Gateway Private Equity Group

+ Why should I consider investing in hotels?

We’ve found that hotels provide better income long-term versus other commercial real estate asset classes. How? Let’s compare hotels to apartment complexes because that's the niche we've been in for years. It's also a space that has been very hot in many markets across the country. During the past 7+ years in the Phoenix metro market, investment into apartment complexes has driven up the purchase cost and placed downward pressure on investor returns. And, as of early 2020, there are currently 90 active large apartment complex development projects in process in the greater Phoenix metro area. But even before the higher purchase price for an apartment complex, our conservative numbers were that each apartment would give you $100 in cash per month after all expenses and mortgage payment. Can you do better than this with some properties? Yes, perhaps up to even $200 per unit per month…... but $100 is a consistent number that we saw across a wide range of long-term rental properties. In the hotel space, our conservative cash on cash return is $400 per room per month.

Bringing Airbnb into this, if you talk with anyone who has a short-term rental (in the right location) compared to a long-term rental. You'll find a similar large delta. A hotel is essentially a short-term rental at scale.

Hotel investing also gives us a number of levers to increase net profit including:

• Dynamic pricing. Pricing on a per night basis is automatically adjusted to align with market rates. In apartment complexes with longer-term lease agreements, you could be below market rents until the next renewal which is a lost revenue opportunity.
• Opportunities to further monetize the space. Rent out the hotel breakfast area or conference room, sell inexpensive memberships to the fitness center for those who live locally, sell blocks of time after a room has been cleaned but before the next guest checks in.
• Create corporate packages and memberships.
• Renegotiate contracts. Yes, you'll have some expense contracts in the apartment complex such as maintenance and property management but there are more contracts & opportunities in hotels. Examples include food, cleaning supplies, and marketing.
• Add food & beverage quick options or create partnerships with local restaurants.
  

There will always be pros/cons of any business or real estate niche. But whether we are talking about apartment complexes, hotels or short-term home rentals, any successful real estate investment has these qualities:

• The property is in a good location. What is "good" depends on the use case but location should always be your number one criteria.
• Purchase on value so that you have upside but also so that you have a hedge against economic uncertainty which impacts every niche.
• Work with experienced management that can find ways to maximize your profit.
  

+ How do hotels compare to multifamily?

Hotels have a strong operational aspect compared to most real estate, and are uniquely dynamic because they do not rely on lease agreements. While office, retail and multifamily tenants generally sign leases ranging from one year for an apartment to up to 20 years for an office, hotels depend on guests who make their “leasing” decision nightly.

This means hotels are able to respond to changes in the market almost instantly. Hotels can flex rates on a daily basis to quickly capture the benefits of a tight market or mitigate the risks of a soft day, month or year. This flexibility allows hotel investments to benefit from capital improvements and operational enhancements much faster than other sectors. Hotels typically generate outsized cash yield relative to other asset classes.

On the flip side, hotels can be among the first to suffer from disruptions in the market. When a local economy weakens or new supply is introduced, hotel operators may find that they need to immediately lower rates or increase the quality of their product offering to remain competitive. While no sector is immune to market changes, hotels usually feel both the good and the bad before others. Investing with an experienced operator and management company that has been through past downturns is key.

+ How is investing with you different than a hotel REIT?

A REIT is a company that holds a portfolio of properties across multiple markets in an asset class. Real estate syndications are a direct investment in a single property. You know the exact location, the number of units, the financials specific to that property, and the business plan for your investment.

When investing in a REIT, you purchase shares in the company that owns the real estate assets. When you invest in a real estate syndication, you and others contribute directly to the purchase of a specific property through the entity (usually an LLC) that holds the asset.

One of the biggest benefits of investing in syndications is tax savings. When you invest directly in a property, you receive a variety of tax deductions, the main benefit being depreciation (i.e., writing off the value of an asset over time). In hotels, we implement a strategy called cost-segregation which is a strategic tax planning tool that allows us to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes. These depreciation benefits can often surpass the cash flow. So, you may show a loss on paper but have positive cash flow. Those paper losses can offset your other income, like that from an employer.

+ How do you evaluate hotel investments?

Hotel real estate utilizes a few sector-specific metrics to track performance — the two chief calculations being Average Daily Rate (ADR) and Revenue Per Available Room (RevPar). ADR is the measure of the average nightly rate paid for rooms at a hotel, and is calculated by dividing room revenue by rooms sold over a particular period of time.

RevPar is calculated by multiplying the ADR by the occupancy rate. Investors can also think of it as the total room revenue divided by the total number of available rooms. RevPar complements ADR because while ADR only considers the average rate of rooms sold, RevPar takes into consideration the number of rooms that were actually occupied at that rate over a given period.

Hotel owners and operators use daily, weekly, monthly and annual RevPAR trends to gain insight into factors impacting the hotel’s performance. Even better, comparing a hotel’s RevPar over the last year to the RevPar of competitor hotels can provide a powerful metric for judging the performance and competitiveness of any hotel over a given period.

Relative to other property types, hotels focus heavily on the performance of their “competitive set.” This is because guests tend to make lodging decisions in real-time and weigh factors such as cleanliness, service, amenities and location relative to certain moving demand drivers (e.g., events, stadiums, offices, restaurants and shops).

We leverage the competitive set data to determine a hotel’s current performance and opportunities for improvement. We look for hotels that are under-performing and have strong upside through operational, renovation and/or sales improvements.

+ How is investing with you different than a crowdfunded hotel investment?

For many people, the opportunity to invest passively in real estate is the perfect way to participate in the real estate sector. You might understand the benefits to investing in real estate but not necessarily have the time or interest to do it all yourself. From there though, you might not understand which is a better choice for you – crowdfunding or syndication. Our hotel investment opportunities are offered through syndication.

The biggest benefit of a syndication over a crowdfunded investment is the overall relationship. We look to develop ongoing, long-term relationships with our investors. This includes regular education, updates and access to private investor events and property tours. We are also directly available and reachable for our investors that have questions on the property or investment.

+ What are your buying criteria for hotel investments?

Here is our specific list for evaluating hotel properties:

Location

• Location with business & hospitality friendly laws and regulations. Examples include AZ, TX, FL, GA
• The hotel must be close to an Interstate/major highway (used for commerce like I-70, I-10, I-65) or a Hospital.
• Secondary cities that are at least ½ hour from a major metro area of 750,000+ population
• Restaurants in walking distance, less than .1M

Size

• Size of the hotel needs to be 60+ keys

Financials

• CAP rate minimum of 8.5% for urban 100% ready. 9.5% for others.
• Revenue multiplier x% below market .5-.7 % points below market
• Opportunity to increase rates compared to competition by 5%
• Revenue growth strategy by % through rates, remodel, contracts (occupancy) or events (meeting rooms). 10% increase years 1-2 and 15% years 3-5
• Acquisition is less than new build costs

Hotel Characteristics

• Branded-flag bookings
• Value minded limited service or extended stay hotel
• Underperforming asset due to mom & pop management, not locally engaged, absentee owner
• Interior corridors