ATLANTA — For those who want as close to a sure-bet hotel investment as possible these days, the answer is select-service or extended-stay product.
That was the prevailing sentiment from hotel owners and investors who took the stage at the Hunter Hotel Investment Conference’s “Wall Street Talks” panel this week.
Tyler Henritze, senior managing director at Blackstone, which partnered with Starwood Capital Group to acquire the Extended Stay America brand and its owned portfolio last year for roughly $6 billion, said the purchase makes sense because the brand doesn’t suffer from an identity crisis.
“Extended Stay America knows what they are,” he said. “We like select-service because it knows its in the rooms business. They know it, and they’re focused on it. … We liked Extended Stay; hence, we bought it again.”
The private-equity giant has owned Extended Stay America before, first purchasing the brand in 2004 for about $3.1 billion. Blackstone sold it in 2007 for about $8 billion to The Lightstone Group. Blackstone, as part of a consortium, bought ESA in 2010 at auction for nearly $4 billion to take the company out of bankruptcy.
The Attraction of Select-Service Hotels
The attraction of select-service and extended-stay hotel investments also drew private equity firm KSL Capital Partners to the table via its formation last year of Mission Hill Hospitality, a company designed to focus solely on select-service and extended-stay hotel investment — a departure from KSL’s more traditional investments into larger, full-service resort properties.
“We at KSL had looked at select-service and extended-stay for many years and could never quite figure out how to get into the space,” said Greg Kennealey, CEO of Mission Hill and a longtime KSL executive. “At the end of the day, we said the only way to do it would be to take the KSL DNA, hire a team with this kind of expertise and focus on nothing but that.”
Mission Hill acquired 18 hotels in its first year, representing roughly $520 million in enterprise value, Kennealey said.
In today’s tough operating environment, margins matter, said Justin Knight, CEO of Apple Hospitality REIT. A large part of the company’s 219 hotels are extended-stay brands such as Home2 Suites by Hilton and Residence Inn, and select-service brands such as Hampton by Hilton, Aloft Hotels and Fairfield.
“Our background is in multifamily, we segued into extended-stay and from there we fell in love with the select-service rooms model because of the margins,” he said. “We could diversify our portfolio so much more. And CapEx is meaningfully lower, so we’re able to maintain the assets.”
Investors in select-service hotels say the sector holds even more attraction now than it did in past cycles because the product has improved so much.
“There’s an arms race underway,” Kennealey said. “Select-service hotels 10 to 15 years ago had a different value proposition than those being built today. Today they have rooftop bars, elevated rooms.”
Quality of construction has improved as well, making the real-estate investment pencil even better, Knight said.
“Resorts and larger convention houses have a place, but when you look at all the hotels that exist outside of those, select-service hotels do the same things and do it more efficiently,” Knight said. “You can renovate them more cost-effectively, so the assets stay relevant over a longer period of time.”
Sun Belt Locations
When it comes to ideal markets for extended-stay and select-service hotels in particular to prosper, investors said the strategy is to find locations that benefit from both business-transient demand and leisure demand.
For many investors, that means Sun Belt locations across the United States, which are anchored by cities that typically pre-pandemic drew in substantial business demand, but which also have thrived as the majority of U.S. hotel demand turned leisure.
Other types of markets also fit that dual bill, speakers said.
“Universities are real anchors now,” said Suril Shah, CEO and managing partner of private equity firm Riller Capital. “We used to think university towns were great just because they generated demand, but they also generate the talent. People want to stick around places like Columbus, Ohio; and Cambridge, Massachussetts. If there’s an answer outside the Sun Belt, look to the great universities.”
Tech markets such as Atlanta, with substantial leisure travel demand drivers, also are attractive, Henritze said.
But what about the vast amount of U.S. hotel supply that doesn’t fall into the markets that today’s investors consider attractive for the long term? It’s an interesting question, Henritze and Shah said.
“A generic, full-service-ish hotel in a kind-of urban market is tough now,” Henritze said. “They don’t get the rates to justify a full labor load and the physical box was built for a different time. These hotels are under pressure from modern select-service hotels.”
Shah added that those products “really are the only place you’ll find distress right now.”
Otherwise, cost per key for attractively located select-service hotels has doubled in some cases, and buyers don’t even bat an eye over the prices, speakers said.
Headwinds
Speakers said labor remains an issue, and even if the hotels they’re eyeing are designed to run with labor-efficient models, there are other considerations, too.
“Now, access to public transportation is really important when you’re looking at real estate,” Kennealey said, referring to current high fuel prices and other impediments that may make it tough for property-level employees to get to work.
Shah agreed, saying that his company looks at potential deals by considering how well that asset can attract talent.
“That’s not something we were looking at before,” he said.
And while slow business-transient travel has worried hoteliers in recent months, speakers said that demand is coming back.
“Business transient has come back really quickly over the past couple months, and it bodes well for where rates are heading in that sector,” Henritze said. “It’s coming back more rapidly than people expected. There are certainly some markets with more challenges than others, but Sun Belt markets that are business-friendly? If you can buy those you’ll do very well.”