Hospitality InvestingMay 27, 2020 Educational
A Lesser Understood Category with Historically Strong Returns
Most investors don’t reflexively think of hotels when considering commercial real estate, however, investors are starting to catch on: hospitality-focused funds secured $31 billion in 2017, the largest total since 2008. Private equity managers (sponsors) actively hunt for investment opportunities in private markets that may be developing, mispriced, overlooked, or nascent (like venture capital). We believe that hotels may be one of those overlooked investment opportunities.
Historically, reliable performance has been a key factor. For instance, the hospitality sector generated a higher internal rate of return (“IRR”) than the MSCI US REIT index over both one- and five-year time horizons preceding the COVID-19 pandemic. On a total return basis, also preceding the COVID-19 pandemic, hotels have outperformed both the S&P 500 and the U.S. Aggregate Bond Index since Q1 2000, tripling a $100,000 investment over this time frame with higher risk-adjusted returns than the S&P 500 and higher total returns than U.S. Aggregate Bonds.
Over the last thirty years, hotels have:
- Generated a total return of 8.0% per year with a third of the volatility of stocks
- Diversified a portfolio with near-zero correlation to stocks (0.17) and a negative correlation to bonds (-0.05)
- Produced an average annual yield of 7.2%, outperforming both stocks and bonds