Unlocking Hotel Investment Opportunities: A Guide To Navigating Purchase Options

Investing in hotels is an attractive prospect for many, as it can provide long-term income, build wealth, and diversify a business portfolio. There are several ways to invest in hotels, from building a new hotel to buying shares in a hotel company.

One popular method is to invest in a hotel real estate investment trust (REIT), which invests in hotels and returns profits to shareholders. Another option is to purchase shares in a hotel operating company, which is ideal for those seeking more modest investments or investing in an established brand. For those with a higher appetite for risk, buying a hotel outright or investing in a new hotel project is possible, although this requires significant capital and a thorough understanding of the hotel industry.

Before investing in a hotel, it is crucial to research the location, analyse the hotel's finances, assess its value, and consider the employees and management team.

Hotel Real Estate Investment Trusts (REITs)

Benefits of Hotel REITs:

Hotel REITs offer a steady income stream through rental income, which is then distributed to shareholders as dividends. This provides investors with a reliable source of passive income.

Hotel REITs also benefit from high turnover, as hotel rooms are typically rented out for short periods, and the booking process is simple. During peak seasons, luxury hotels in tourist destinations are often fully booked, while business travel hotels have high booking rates year-round.

Additionally, by holding a diverse portfolio of hotel properties across different locations and market segments, hotel REITs can spread risk and reduce dependency on any single property or market. This diversification protects investors from fluctuations in the hospitality industry and economic downturns, making hotel REITs a valuable addition to a well-rounded portfolio.

Risks of Hotel REITs:

The performance of hotel REITs is subject to cyclical fluctuations, as demand for travel and tourism varies seasonally. While they generate record-high revenues during peak seasons like holidays and summer, they also experience substantial vacancies during off-seasons.

The hospitality industry is highly competitive, with numerous hotel chains and standalone hotels vying for customers. This competition often leads to price wars, adversely impacting profit margins. There is also a constant risk of oversupply, as too many hotels in one place can result in significant vacancies and decreased room prices.

How to Invest in Hotel REITs:

Most hotel REITs are publicly traded and can be bought and sold like stocks through online stock brokers. Investors can also purchase hotel REITs through mutual funds and REIT exchange-traded funds (ETFs). It is important for investors to conduct thorough research on the REIT's management team, property portfolio, financial health, occupancy rates, and industry outlook before investing.

Examples of Hotel REITs:

• Apple Hospitality REIT Inc. (NYSE: APLE) is one of the largest hotel REITs in the US, operating over 220 hotels. They focus on maintaining a geographically diverse portfolio and have a strong track record of selecting high-quality properties in strategic locations.
• Park Hotels & Resorts Inc. (NYSE: PK) is a leading hospitality and lodging REIT with a multi-billion-dollar market cap. They have a strong presence in prime locations and popular tourist destinations, ensuring steady revenue and growth.
• Pebblebrook Hotel Trust (NYSE: PEB) specialises in acquiring and managing upscale, full-service hotels and resorts across the US, focusing on well-positioned properties in high-demand markets.
• Host Hotels & Resorts, Inc. (NASDAQ: HST) is a leading global lodging REIT with a portfolio of over 80 properties and approximately 47,000 rooms. They cater to a wide range of travellers and have established themselves as a key player in the industry.
• RLJ Lodging Trust (NYSE: RLJ) is one of the largest real estate investment trusts specialising in upscale hotels in prime locations. With over 100 properties, they offer a diverse range of lodging options for business and leisure travellers.

Shares in a Hotel Operating Company

When investing in a hotel operating company, it is important to consider the company's financial performance, stability, and key metrics such as revenue growth, profitability, and debt levels. Additionally, evaluating the company's market positioning and competitive advantage within the hospitality industry is crucial. Look for companies with strong brand recognition, unique offerings, and a loyal customer base.

There are several benefits to investing in hotel operating companies. Firstly, it offers diversification by providing exposure to the hospitality sector. Secondly, many hotel companies pay dividends to their shareholders, providing a steady income stream. Lastly, the hospitality industry has significant growth potential, especially in emerging markets, making it a promising investment opportunity.

However, there are also risks associated with investing in the hospitality industry. Economic downturns, natural disasters, pandemics, and competition from other hotels can all impact the financial performance of hotel operating companies. Regulatory risks, such as non-compliance with zoning, building, environmental, and labour laws, can also affect the reputation and profitability of these companies.

Overall, investing in shares of a hotel operating company can be a lucrative opportunity, but it is important to conduct thorough research and carefully consider the risks before making any investment decisions.

Crowdfunded Hotel Investments

Crowdfunding is a great way to invest in hotels, especially as it opens up a market that was traditionally restricted to institutional investors. There are several platforms that offer this service, such as HotelierCo, EquityRoots, and Crowdstreet.

The process is simple. You create a profile, browse investment opportunities, perform due diligence, and then invest. The platforms allow you to pool your capital with other investors, including larger hotel developers and hospitality groups.

Crowdfunding allows you to invest in hotels with less capital, as you can buy shares in different hotels. It also provides an opportunity to diversify your portfolio. Additionally, some platforms, like EquityRoots, offer quarterly performance updates and distribute your annual K1 to be attached to your personal income tax statement.

There may be limitations on who can invest and the minimum investment amount. For example, EquityRoots limits its offerings to "accredited investors" and requires a minimum investment of $10,000 to $25,000 USD.

As with any investment, there are risks involved. Hotel investments are no exception, and it's important to do your due diligence before investing. It's also crucial to remember that the hotel industry is highly competitive and depends on access to enough rooms and high-end, modern, and updated properties.

The cost to buy and own a hotel depends on location, size, type, demand in the area, the business model, and the condition of the property. It can range from $500,000 up to $5 million or more.

If you're looking for other ways to invest in hotels, there are several options. You can purchase stock in a hotel company, invest in a hotel REIT, buy an existing hotel, invest in new hotel projects, renovate an existing hotel, or buy and flip a hotel.

In Summary

Buying an Existing Hotel

Determine Your Acquisition Criteria:

Before purchasing an existing hotel, it is important to establish clear acquisition criteria. This includes considering factors such as purchase price, capital expenditure, and working capital requirements. Decide whether you plan to operate the hotel yourself, enter into a franchise agreement, or have the brand manage the hotel. Assess the potential for asset value appreciation and the upside potential from rebranding, taking into account any associated property improvement plans and their costs. Evaluate the hotel's financial performance, including cash flow yield, revenue per available room (RevPAR), and occupancy rates. Consider whether the hotel's location aligns with your strategic goals and assess the competitive landscape in the area. Determine if the hotel is a good fit for your existing portfolio and if it adds geographic scope. Finally, define the anticipated "hold" period, which is tied to your overall strategy.

Identify the Right Target:

Once you have established your acquisition criteria, it's time to connect with industry professionals such as brokers, asset managers, industry consultants, or even hotel brands themselves to explore potential opportunities. Conduct site visits and perform a thorough property and marketing analysis (feasibility study) to gather the necessary information for developing a business plan and determining a bid price.

Manage the Bid Process:

Hotels are often sold through an auction process, which can be resource-intensive and involve tight deadlines. As a buyer, you will typically need to submit an indicative offer, and if successful, provide a final bid along with a marked-up draft sale and purchase agreement (SPA). It's important to note that offering the highest price does not always guarantee success, as sellers may consider other factors such as evidence of funds, completion speed, and acceptance of key SPA terms.

Determine the Right Price:

Price is a critical factor in any acquisition, and there are various hotel valuation methodologies to consider. Consult with your financial advisor to determine the most appropriate method for your situation, such as discounted cash flow analysis, EBITDA multiples, comparable hotel sales, or surveyor valuations.

Determine the Right Structure:

As a buyer, you generally have two main options for structuring the acquisition. You can choose to purchase the shares of the company that owns the hotel property and other assets, or you can buy the hotel property and assets directly from the company. Share purchases result in acquiring all the company's assets, liabilities, and obligations, even those unknown to the buyer. Asset purchases, on the other hand, allow for more control over which specific assets and liabilities are transferred but tend to be more logistically complex.

Ensure Financing is in Place:

It is crucial to have a clear understanding of how you plan to fund the purchase and any initial capital expenditure programs. This could involve using existing cash resources, bringing on additional investors, or securing bank debt. If you plan to use bank debt, engage with potential lenders early on to understand their lending capacity and specific requirements, such as security over the hotel or bank accounts.

Conduct Proper Due Diligence:

Due diligence is of utmost importance in any hotel acquisition. Assemble a team of experienced advisers, including lawyers, financial advisers, and property surveyors, to conduct a thorough investigation of the hotel's business operations, financial health, and physical assets.

Assess Management Options:

In most cases, a third-party management company is already managing the hotel. Their consent will be necessary for completing the deal, and discussing this with the seller early on is essential. If there is no incumbent management company, you will need to engage a third-party management company to assess the hotel's compliance with brand standards and identify any necessary property improvement plans.

Negotiate the Right Price Adjustment Mechanism:

The pricing mechanism is a key negotiation point in the sale and purchase agreement (SPA). The two most common structures are Completion Accounts and Locked Box. Completion Accounts allow buyers to pay only for the balance sheet they acquire and verify the financial position after taking full control of the business. Locked Box provides sellers with certainty of proceeds and no post-completion adjustments, making it their preferred choice.

Negotiate Robust Warranties and Indemnities:

Warranties serve to confirm the accuracy of information provided by the seller and disclose any known issues. They also apportion risk, providing buyers with the right to sue for damages if the warranties are inaccurate and the acquired business's value is reduced. As a buyer, seek warranties on critical aspects such as good title to the hotel land, accuracy of accounts, and absence of litigation. Additionally, address any known material risks through indemnities, which provide dollar-for-dollar compensation for specific losses.

Building a New Hotel

Step 1: Make a Plan

Before starting any construction, it is crucial to have a detailed business plan in place. This plan should include market research to identify the target audience and their needs, as well as a unique value proposition (UVP) that sets your hotel apart from competitors. The plan should also encompass financial projections, including construction costs, startup expenses, and revenue forecasts.

Step 2: Secure Funding

Step 3: Choose a Location

Location plays a pivotal role in the success of a hotel. Consider factors such as proximity to transport hubs, entertainment options, and target audience preferences. Select a location that caters to the needs of your target market and offers convenient access to relevant amenities.

Step 4: Permits and Legalities

Consult with local authorities to understand zoning regulations, permits, and building codes specific to the hospitality industry. Ensure you fulfil all legal, regulatory, and insurance requirements, including establishing a business structure, obtaining necessary licenses, and complying with health and safety standards.

Step 5: Construction and Furnishing

Once funding and permits are in place, it's time to begin construction. Find architects and contractors who can bring your vision to life and oversee the building process. Select furnishings and amenities that align with your target audience's expectations and your hotel's unique concept.

Step 6: Recruit and Train Staff

Recruiting the right employees is crucial to the success of your hotel. Create a staff persona and develop personality tests to find individuals who embody the characteristics most important to your establishment. Hire a mix of executive, departmental, and operational staff, providing comprehensive training to ensure they are well-prepared to deliver exceptional guest experiences.

Step 7: Develop Systems and Technology

Implement efficient systems and technology to streamline operations. This includes a reservation system, accounting software, marketing automation tools, and a property management system (PMS). Consider additional tools such as a booking engine, reputation management software, and channel manager to optimise your hotel's performance.

Step 8: Grand Opening

Finally, it's time to introduce your hotel to the world with a grand opening event. Invite the local community, stakeholders, influencers, and potential partners to celebrate this milestone. Use event planning tools, collaborate with vendors, and create a memorable experience that reflects your hotel's mission and values.

Frequently asked questions