Stonewood Alchemy Real Estate aims to broaden reach with extended-stay hotels

Stonewood Alchemy Real Estate (SARE) is looking to broaden the reach of its US property portfolio by investing in the fast growing extended-stay hotel sector, a move that would add demographic diversification to the portfolio, broaden the return profile beyond the existing exposure to the assisted living and acute care sectors.

Extended-stay hotels, which are known as apartment hotels in Europe, are serviced apartments that allow people to check-in and check-out as they please without the hassle of deposits and fixed-term leases. It’s a rapidly expanding sector in the US thanks to the resurgence in the nation’s economy as well as due to the flexibility it provides to consumers in both upswings and downswings.

Our research shows that even during the 2008 recession extended stay occupancy levels averaged around 75%, which illustrates its resilience even in the face of severe economic headwinds. This is due to the tendency of people to downsize to smaller, more flexible accommodation options during times of financial strife. By the same token, companies that are downsizing or closing regional operations, usually still need to service those areas by flying in representatives from more active hubs. For these executives flexible, short-term accommodation options are ideal. For investors, they also offer the added benefit of offering steady occupancies even during boom times due to the influx of contract workers and those seeking new employment opportunities.

But why extended-stay hotels rather than multi-family residential housing facilities? The main reason is the explosion in the supply of multi-family residential housing complexes in recent years, which has pushed yields in that sector to all-time lows. Although multi-family residential units typically provide greater longevity of lease, their declining yields make investment less attractive when compared to higher yielding extended-stay options, which offer a balance between quality and affordability. What’s more, SARE has identified opportunities to purchase extended-stay assets in locations where occupancy rates are as good, or almost as good, as multi-family options but at a significant discount to multi-family yields.

SARE is also targeting the economy to mid-market segment of the extended-stay hotel sector, which has lower operational costs than the upper income or luxury segments as they have fewer amenities and need to be serviced less frequently. Adding extended-stay hotels to our portfolio also adds a powerful element of demographic diversification into our asset base as the product is largely aimed at working-age professionals. By contrast, our assisted living and acute care assets are focussed on the ageing baby boomer generation, which although still a wealthy and economically powerful demographic, lacks the reach into younger demographics like Generation Xers or the Millennials.

The success of our two previous investments in US property, the Savanna House Assisted Living & Memory Care facility in Arizona and the Bear Creek Skilled Nursing facility in Dallas, has also given us the confidence to pursue extended-stay hotels as an additional leg to our investment thesis. As a Guernsey-registered joint venture between Alchemy Properties and Stonewood Capital, SARE is fortunate to have seasoned partners with an established track record in this field who are continuously evaluating potential investments. This provides added assurance when navigating the mature and highly competitive US property market.

By Eldon Beinart, CEO of Stonewood Capital and Director of SARE