Privately owned property investment and development company, Stonewood Alchemy Real Estate (SARE) today announced that it has acquired, together with its U.S. partners and investors, 16 Extended Stay America hotels in Texas and Oklahoma.
The property investment deal, worth R1.2 billion ($85 million), includes the rights to build five additional hotels. The transaction augments the company's current U.S. portfolio, which includes investments in the post acute healthcare, memory care and assisted living sectors.
Together with its co-investment U.S. partner, EastSide Investment Partners LLC, SARE will leverage the clear opportunity available from the acquisition of hotels that are underperforming compared to their competitors.
According to the 2018 Highland Group extended stay report, extended-stay hotel rooms accounted for approximately 8.5% of the total supply of U.S. hotel rooms as at the end of 2017. Overall extended-stay hotel demand grew 8.4% in 2017, which was the fastest annual increase in demand since 2005, excluding the 2010 recovery, and extended-stay hotels achieved an occupancy that was 10.4% greater than the overall hotel industry.
“The extended stay sub-sector of the hospitality industry is also a play on the short- to medium-term accommodation sector. We believe multi-family yields in the U.S. are at all-time low at the moment. This investment will tap into some of the key positive demographic trends supporting multi-family investments, at a very attractive entry yield,” states Eldon Beinart, Director of SARE.
“Extended Stay America is a household brand in the U.S. extended stay sector. However, it manages a very large portfolio within a highly corporatized framework. We believe that through the dedication of our skilled and experienced hospitality partners we can extract greater efficiencies,” states Beinart.
By providing a more efficient management structure and implementing enhanced operations and focused management practices, which will be managed by SARE’s U.S. partners, Beinart believes additional top line revenue growth can be achieved.
Approximately $5m of capital will also be invested into the hotel portfolio for pre-identified refurbishment and renovations, which the investment partners believe will materially enhance revenues and occupancy to achieve the projected returns.
The properties were also selected strategically in market clusters to facilitate an efficient management and cost control process. Additionally, SARE and its partners are analysing further strategies to reduce operating expenses.
SARE expects a cash-on-cash return in excess of 12% in USD at inception of the transaction, with the potential to earn a pre-tax internal rate of return (IRR) of 18-20% over a five-year period. The investors intend to build a further five properties in this portfolio, and once the investment case is complete, exit the portfolio to a specialist private equity fund or family office investor group.
“SARE has identified extended stay hotels, alongside the post acute healthcare, assisted living and memory care sectors as focal points for its capital. We are continuously engaging with current and new investors to bring them onto our platform,” adds Beinart.
SARE is also invested in the United Kingdom with a long-standing local partner and will consider investments in mainland Europe at the appropriate time.