Distressed hotel deals almost within reach for Banyan’s BLEV fund

Investors are finally bidding on some of the first hotel properties available for sale after being hit by the crisis caused by the coronavirus pandemic.

Since the start of the pandemic in March 2020, many hotels have earned a fraction of their usual revenue, especially if that revenue came largely from business travelers. Many investors immediately saw an opportunity to buy hotels at a discount. But more than a year later, very few struggling hotels are available for purchase.

Until now.

Banyan Investment Group, based in Atlanta, Georgia, is now in the “best and last offer” stage of auctions in half a dozen separate bids to buy distressed hotel properties for its Banyan Lodging Enhanced Value Fund ( BLEV).

“The pandemic has created a number of investment opportunities, ranging from new assets being sold at below replacement cost to rebates resulting from owners facing liquidity crises,” said Andy Chopra, managing partner and director of Banyan investments.

Banyan has already closed the first $20 million in investments in its BLEV fund, according to an announcement in early December. That’s already more than half of the fund’s $35 million cap, which it’s expected to reach in early 2022.

WMRE caught up with Chopra to ask why opportunities to buy distressed hotel properties have taken so long to come to market and what kinds of deals are likely in the near future.

“It’s a long process,” he says. “During the global financial crisis, it wasn’t until four or five years into the crisis that lenders started selling distressed assets off their balance sheets.”

This interview has been edited for style, length and clarity.

WMRE: Why do you think more and more distressed hotel buying opportunities are emerging now?

Andy Chopra: There is a fatigue on the side of the capital invested before the pandemic. And there is fatigue on the part of lenders. According to recent research by Jones Lang LaSalle, hotel property foreclosure activity in September 2021 was four times higher than in June 2020.

Many of these properties have gone two or even three years without any kind of ex investment cap, and there really isn’t any extra liquidity to do so. There will be pressure from brands to start making improvements. Other hotel properties have loans coming due. Owners may not see financial sense in investing more in the property. They would rather just sell…or return the keys to the lender.

WMRE: How do you identify properties in difficulty and owners ready to sell?

Andy Chopra: We use our existing networks, our lending relationships and of course the broker community… We also get phone calls before an asset is widely traded… We have a reputation, because when we make an offer and that offer is accepted, there is a very high probability that we will close.

WMRE: Your BLEV fund will have a hard cap on its fundraising of $35 million. How will you deploy this capital?

Andy Chopra: Joint venture partnerships with institutional investors and syndicates of retail investors…involving total investable equity in the range of $350 million. We plan to acquire a collection of hotels, probably a dozen select-service, extended-stay, lifestyle or compact full-service hotels.

WMRE: Will all hotel properties acquired by BLEV be in difficulty?

Andy Chopra: We believe around 60% of our investments will be in well-positioned hotels that are already cash flow positive. Some hotel properties — many resort hotels, for example — are already reclaimed. BLEV is now under contract to purchase three hotel properties like these. These properties, in terms of cap rate based on a 12 month number, we feel comfortable with 7% to mid-8%… They will provide an immediate return to our investors.

BLEV has also identified at least two dozen struggling hotels that it is evaluating. For about half a dozen hotel properties, BLEV is one of the few potential buyers who have been asked to make their “best and last” offer. Let’s say a property started with 20 bidders who gave letters of intent. In the “best and final” round, it was reduced to two or three letters of intent.

The overall objective is to achieve an equity multiple of 2x, or an internal rate of return of 20% for BLEV investors. We will structure the portfolio accordingly.

WMRE: Do you plan to buy these distressed properties at a reduced price?

Andy Chopra: We would be buying somewhere between what the 2019 cap rate was and what we think it will be in the next three years. This may look like a very low cap rate with the last 12 months net operating income (NOI) – we could end up buying on what looks like a 5% cap rate.

WMRE: If you took the price and considered that in terms of NOI of a distressed hotel from 2019, what cap rate would you get?

Andy Chopra: I would say between 7.25% and 8.75%. There are also a number of disparate variables, particularly cap ex, that can affect valuation. Maintenance has been postponed in many of these hotels. Hotels may also require improved technology.

WMRE: Can you characterize your investors?

Andy Chopra: Investors in the BLEV fund are mainly high net worth and ultra high net worth individuals and family offices.

WMRE: Do you also plan to raise funds from other private equity funds?

Andy Chopra: For the structure of the BLEV fund, we really have to be nimble and flexible, which is really not consistent with the business plan of other conventional private equity funds. If we look for certain assets that are stabilized and then add other assets that will offer higher returns with higher risk, it is difficult to find funds that are suitable for both areas.

WMRE: Why do you think value is likely to return to these hotel properties?

Andy Chopra: We certainly believe in the long-term outlook for travel. People are going to get on planes to see their customers. We also believe we will be in a tight supply environment for the next two to three years.

We also believe the economy is in expansion mode. Therefore, there is a high probability that we are in an inflationary environment. Hotels review their rents every 24 hours. We therefore believe that we are well positioned to drive yield and investor returns should we encounter a prolonged inflationary environment.

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