Investors often overlook hospitality as an asset class for their investment portfolios. Why? The drivers in typical residential or commercial real estate may not always apply in hospitality. However, the hospitality industry is approaching nearly ten years of consecutive growth. From 2009 to 2017, US hotel gross bookings grew from $116 billion to $185 billion (Deloitte). The potential for robust growth, steady cash flow, and upside for appreciation make hospitality an asset class that you should consider for your investment portfolio.
Before “checking in” to your new hotel investment, here are four points to consider.
1. Review demand drivers
2. Make sure the brand is the right fit
3. Evaluate the hotel’s management
4. Consider potential cash flow and tax benefits
Review demand drivers
Investors should consider the risks associated with investing in hotels as they behave slightly differently than traditional real estate assets. Due diligence is critical by both the deal sponsor and the investor.
Developers do not build a hotel and then think about how to fill it with guests; instead, they design hotels around customers.
Detailed analysis is conducted into key demand drivers before the project begins. This analysis includes the hotel’s proximity to venues such as hospitals, arenas, or office buildings. Building design and amenities are tailored to the hotel’s target guests. Construction timeline and costs are projected to the decimal. Project cash-flow analysis and transaction document summaries give investors more details that facilitate an informed investment decision.
Positive economic forces, such as strong job growth, consumer confidence, and rising retail consumption, help support the current hospitality sector’s momentum. There are three general demand drivers for hotels: business travel, tourism, and group demand (sports teams, convention attendees, etc.) Hotels that appeal to more than one type of guest can help ensure demand and reduce dependency on one kind of guest.
The ideal property is in an attractive market that appeals to travelers for business or pleasure. Just as importantly, you will want to look at the growth of those demand drivers. Is the local government investing in new universities, sports complexes, and convention centers? Is the hotel located near mass transit options that make it easy to come and go? Are employment hubs growing and attracting job trainees and business consultants?
The brand matters
Each hotel brand has a different value proposition for its specific target guest. A Ritz-Carlton and a Hampton Inn are unlikely to compete over guests. The type of hotel, whether it be full service, select service or limited service, can have a significant impact on performance during different market cycles.
For example, a full-service hotel such as the Ritz-Carlton sees increased demand when the economy is strong, and tourism and business travel peaks. Alternatively, in a recession, market demand for luxury hotels drops as travelers look to cheaper lodging accommodations. Limited-service hotels such as Hampton Inn offer modest pricing that can be favorable in a down market but lower profit margins in an up market. Select-service hotels such as the Courtyard by Marriott offer a cost-efficient medium between the two ends of the spectrum and account for 63% of the total U.S. hospitality project pipeline (STR via Hotel News Now).
Having the right hotel operator to manage a hotel can make a significant difference in the success of an investment. Virtua Partners’ affiliation with Hotel Equities puts its hospitality projects in the hands of best-in-class management.
Hotel Equities, with a track record that goes back over 30 years, has earned the trust of prominent hotel brands through its skills in two important facets of management. First, Hotel Equities seeks to optimize operational efficiency, which includes balancing cash flow and strategic sales and marketing to attract guests. Second, Hotel Equities strives to provide an incredible stay for each guest. Look for hotels with low staff turnover. Low staff turnover suggests an active management culture that tends to translate to a great guest experience. Poorly operated hotels can result in weak cash flow and higher operating costs that eat into the bottom line, potentially even resulting in loss of principal.
Cash flow and tax benefits
Hotel business structures have the potential to offer investors favorable cash-flow levels for several reasons. Guests often pay for rooms in advance. Other services can help generate revenue, like hotel bars and restaurants. Proper management can increase occupancy and contribute to the bottom line.
Unique tax benefits can also increase the appeal of hotels. Furniture and fixtures in hotel developments are subject to accelerated depreciation, which can be used by investors to reduce their tax liability. By tweaking hotel operations and implementing the right value-adds, a hotel’s potential can be maximized to improve cash flow and increase value.
Investors should consider these critical points before investing in hotels. Hotels tend to behave differently than other real estate asset classes but can offer a steady yield profile and an attractive diversification opportunity for an investment portfolio. For more information on Virtua Partners’ hospitality investment opportunities, please visit virtuapartners.com
The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Not an offer to buy nor a solicitation to sell securities. An offer for securities is subject to the terms and conditions of any corresponding confidential Private Placement Memorandum. All investing involves risk, and past performance may not be indicative of future results. You should consult with your financial, tax, or other advisors to determine whether an investment is suitable for you. 054-MBD-011320
About Virtua Partners:
Virtua Partners is a global private-equity firm specializing in commercial real estate. The firm and its affiliates sponsor a variety of investment funds and commercial real estate projects across the United States.
About Hotel Equities:
Hotel Equities is an Atlanta-based full-scale hotel ownership, management and development firm managing more than 140 hotels throughout the U.S. and Canada. Frederick W. Cerrone, CHA, serves as Founder and Chairman; Brad Rahinsky serves as President and CEO. For more information, visit www.hotelequities.com.