Acquisition of the Newport Beach Hotel & Suites strengthens the real estate investment and services’ firm boutique resort holdings and expands its presence in this red-hot Rhode Island leisure destination.
PROVIDENCE, RHODE ISLAND – Procaccianti Companies’ April 11 acquisition of the 71-key Newport Beach Hotel & Suites was more than an opportunistic play for a familiar asset located near the firm’s Cranston, Rhode Island corporate headquarters. It was an action step in Procaccianti’s strategic growth plan in the upscale boutique, independent hotel segment.
Tuck-in buys of unbranded properties like this waterfront resort are gaining appeal for companies such as Procaccianti that can aggregate one-off opportunities into a nimble growth platform that complements a core portfolio of hard-branded hotels.
Smaller and often attractively priced, these assets keep the deal needle moving at a time when debt has slowed to a trickle since their overall price tag broadens the network of possible lenders to regional and sometimes community banks. They also have potential for a quicker ramp-up as renovations and application of group efficiencies of scale along with cross-marketing energize their revenue generation.
How, why the deal got done
Rob Leven, chief investment officer of Procaccianti Companies, had this property on his acquisition radar. “Our firm has a substantial footprint in the Northeast and, given we were founded in the region more than 60 years ago, we have developed trusted relationships that span generations. It was through one of these long-term relationships that we became aware of this exceptional investment opportunity,” he said. “We approached the owners directly because we saw the asset and the market as a good fit for our existing footprint and for our strategy to continue to invest in independent assets in high barrier to entry leisure-oriented markets.”
The fact that this was an asset with benefits heightened the appeal. In addition to the obvious value of its unique location on a strip of land that affords beachfront views from any angle, the property included an additional land parcel that would allow for future development. “Our belief in the long-term growth story in Newport and the potential expansion opportunity on the adjacent land were critical factors, Leven added.
Leven liked the operational as well as the market upsides. Comprised of an historic hotel built in 1940 and a suite property that opened in 2008 along with its spa and rooftop bar, the resort gave Procaccianti and its hotel management affiliate TPG Hotels and Resorts a differentiated offer to their predominantly branded hotel cluster in the area. It also had room for improvement to its top and bottom lines, both at the property level and as part of an institutional management platform with more than 130 hotels, resorts and marinas.
We see the annual cash yields stabilizing in the low to mid-double-digit range.
Rob Leven
Rate, RevPAR headroom in a hot market
“While the property has been well-maintained, we saw that we could spend approximately $40,000 per room to upgrade the lobby, replace windows, and upgrade guestrooms and bathrooms, particularly in the historic building. We believe these upgrades will elevate the product and allow for meaningful growth in ADR,” Leven said.
Newport’s ranking among the top leisure markets in the United States and what Leven terms “its tremendously high barriers to entry” should support that uptick in rates. Local market intelligence backs that up. The Newport and Bristol County Convention and Visitors’ Bureau (also known as Discover Newport) recently issued its annual financial audit showing record-setting fiscal year-over-year gains for hotel rates (they more than doubled from FY2021 to reach an average $224.30for FY2022) and “soaring occupancy” (up from 43.18% in FY2021 to 57.18% in FY2022).
Although cautioning the local tourism industry about a possible correction sparked by travel inflation, concerns over how long travelers will be willing to pay more for travel experiences and the dangers of marketing to the top 1% of travelers, local tourism officials unveiled business-building plans for weekdays and the off-season to offset peak demand in the sold-out summer months.
Debt, discounts and future deals
Leven said that as a direct deal with the owners, the transaction was “pretty straightforward.” “We try to reduce or eliminate bold and risky investment decisions,” he added. It was financed through “a regional New England bank.”
“One of the biggest challenges in our industry today is securing suitable financing. Fortunately, we have a strong track record and many long-term banking relationships that help us facilitate our business through these fluctuating economic conditions,” Leven said.
Although Procanccianti did not disclose the purchase price, Leven told Hotel Investment Today, “It would be difficult to determine the exact discount to replacement cost as finding comparable land in this location would be very difficult, but it was purchased below replacement cost.”
He anticipates the deal to be immediately accretive with potential for further growth as they improve operations and the physical property. “We intend to be longer-term holders of this asset, so IRRs are not as relevant. We see the annual cash yields stabilizing in the low to mid-double-digit range.”
Looking to the future, Leven said, “We will likely continue to stay in our lane described above unless we see something extraordinarily opportunistic. We have the experience to pursue attractive investment opportunities in many different real estate sectors and markets.”