Investors are finally bidding on some of the first hotel properties available for sale after being hurt in the crisis caused by the coronavirus pandemic.
Since the pandemic began in March 2020, many hotels have earned a fraction of their usual income—especially if that income came largely from business travellers. Many investors immediately saw an opportunity to buy hotels at discount. But more than a year later, very few distressed hotel properties have been available to buy.
Banyan Investment Group, based in Atlanta, Georgia, is now in the “best and final offer” stage of bidding in a half-dozen separate deals to buy distressed hotel properties for its Banyan Lodging Enhanced Value Fund (BLEV).
“The pandemic has created a number of investment opportunities, ranging from newer assets selling at below replacement costs to discounts resulting from owners facing liquidity crises,” says Andy Chopra, Banyan's managing partner and chief investment officer.
Banyan has already closed the first $20 million of investments in its BLEV fund, according to an announcement in early December. That’s already more than halfway to the fund’s hard cap of $35 million, which it is likely to reach in early 2022.
WMRE caught up with Chopra to ask why opportunities to buy distressed hotel properties have taken so long to come to market and what kinds of deals are likely in the near future.
“It’s a long process,” he says. “During the Global Financial Crisis, it was not until four or five years after the start of the crisis that lenders began to sell troubled assets off of their balance sheets.”
This interview has been edited for style, length and clarity.
WMRE: Why do you think that more opportunities to buy distressed hotel properties are emerging now?
Andy Chopra: There is fatigue on the part of capital invested pre-pandemic. And there is fatigue on the part of lenders. According to recent research from Jones Lang LaSalle, foreclosure activity for hotel properties in September 2021 was four times what it was in June 2020.
Many of these properties have gone two or even three years without any sort of cap ex investment, and there is really no additional liquidity to do that. There is going to be pressure from brands to start making improvements. Other hotel properties have loans that are coming due. The owners may not see financial sense in investing more in the property. They would rather just sell… or hand the keys back the lender.
WMRE: How are you identifying distressed properties and owners ready to sell?
Andy Chopra: We are utilizing our existing networks, lending relationships and of course the brokerage community… We will also get phone calls before an asset is widely marketed… We have a reputation, because when we put an offer out and that offer is accepted, there is a very high probability that we are going to be closing.
WMRE: Your BLEV fund will have a hard cap on its fundraising of $35 million. How will you deploy that capital?
Andy Chopra: Joint venture partnerships with institutional investors and syndicates of retail investors… implying total investible equity in the range of $350 million. We plan to acquire a collection of hotels—likely a dozen select-service, extended-stay, lifestyle or compact full-service hotels.
WMRE: Will all the hotel properties bought by BLEV be distressed?
Andy Chopra: We think about 60 percent of our investments will be well-positioned hotels that are already cash-flow positive. There are certain hotels properties — many resort hotels, for example — that are already recovered. BLEV is now under contract to buy three hotel properties like these. Those properties, in terms of a cap rate based on a trailing 12-month number, we feel comfortable with 7 percent to mid-8 percent… They will provide an immediate return to our investors.
BLEV has also identified at least two dozen distressed hotel properties that it is evaluating. For about a half dozen hotel properties, BLEV is one of a few potential buyers who have been asked to make their “best and final” offers. Say a property started with 20 bidders who gave letters of intent. By the “best and final” round, it has been narrowed down to two or three letters of intent.
The overall goal is to get a 2x equity multiple, or a 20 percent internal rate of return for BLEV’s investors. We will structure the portfolio accordingly.
WMRE: Are you planning to buy these distressed properties at a discount?
Andy Chopra: We would buy at something between what the 2019 cap rate was and where we think it will be in the next three years. It may look like a very low cap rate with the trailing 12-month net operating income (NOI)—we might end up buying on what looks like a 5 percent cap rate.
WMRE: If you took the price and considered that in terms of a distressed hotel NOI from 2019, what cap rate would you get?
Andy Chopra: I would say anywhere from 7.25 percent to 8.75 percent. There are also a number of disparate variables—particularly cap ex—that can affect valuation. Maintenance has been deferred in many of these hotels. The hotels may also require upgraded technology.
WMRE: Can you characterize your investors?
Andy Chopra: The investors in the BLEV fund are primarily high net worth and ultra high net worth individuals and family offices.
WMRE: Do you also plan to raise money from other private equity funds?
Andy Chopra: For the BLEV fund’s structure, we really need to be nimble and flexible—that is really not consistent with the business plan of other conventional private equity funds. If we are going after certain assets that are stabilized and then adding other assets that will provide greater returns with greater risk, it is tough to find funds that are okay with both of those areas.
WMRE: Why do believe that value is likely to return to these hotel properties?
Andy Chopra: We certainly believe in the long-term prospects for travel. People are going to get on planes to see their clients. We also believe that we will be in a constrained supply environment for the next two to three years.
We also believe that the economy is in expansion mode. Because of that there is a high probability that we are in an inflationary environment. Hotels reset their rents every 24 hours—so we feel that we are well-positioned to drive yield and investor return if we do encounter a prolonged inflationary environment.