieved."

Risoleo declined to comment directly on published reports that the company is marketing about $1.2 billion in assets, but emphasized that the company aims to have a portfolio made up of "iconic and irreplaceable assets."

Host can assemble such a portfolio either by buying such properties, or by selling properties it owns that do not fit that profile, he said.