Extended stay versus full service hotel deals in the same secondary metro, and where the real risk sits
Take two hotel deals in the same secondary metro, both offered as co-invest positions alongside a sponsor. Deal A, extended stay, 118 keys, built 2016, no PIP required for four years. Trailing RevPAR 94, occupancy 79 percent, ADR 119, average length of stay 5.8 nights. Price 17.7M, 150k a key. In-place NOI 1.32M, a 7.5 percent going-in yield. Sponsor models stabilized NOI of 1.48M by year three, exit at 7.75 percent. Deal B, full service, 210 keys, built 1998, 14,000 square feet of meeting space, attached to a small convention facility. Trailing RevPAR 81, occupancy 61 percent, ADR 133. Price 23.1M, 110k a key. In-place NOI 1.44M, a 6.2 percent going-in yield. PIP of 8.6M, 41k a key. Sponsor models 3.1M NOI by year four on RevPAR of 107, exit at 8.25 percent, contingent on group business recovering to 2019 levels in that submarket. Deal A produces a lower return with a much tighter operating story. Labor per occupied room on an extended stay asset runs roughly half of a full service property, since there is no restaurant, no banquet staff, and limited housekeeping on stayover days. Deal B carries all of the upside and all of the operational and cyclical exposure, plus 8.6M of construction risk before it earns anything. The part of Deal B worth pressure testing hardest is the group business assumption, corporate meeting demand modeled at 88 percent of 2019 room nights in that submarket. That figure is difficult to verify independently without the underlying source contracts, and a sponsor who will not share them is asking for a fair amount of trust on the single number the whole return depends on. Between a lower, tighter return and a higher, more exposed one with an unverifiable key assumption, the disciplined answer usually leans toward the asset whose story can actually be checked.
