Historic Inns Collection Sells for $109 Million

August 17, 2018 | Keith Bland

The big news of late summer 2018 in the Key West lodging market is the sale of the 222-unit Historic Key West Inns collection. KHP Capital Partners, a private equity firm led by former Kimpton Hotel executives and based in San Francisco, purchased the Old Town guesthouse portfolio as well as parking lots and office buildings that were included in the transaction. Closing on August 2, 2018, the $109 million price tag, well north of $450,000 per hotel unit, has prompted several to ask why the per unit value of this sale was so much more than the typical recent Old Town B&B transactions.

Why do some hotels sell for more per unit than others?

· Commercial Real Estate, including hotels, are income producing properties. The higher the Net Operating Income (NOI) of a property, the higher the value of the property. NOI is defined as gross revenue less property operating expenses, assuming no debt. Assigning value based on property NOI is called the Income Approach to Value in the appraisal industry and is the most important factor in valuing commercial real estate. The result of the increasing occupancy and average daily rates of Key West hotels in the past decade is the main reason for the increased NOI and clearly, this particular portfolio was outperforming most of the B&B market. Just because one guesthouse property sold this year or last for $350,000 per unit and this sale was in excess of $450,000 per unit is primarily because of the difference in NOI per unit.

· Large private equity firms like KHP as well as Real Estate Investment Trusts (REITs) can and will pay a higher amount based on NOI than smaller investors because their cost of capital used to purchase the property is less expensive, i.e. there is not a middle conduit like a commercial bank that lends money to the smaller investor. With the involvement of a third party lender, both the lender and the investor require profit on the investment, hence the higher cost of capital as opposed to the larger equity firms investing in-house capital with lower return requirements.

· In addition, the large equity firms and REITs require a certain number of rooms (222 in this case) to be under central management and one reservation system. The economies of scale save on the expense side of the NOI equation, and these investors are typically not interested in small properties.

Clearly, the hotel investment experts at KHP Capital Partners believe in the health of the Key West lodging market. With our highly regulated supply side combined with what they and many others believe to be growing consumer demand, the trajectory of the hotel investment market in Old Town Key West is continuing to trend upward.