WHY REIT II FOR LPL
Select Service Hotels
Based on our research into the fundamentals of the asset classes, we think that there is a significant investment opportunity within the hospitality industry – specifically select-service hotels. The term “select-service,” refers to business-class hotels that do not depend on luxury, leisure travel. The vast majority of the assets Moody National REIT II (“REIT II”) will acquire will be Marriott, Hilton, and Hyatt select service hotels (such as Courtyard by Marriott, Hilton Garden Inn, or Hyatt Place). We invest in these brands for the superior reservation systems and high quality brand standards versus other franchisors (such as Intercontinental Hotels Group or Choice Hotels). Furthermore, select-service operators are able to take 35-40% of gross revenues to the Net Operating Income (NOI) line of profit and loss statements whereas full-service hotel operators typically bring closer to 20% of gross revenues to the NOI line.
Where We Buy
REIT II will buy predominately in major metropolitan markets in the East Coast, West Coast, and Sunbelt regions. In addition, our analysis also suggests that in order to perform over time, select-service hotels must be located within a high concentration of office buildings, at the gate of a major university, or near a major medical center. Those three traits generate hotel room-night demand that is relatively inelastic to fluctuations in the economy. For instance, hospitals and universities operate in good and bad economic times. REIT II will also seek hotel opportunities in U.S. “Global Gateway” cities that face technical pressures from emerging international economies. We believe this comprehensive, global view gives REIT II another market-leading edge. According to Smith Travel Research (“STR”), for the last 20 years, hotels located within the Top 25 U.S. Markets have achieved nearly a 40% premium on rate versus the smaller U.S. markets. Moody National Companies has had extensive experience financing, owning, and operating hotels since 1996. As a result, Moody’s team of experts, who have experienced many cycles in the hospitality sector, will provide REIT II with unparalleled expertise as its Advisor and Manager
Competitive products
To some extent CareyWatermark 2 is a competitive product as another lodging REIT, however CW2 invests primary in full service and luxury hotel assets, while we exclusively target select- service hotel assets. We also invest in “dollar-good day one” cash-flowing assets. CW2 has historically invested in more capital appreciation opportunities. With this in mind, broker dealer firms consider REIT II a complimentary product to CW2, not necessarily competitive.
Top Strengths
1. Income. REII II is actively deploying capital into select service hotel assets, which are trading in the 7%-8% capitalization rate range. With the use of moderate leverage, this delivers to REIT II in place, double digit cash-on-cash returns. Therefore, the greatest strength executed currently by REIT II is its distribution.
2. Value Creation. In the post-15-02 environment, sponsors are required to value REITs sooner. This is a good step for the industry, however the onus is on the sponsors to execute. As a math-based company, Moody identifies the asset class that has the highest propensity to increase in Net Operating Income (NOI) in the shortest period of time. Without question, this asset class has been and continues to be hospitality. From 2010 to 2015, hotel demand increased 23.5% as compared with a 4.9% growth in supply according to CBRE Hotels. As a result of this imbalance, RevPAR (Revenue per Available Room) is expected to see continued growth following an increase of 6.8% in 2015. The combination of strong demand growth and suppressed supply should result in pricing power for hotel operators and asset appreciation for hotel investors.
Specifically, REIT II has demonstrated it can achieve growth during the offering period. In accordance with FINRA 15-02, REIT II utilizes the Appraised Value Methodology for value reflection on monthly customer statements. On March 20th, REIT II’s Independent Board of Directors has determined an estimated value per share of $25.04 for the company’s stock as of December 31, 2016. This marks the second consecutive year of valuation increase for REIT II (previous value of $25.03 for the company’s stock as of October 31, 2015). The REIT’s advisor, Moody National Advisor II LLC, performed the valuation in accordance with Investment Program Association guidelines and engaged CBRE Inc. – Valuation & Advisory Services and Landauer Valuation & Advisory, a division of Newmark Grubb Knight Frank, to provide appraisals.
Top Risks of Program
Lodging demand tends to track the broader economy. Should the U.S. fall into a recession, this could negatively impact room night demand as corporations pull back on business travel spending. This is why it is critical to maintain a rigorous acquisition strategy of only buying premier branded hotels and only within submarkets of major metropolitan cities that display multiple demand generators that are rather inelastic to fluctuations in the economy.
Target Market for this Product
Investors seeking an income producing, non-correlated, inflationary hedge investment.