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Case Study #4 – The Stones Hotel – Acquisition (Case Only)

This is the fourth in a series of commercial real estate case studies shared by A.CRE. These case studies are meant to help you practice mastering real estate financial modeling. The Stones Hotel puts you in the position of an associate at a leading provider of debt and equity capital for value-add and opportunistic hospitality investments. You are asked to assess the viability of a value-add hotel investment opportunity, before pricing either mezzanine debt or preferred equity for an existing JV partner.

Practice makes perfect!

Each case study shared in this series mirrors real world situations, either in terms of the types of deals you will look at in various roles or the types of modeling tests you’ll be required to perform as part of the interview process. You can browse this and other case studies in the A.CRE Library of Real Estate Case Studies.

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The Stones Hotel – Case Study Overview

You are a second-year associate at A.CRE Capital, a leading provider of debt and equity capital for value-add and opportunistic hospitality investments across Europe and the UK. Your investments are most commonly in the form of senior bridge debt, mezzanine financing, and preferred equity. In all cases, your position in the capital stack has priority over the common equity brought by the sponsors in the investments.

You’ve recently been approached by a long-time partner about providing mezzanine debt or preferred equity to partially capitalize the acquisition of a 250-key hotel in the CBD of a major market within your territory. Before taking the opportunity to your boss and talking through structure and pricing, you’ve decided to first assess the viability of the investment opportunity itself.

The Stones Hotel – Financial Modeling Technical Interview

This is a variation of a timed technical interview test previously given by a global real estate private equity firm as part of its hiring process.

Participants are given 60 minutes to complete this test.

Assumptions – The Stones Hotel

  • 5-year hold period
  • 250 rooms
  • Acquisition price of € 200k/room
  • Acquisition costs are 2% of purchase price
  • Debt
    • 70% loan-to-cost (LTC)
    • 5% interest rate, and requiring mandatory annual debt amortization based on
    • 25-year annual amortization period
  • Occupancy
    • 60% in Year 1, 65% in Year 2, 70% in Year 3, and 75% thereafter
  • Average Daily Rate (ADR)
    • € 325 in Year 1, growing at 5% in Year 2, 4% in Year 3, and 3% thereafter
  • Room Revenues equal 75% of total revenues and other revenues make up the remaining 25% to get Total Revenues
  • Assume the following EBITDA margins:
    • 20% in Year 1
    • 23% in Year 2
    • 25% in Year 3
    • 30% thereafter
  • Capex reserves are 4% of total revenues
  • For the exit value, assume a 13x on T12 EBITDA with 2% transaction costs

Questions – The Stones Hotel

  • What is the unlevered and levered IRR?
  • What is the Peak Equity and WDP (whole dollar profit, i.e., undiscounted profit after recovery of the original basis)?
  • Please build sensitivity tables showing the results for the levered IRR and levered WDP with the following variables:
    • Exit multiple vs. hold period
    • Acquisition price vs. exit multiple
    • Loan-to-cost vs. cost of debt

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