Transitioning from Buyside AM to CRE--Any Good + Free CRE Investment Primers Out There?

I recently received and accepted an offer to be an acquisitions analyst at a RE Dev firm, focusing on hotels / hospitality. This is a big transition for me as I was previously a research analyst at a buyside AM firm covering Industrials. While I am very familiar with finance and investing concepts in general, as well as some basic real estate analysis, I still do not have a lot of the RE terminology down and how to approach the industry, so I was wondering if there is any good primer out there? It doesn't have to be focused on hospitality, but something that at least teaches you the general concepts.

 
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This website is a good start, another really good online resources is Adventures in CRE: https://www.adventuresincre.com/re-education/a-cre-101-basic-concepts-i…

As far as books go, the classics include “The Real Estate Game” by William Poorvu and “Real Estate Finance and Investments: Risks and Opportunities” by Peter Linneman. Since you are going into development I would highly recommend “Making It in Real Estate: Starting Out as a Developer” by John McNellis - short and easy read by a seasoned developer who walks you through high level topics in RE development.

Although I personally have done limited hospitality acquisitions, I did specialize in hotel underwriting during my valuation days - here are some high level thoughts to keep in mind:

  • Hotels are primarily an operating business, that is where value is created This was a surprise when I first started doing hotel work but the reality is this is an operating business and most of the value add (particularly from acquiring operating hotels) comes from running that business more efficiently by being more cost conscious, taking advantage of any other income available, etc. The revenue side of the equation is usually easier to get comfortable with (room rates and occupancy rates are pretty easy to obtain) so focus on operating and construction costs when looking at new deals.

  • Hotels are an operating business ASSUMING you’ve got your location right This is the big IF and what ties hotel investment closest to real estate and other property types - for hotels it is just as, if not more important to have an excellent location. Always keep it simple - hotels are used by people temporarily staying in an area, the two primary reasons why they do this is for business travel or tourism (“fun” travel). You better hit at least one of those demand sources, if not two if you want to have a long term hold on any of these assets. Keep in mind that a hotel that gets most its demand from tourism will likely have less reliable occupancy during down economic cycles as consumers scale back. As such, hotels are often located within a 10 minute drive (ideally a walk) from a major tourist attraction, a CBD, conference centers, the beach/a body of water, etc. Most hotels have excellent highway accessibility and are often located at intersections of major highways as they want to provide easy regional access for their guests.

  • Limited vs Full Service - a gross overgeneralization One distinction that separates hotels into groups is if they are limited or full service. Limited service is a hotel which offers food but not a full restaurant. That might mean continental breakfast, room service, snack bar, etc but it will not have an attached restaurant. Full service does include a full restaurant which can be structured in a variety of ways but usually it is either renting that space to a third party or running it yourself. Now this is a gross overgeneralization but in my experience most limited service hotels are usually far more productive and profitable than full service. That’s because the hotel usually runs the restaurant which requires its own expertise that is quite different from running a hotel which usually means the food quality is suspect and it takes away operational resources from the hotel business. That doesn’t mean it can’t work (and often does for luxury brands or Class A assets) but in majority of projects that restaurant becomes at best a break even.

  • Independent vs Chain - going at it alone or with the big boys Another distinction to be aware of is independent vs chain “flags”. Most of the hotels many are familiar with are franchised - an owner chooses which company they want to run their hotel as, the franchise provides the owner the computer infrastructure, marketing, design and branding that need to be in place to operate as a Springhill Suites (for example). The owner then pays a portion of their operating income as franchise fees are are required to keep up with brand standards through occasional PIPs (Property Improvement Plan, a guide with budget for a partial to full remodel).

There are five big hotel conglomerates who each own a handful of brands which are usually separated by price point (luxury to motel). A brief overview of “big five” and their brands:

  • Hilton - includes DoubleTree, Embassy Suites, Hilton Garden Inn, Homewood Suites, Hampton

  • Hyatt - includes Park Hyatt, Grand Hyatt, Hyatt Regency, Hyatt Place, Hyatt House

  • Marriott - includes Marriott Hotels, Ritz Carlton, JW Marriott, Renaissance, Courtyard, Springhill Suites, Fairfield Inn and Suites, Residence Inn, Four Points by Sheridan, W, St. Regis

  • InterContinental Hotels Group (IHG) - includes Crowne Plaza, InterContinental Hotels and Resorts, Holiday Inn, Holiday Inn Express, Candlewood Suites

  • Wyndham - includes Ramada, Day’s Inn, Super 8, Howard Johnson, Travelodge

Now, if you’re not one of the above and you operate under your own flag, branding and marketing you are what’s called Independent. In my experience these hotels “fail” far more often for a litany of reasons - usually poor operations, inconsistent messaging, lack of organized market budget, etc. That being said, there are still independent hotels that make a name for themselves (particularly the iconic, luxury oriented ones) and operate fine independently but those are more the exception than the rule.

In terms of other information you should know, terminology for hotel underwriting is unique and different even relative to other real estate assets. Some important ones for you to know include ADR, occupancy and RevPar.

ADR stands for Average Daily Rate and this is the average rate charged for any of your rooms on any day throughout the year.

Occupancy is pretty straight forward, how many rooms are full throughout the year as a percentage of total available rooms.

RevPAR strands for Revenue per Available Room. This is calculated by multiplying ADR by your Occupancy and is one of the best metrics you can use to look at hotels vs each other on an “apples to apples” basis.

The hotel industry is unique in that competitors are quite transparent with each other about sharing data amongst each other. All of the above are found and broken down in what are called STR reports (pronounced “Star reports”, named after STR Global the company that produces them). This is an incredibly useful breakdown of all your hotel’s key metrics versus your direct competitive set. Although some hotels choose not to participate, whenever possible try to obtain one for your project or nearby competitor when underwriting.

That’s about all I’ve got so I’ll let others who specialize in hotel acquisitions step in but if you’ve got any high level questions happy to help!

 

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