Earlier this year NYU IHIF brought together key PE investors to discuss what influences their strategic decisions, from the capital stack to dealmaking and exit. You can enjoy a portion of the discussion below.
From a historical perspective, US hospitality transaction activity has remained low in recent years because of a string of market challenges disrupting markets. “There's been very few periods of normalcy in the transaction environment over the past three or four years,” said Michael Mohapp, a partner at KSL Capital Partners, earlier this year at NYU IHIF. ‘Every time we get over one hurdle, there's another one, whether it's tariffs, Covid, or the cost of debt capital.”
What Equity Lenders Are Offering
While a good proportion of KSL’s investments are in hotels, the company has a more diverse investment strategy than most hospitality investors, as it invests in different flavours of travel and leisure, including restaurants, health and wellness, marinas, private aviation, the ski industries in the United States, Europe and Asia. Mohapp said that global funds mean that KSL can pivot investment geographically depending on opportunities but is seeing reasonably good deal activity, both in the United States and Europe.
What private equity investors are funding
Benjamin Brunt, managing principal and chief investment officer at Noble Investment Group, an Atlanta-based investment manager focused solely on US assets, noted that Noble invests predominately on premium select-service and extended-stay assets, but more recently has added branded, long-term, mid-scale accommodations to the mix and is building and buying to scale up this segment.
Brunt said his firm is currently deploying Fund Five, which closed in 2023, noting that some of that fund was invested in 2022, when there were more opportunities in the marketplace than now.
Continued chaos in the investment market is making value-add plays that involve extensive renovations challenging, according to Jeff Stulmaker, partner and chief investment officer at KHP Capital Partners, a private equity firm focused on investment in upper-scale lifestyle hotels. “I feel like I get a push alert every couple of minutes that something crazy is happening, and that makes pricing opportunities challenging. But we like to say that all of that's a good thing, When there's uncertainty, there's a lack of liquidity in the market, and if we can be that consistent liquidity provider in U.S. hospitality, that should position us well,” Stulmaker explained.
Stulmaker noted that luxury hotel investors also are pursuing value-add opportunities, because new construction doesn’t make sense from a cost standpoint. “The divergence between the cost to build, and the cost to buy is at its widest point in the last decade,” he said.
Adaptive reuse
Adaptive reuse projects are the exception. “We’ve had a long track record of converting historic buildings, typically office buildings, to hotel use,” he said. “In those circumstances, you can buy the building at a significant discount of replacement cost and get incredible features and craftsmanship you don’t see anymore. And most importantly, you can leverage federal and state incentives to offset your basis,” Stulmaker pointed out, noting that his company is currently repositioning a historic office building in Charlotte that was acquired for $25 per sq. ft. “That works pretty well, even if you do have to do significant investment to convert it to a hotel.”
Mohapp said that his company also focuses on creating strategic angles on real estate investments. “What we've done over the years is create, acquire and grow platforms that have unique operating capabilities or its own brand, which gives you that strategic reason to acquire an asset that helps to bridge the Bid-Ask gap.”
Citing valuation examples, like the Outrigger in Hawaii; Bailey Lodges, a global luxury lodge platform; and Altera ski resorts, Mohapp noted, “We found a lot of success investing behind those platforms because we can implement a playbook that we have confidence in and because we can buy real estate with a level of strategic synergy that doesn't exist without those platforms.”
How deals are being structured
“Structure is the name of the game right now for the large transactions,” Mohapp continued. “We're seeing structure in almost every deal, he said, noting that it's really hard to make the math work for a seller and buyer in a large deal right now without some type of structured workout.
Noble is one of the few hotel investors today with significant new supply underway. The firm’s construction focus today is around its entry into the branded, long-term, mid-scale market. Brunt noted that Noble currently has eight projects under construction and has purchased sites to build eight more hotels. Discussing projects underway, he noted that select-service hotels in San Diego and Savannah were capitalised right after the pandemic, when markets began to move again, so they are an anomaly in terms of what is happening today.
“Everything else that we've looked at that's in that vein has been a lot more difficult to make sense,” Brunt continued,” so we made a strategic shift into branded, long-term accommodations, where we have partnered with Marriott, Hilton, Hyatt Choice around some of their brands.
“In that space, our cost of land, cost of the product and programmatic nature of what we're developing, we can really zero it down to only real risk around the development piece—our site and work package,” he explained. We’re finding success from a development standpoint in today’s market, because we have one design and know what it's going to cost, and what it's going to look like.
Brunt noted that projects underway and planned so far are in Noble’s backyard, the southeast, from Virginia to Florida. These are markets we know well in terms of cost environments, labor availability, land costs, and property taxes. “That has driven us early on, but we’ve begun to look west,” he said, noting challenges to get product to pencil in some of these markets due to high property taxes, as well a premium commodities, like wood, where there’s competition for those commodities with whatever else being developed.
All quotes taken from the NYU IHIF 2025 panel: ‘Private equity outlook: The drivers behind hotel investment strategies'