Master Key: Ten years a hotel LP. Numbers say recovery, K1s say otherwise
A special guest edition of Master Key, written by my husband, Matthew Brown. What we've learned over ten years of investing in hotels.
Master Key focuses on economics and finance specific to the travel and hospitality industries. This edition was written by a special guest - my husband, Matt Brown.
Matt is one of the smartest people I know - that’s why I married him. We’ve been together since 2004, and have known each other since we were 9 and 12, when we were neighbors. He has a lifetime of investing experience, and was previously a managing director at Oppenheimer Funds. When our daughter was born, we made the decision for him to leave his finance career and start managing an investment fund we set up - Colorado Ohana Ventures. We primarily invest in real estate, hotels, VC, and PE. After our hospitality sub asset class did not perform over the past ten years as we hoped, I asked him to write this article about what he thinks happened. - Anne Marie
I’ve spent over two decades in the investment industry, moving from distribution, to buy-side equities and fixed income, to covering private investments and more recently concentrating on 1031 exchanges. Around 10 years ago, Anne Marie and I carved out a portion of our own money that we would use to focus on real estate investments and private investments overall. It’s been a wild ride. We’ve been able to rotate through some decent sub-asset classes and invest with great partners along the way. Sometimes we’ve hit strong macro tailwinds, and sometimes headwinds.
Anne Marie asked me to write an article on our experience being an LP (limited partner) in the hospitality sub-asset class and document some lessons from the last decade. This is my attempt to summarize those.
Top line numbers seem good. Hotel RevPAR (revenue per available room) and ADRs (average daily rates) hit record highs in 2024. Last year’s occupancy rate is softer than posted records in 2019, but certainly up from the lows during covid. NCREIF, a basic indicator for real estate investment performance, has posted a 7.2% annualized performance for the last 5 years. Pretty weak when compared to the equity markets, but nothing to complain about.
Why then has my experience as an LP investor been mixed (at best) and for the most part been horrible? It comes down to three things: development timelines, leverage and input costs.
I think the first thing that is important to know when comparing two things is the makeup of those two things being compared. Primarily, the NCREIF is a benchmark of stabilized, operating investment properties that are unlevered. Unlevered means they don’t have debt (a mortgage) and are stabilized (not in lease-up or in post construction marketing phase). Therefore, this is a pretty bad comparison to how a hotel developer (or any real estate developer) would operate. It might be helpful to walk through the development structure and timeline.
I’m going to over simplify this as much as possible, so first off, there are generally two investment groups and a lender, the General Partner and the Limited Partners (GP/LP).
The lender will finance anywhere from 50-80% of a deal, but usually sit around 70%. The GP is the one putting the deal together, they will find a site and work with lawyers to get permits. They will contract with a design team and find a general contractor to build the project. They will find financing from a bank or other lender. And ultimately they find other investors to join in, the LPs. For all this work, they are usually compensated on the backend by taking a greater percentage of the sale or refinance. Usually they put up 10% of the equity (so 3-5% of the whole deal), but often they can get anywhere from 20-50% from a sale or refinancing. The LPs get the majority, but they also contribute most of the equity. Along the way they also accrue 6-8% per year as a ‘hurdle’ or ‘pref’ rate.
