THE ROLE OF THE QUALIFIED INSTITUTIONAL BUYER IN THE HOTEL INDUSTRY

 

The hotel industry was one of the hardest hit by the COVID-19 pandemic. However, it is recovering and gaining momentum as assets change hands at an accelerated pace. 

The lodging industry is expected to see a full recovery towards the end of 2023. Until then, hotel buyers and owners battle it out to find a fair price for hotels on the market. 

A qualified institutional buyer (QIB) plays a vital role in the investment sector, but how does this manifest in the hotel industry?

 

WHAT IS A “QUALIFIED INSTITUTIONAL BUYER” FOR THE HOTEL INDUSTRY?

 

The real estate industry thrives when properties are turned for a desirable price. Whether it’s the construction of a new building, the sale of residential property or the purchase of commercial infrastructure – real estate contributes to a country’s economic growth.

A qualified institutional buyer (QIB) is a financially sophisticated investor. A QIB is an individual entity that legally requires less protection from issuers than other public investors. Their status is the result of experience, assets under management, or net worth. 

In a nutshell, the position of a QIB can be described as follows.

• Manage a minimum investment of $100 million in securities on a discretionary basis
• Operate as a registered broker-dealer with a minimum of $10 million investment in non-affiliated securities
• SEC rule 144A stipulates that QIBs are able to trade securities on the market, thereby increasing the liquidity for the specific security

QIBs benefit greatly from SEC Rule 144A. It provides a safe harbor exemption against the SEC’s registration requirements for securities. In turn, this allows for the public re-sale of controlled and restricted securities, as long as certain conditions are met.

RECENT CHANGES TO THE SEC’S RULES

A recent amendment to the SEC’s rules has expanded the categories of entities in the definition of a QIB. For example, limited liability companies and RBICS are eligible for qualification if they meet the required investment portfolio threshold. 

QIBS IN THE HOTEL INDUSTRY

In the hotel industry, it’s possible for entities that manage hotel franchises, mergers, and acquisitions to qualify as QIBs. As the hotel industry is recovering from the impact of COVID-19, the value of holding a QIB status is becoming more relevant.  

For the past year, the pandemic has pressed pause on hotel development, investment, and acquisition. Now, investors are on the hunt yet again, and QIBs are leading the charge. 

WHAT DOES TODAY’S HOTEL BUYER LOOK LIKE? 

Unfortunately, the pandemic had a devastating effect on a large percentage of the hotel industry. In 2020, there was a 20% increase in hotel businesses filing for bankruptcy. This figure isn’t expected to settle until late 2023.

However, it’s not all doom and gloom. While the post-lockdown metrics for success may have shifted, the hospitality industry is starting to activate again. Hotel investors, in particular, predict an accelerated trend of increased interest in select-service properties.

MERGER AND ACQUISITION

Many investors are looking for bargains in the buyer’s market, hoping to leverage discounts from the pandemic. Acquisitions offer struggling hotels the opportunity to survive and gain access to a market.

Investors that pursue acquisitions or mergers bring a lot to the table. By combining resources, cutting down operation costs, and sharing industry knowledge, the investment potential is strengthened. As a bonus, market competition decreases.

EXAMPLES OF RECENT ACQUISITIONS

There have been several hotels that have changed hands in states across America. Consider the following examples as insight into the current state of the market.

• Tennessee

Dreamscape Cos. acquired the Sheraton Grand Nashville Downtown. The acquisition contributed to the company’s goal of reaching $1 billion in acquisitions over the next 24 months.

• Colorado

Five Senses Hospitality acquired the former Baymont Inn & Suites in Frisco. The hotel will operate independently while undergoing renovation, after which it will join a hotel brand. The acquisition formed part of a joint venture with Bedford Lodging, a Dallas-based hotel development company. 

• Washington, D.C.

Driftwood Capital, a commercial real estate, development, and lending platform, has acquired the Hyatt Regency Fairfax in Washington, D.C. The plan is to rebrand the hotel with a Hilton flag and be managed by Driftwood Hospitality Management, the investor’s sister company.

NEW OPPORTUNITIES VS. DISTRESS PROPERTIES

While some investors are looking to acquire hotels, others are interested in purchasing distressed properties on the brink of foreclosure. In most instances, the price is discounted and available at auction. 

For example, a portfolio of U.S hotels owned by Singapore-based REIT, Eagle Hospitality Trust, were successfully sold after appearing on the auction block. 

While some investors look to seize distressed assets, others look for new opportunities entirely. Banks and hotel owners are offering buyers cheaper rates. While this benefits the buyer, it doesn’t necessarily help the hotels in trouble and looking to sell. 

THE RISE IN FIRST TIME BUYERS

A QIB can not be an individual investor, regardless of their wealth or financial prowess. However, this has not stopped first-time buyers from entering the hotel investment scene. 

First-time buyers have surprised existing players in the hotel investment game. Individuals from high-net-worth and family-office capital are leveraging the value in real estate assets. 

Hotels reportedly represent a significant portion of investments belonging to high-wealth individuals, especially those that have developed an attraction to luxury hotels post-COVID.

First-time buyers from high-wealth families prioritize a return on investment. Without industry knowledge, these buyers need to surround themselves with hospitality professionals to meet their financial goals.

BUYERS ARE MOTIVATED AND OPTIMISTIC

There is overarching optimism about the future of hotel investment.

Hotel investment is gaining momentum and is expected to continue to do so as travel opens up again. A combination of economic recovery, vaccine rollouts, and the deep desire to travel is expected to increase the number of hotel bookings – and the predicted success of such assets.

Analysts have assessed the market and predict a full recovery for hotel investment by 2024. Leading up to this point, large private equity investors are assembling strategies for acquisition and investment. The biggest challenge at this point is finding the sweet spot between what the owners and investors agree is a fair sale price.

TIME TO ROLL UP THE SLEEVES

At NewGen Advisory, our team is dedicated industry specialists with a finger on the pulse of hotel investment happenings. We’re constantly monitoring the shifting landscape so that we can expertly guide hotel investors and owners on how to maximize return on investment, 

Contact us to find out more about how to buy a hotel or list your asset for sale. 

 

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