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Two New Funds Targeting Hotels Launch as Investor Demand, Deal Pace Remain Strong

Investment Targets Include both Ends of the Spectrum: Upscale and Economy Hotels
June 7, 2018
The Hilton Garden Inn was one of three Hilton-branded hotels MCR acquired in Champaign, Illinois, last month.

Hotels remain popular with investors as new investment capital continues to flow into the surprisingly active hospitality sector.

In 2017, hotel transaction volume was down about 15 percent from the previous year. However, for the first four months of this year, U.S. hotel transaction volumes reached more than $11.9 billion -- a 93 percent increase over the same period last year, according to preliminary figures released by Jones Lang LaSalle.

The jump in transaction activity to date is underpinned by the acceleration in performance growth, according to JLL. The 52-week moving average for hotel occupancy reached 66.4 percent, the highest level observed over the past decade, JLL found.

"Going into this year, we were hopeful that the improving economy and strong employment trends would translate to an acceleration in RevPAR," said Arthur Adler, chairman for the JLL Hotels & Hospitality Group. "Since March, that is exactly what has happened. Investor sentiment has markedly improved based on the widely held belief that demand will outstrip supply for the foreseeable future, resulting in stronger pricing power and solid profit improvement" for hotel operators.

Seeking to capitalize on the recent investor demand, two new funds targeting hotel property acquisitions emerged in the past couple of weeks.

Crestline Hotels & Resorts, a third-party management company, created a $300 million fund to acquire hotels and invest in properties with certain capital partners. Crestline said the fund will specifically target underperforming hotels to acquire.

"We are actively identifying investment opportunities for our new fund within the upscale and upper-upscale hospitality segments," said James Carroll, Crestline's president and chief executive officer in a statement announcing the fund's formation.

Also MCR, which claims to be the seventh-largest hotel owner-operator in the U.S., just closed on its first hotel investment fund. With a total raise of $300 million, the MCR Hospitality Fund LP garners about $1 billion in buying power when accounting for leverage, according to Russ Shattan, senior vice president of acquisitions and development.

Shattan tells CoStar News that the fund plans to acquire up to 50 hotels, with an average of about $20 million each in cost. MCR said it is on track to acquire 25 hotels by the end of 2018. The fund has five hotels totaling 550 rooms in the pipeline that are expected to close by the end of August 2018.

"The fund is not operating on a market-timing strategy. Rather we see limited-service as an appealing, stable, long-term investment. We are bullish on the select-service hotel asset and are buying to hold (five to seven years)," Shattan said.

  Related News: MCR Raises $300 Million for its First Hotel Investment FundJUNE 4, 2018  |  DIANA BELL

In general, hotels at the two ends of the service and quality spectrum - luxury hotels and economy hotels - are seeing higher performance growth rates than full service hotels, JLL noted.

"Overall, we will continue to see owners who are holding assets seek to refinance and reinvest in their properties. Investors will increasingly gravitate towards lodging given the extremely favorable risk-adjusted returns that the sector offers relative to other forms of real estate," added JLL's Adler.

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