- May 25, 2022
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During the height of the COVID-19 pandemic, hotels and other entertainment-related businesses came to a near halt. Luckily, vaccines, natural immunity and other factors are causing life to return to normal.
Hotels are expected to lock in 60% of pre-COVID revenues in FY22. In March 2022, Park Hotels and Resorts Inc’s PK 48 consolidated hotels had an occupancy rate of 63.0%, representing a 10% increase since February 2022. Per Business Travel News, hotel rates in 2022 are expected to increase 13% globally year over year.
While the recovery is going strong, many hotel real estate investment trusts (REITs) are still overpriced. Fortunately, some private equity investments like Hotel Adeline provide opportunity for growth while being undervalued.
Looking for an alternative to REITs? Browse private equity real estate investment offerings
Host Hotels and Resorts Inc. HST is an established REIT, but it’s somewhat overvalued since its Funds From Operations or FFO per share hasn’t grown much since 2019. FFO measures a REIT’s profitability and uses the below formula.
FFO = (Net Income + Depreciation + Amortization + Losses on Property Sales) – Gains on Sales of Property – Interest Income
Basically, a higher FFO means the REIT is becoming more profitable.
Here are the figures from 2019 to 2021:
Q4 2019 FFO per share: $0.23
Q4 2021 FFO per share: $0.26
The FFO increased by 13% during this time. However, its stock price has increased from its 52 week low of $14.67 to its current price per share of $20.47, representing a 39.5% increase.
Hotel Adeline is a boutique hotel just north of Scottsdale, Arizona, an area that has seen a 24% increase in home prices since 2021. The sponsor, ESI Ventures, is now raising up to $15 million on CrowdStreet to recapitalize the 213-key hotel at a purchase price of $62.5 million, letting investors take advantage of increasing revenues.
Scottdale is an especially appealing market since its average revenue per available room (RevPAR) is usually $50 higher than neighboring Phoenix. ESI Ventures is also extremely familiar with the booming Phoenix market and has completed over $1 billion in commercial real estate transactions since 2016.
This 135-key independent hotel is located in the heart of wine country, Santa Rosa, California. It’s located near famous Sonoma county vineyards and world-renowned Napa Valley. Both areas have seen a strong recovery in tourism since the 2020 lockdowns.
Yang Capital, a boutique real estate investor that has owned the property since 2015, is sponsoring the deal. It’s working on raising up to $7,995,000, representing a 15% to 20% discount to its current value.
The most exciting trait about this investment is its 43% leverage-to-cost and a high average debt service coverage ratio of 4.45. The Sandman offers significant downside protection for investors, as well as the opportunity to outperform benchmarks.
See also: RealtyMogul’s West Valley MHC Mobile Park Offering
The COVID-19 pandemic is waning, and life is returning to normal. A return to normalcy also helps the hospitality industry rise above the damage caused by the pandemic. Per CNBC, 70% of leisure travelers in major countries including the U.S., Canada and Japan plan to spend more on travel in 2022.
While this data is encouraging, hotel REITs like Host Hotels and Resorts are overvalued since its price has increased much quicker than the FFO per share. Despite that, investors can find promising private equity real estate investments that can potentially generate up to 20% IRRs.
Photo by Ph B on Unsplash
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