Saint Paul, MN Healthcare Hospitality, DST

Saint Paul, Minnesota

ASSET CLASS:  Healthcare Hospitality
OFFERING SIZE:  $18,114,363
LEVERAGE:  35.27%
# OF ROOMS:  100
HOLD PERIOD:  7-10 Years
REMAINING EQUITY:  $15,000,000

The Hotel is an extended stay hotel located at 200 Grand Avenue in Saint Paul, Minnesota. The Hotel includes 100 guest rooms, approximately 75,000 square-foot in total, including approximately 400 square feet of meeting space. As a newly built property, the Hotel offers all the modern furnishings and expected global brand amenities. There is sufficient parking with over 70 spaces available between those at the Hotel and spaces reserved through the two nearby hospitals to further accommodate those guests.

The Hotel is being operated as a Residence Inn by Marriott®, one of the many brands under the Marriott International flag. Marriott International promotes amenities which are designed to help you “travel the way you live”, which is welcomed when traveling to access specialty care services or to visit loved ones for an extended stay. In addition to the standard hotel amenities, the outside courtyard and patio, the pool/ spa area and in-room kitchenettes provide the additional comforts and leisure space.

The investment thesis is to operate the newly opened Hotel with management through an affiliate of the original developer. The Hotel is the nearest hotel adjacent to two major medical facilities and conveniently located in the lively Saint Paul metropolitan statistical area (MSA). The Hotel is walking distance to many high traffic venues such as convention and event centers, a science museum and more. With the Hotel’s close proximity to the nearby hospitals, the Hotel may serve as a home base to those being treated as outpatients or family of both inpatient and outpatient guests. It is anticipated that occupancy rates will be strong and steady given the Property’s prime location coupled with a nationally recognized extended stay hotel franchise.

The Property Manager, an affiliate of Kaeding Management Group, is well-known as a leader in the Midwest hotel market. The Property Manager manages eight hotels which include approximately 1,000 guest rooms under various hotel flagships. To further align with the investment strategy, Kaeding or its affiliates own or will own five percent of the Trust’s interests. The Property Manager’s role will include training of the current staff and negotiating any vendor contractual obligations to obtain best pricing for services needed at the Hotel. Regular meetings will also be held between management and the asset and property managers to review performance and pricing strategies, demand for lodging accommodations, as well as other topics.

The Hotel is ideally located in the healthcare hub of Saint Paul, and is therefore a preferred hotel for patients, their families and out of town visitors being a short 0.1 miles to Children's Minnesota Hospital. The Hotel also caters to tourists as it is near the Xcel Energy Center arena, home of the Minnesota Wild National Hockey League team. The St. Paul RiverCentre is adjacent to Xcel and Minnesota Children’s Museum, and the nearby Light Rail system provides an additional mode of transportation. The convenient location coupled with a strong Marriott International brand are expected to drive guests to this Hotel.

The Hotel is adjacent to two of the largest and award-winning hospitals in Saint Paul, Children's Minnesota Hospital and United Hospital. Children’s Hospitals and Clinics of Minnesota, sometimes referred to as Children’s Minnesota, is one of the largest freestanding children’s health care organizations in the nation. It is consistently ranked as one of the top pediatric hospitals and in three specialty areas according to 2019 U.S. News & World Report. United Hospital is part of the Allina Health system and plays an important role in the surrounding area as it is the largest hospital in the Twin Cities east metro. The hospital is ranked #1 in adult care in the 2019 U.S. News & World Report and a leading hospital in one specialty area nationally.

Twin Cities residents enjoy a high quality of life thanks to the relatively low cost of living, the low crime rate, easy access to top-ranking health care services, as well as clean air and water. The metro area offers a multitude of leisure activities, which attracts many residents and visitors. Arts enthusiasts have ample access with more theater seats per capita than any other U.S. city. Mall of America is the largest shopping and entertainment complex in the nation with 4.2 million square feet to suit a variety of preferences. Sports fans have choice of six professional sports teams in Minneapolis for football, baseball, hockey, men’s and women’s basketball, and soccer. The Twin Cities hospitality sector remains strong, with increasing wages and stable job growth nationally, thus allowing for more disposable income. In 2018, the hospitality sector saw a 2.3 percent increase in the number of occupied rooms in the Twin Cities MSA and this trend is expected to continue through 2019.

There are more Fortune 500 companies (16) per capita nationally than any other U.S. metro region. Major corporations headquartered in Minneapolis/Saint Paul include Cargill, Ecolab, Securian Financial Group Inc. and Gander Mountain. This drives business travelers to the area who are often seeking short-term residence.

According to the Cushman and Wakefield U.S. Lodging Industry Overview published in March of 2019, revenue within the U.S. lodging market grew in 2018 for the 9th consecutive year. Between 1995 and 2018, through two major downturns and other market adjustments, the compound annual growth rate for “revenue per available room” (“RevPar”) was 3.0%. While 2017 experienced growth in line with the historical average, 2018 figures were below that at 2.8%. In early 2018 Smith Travel and Research (“STR”) had forecast global occupancy growth to be flat and revenue growth to be 2.4%, pushing RevPar to increase by 2.2%. The actual 2018 results surpassed this level, driven by a lower supply growth and stronger demand.

CB Richard Ellis reports similar figures within its Trends in the Hotel Industry Report. Overall, CBRE cited RevPar growth of 2.6% in 2018. In addition to growing revenues, the hospitality industry has experienced increasing profits for the past nine years as well, although it has become increasingly difficult to replicate these results. According to CBRE, managers were able to limit the growth in operating expenses to 2.8%, thus, allowing a 2.3% increase in gross profits. With revenue growth beginning to slow and operating expenses on the rise, profit will be tighter in the years ahead.

According to CBRE, labor costs were up 3.1%, above the 2.4% increase for all other operating expenses. With occupancy levels near record highs, hotel operators must clean and service more rooms. With the U.S. unemployment rate below 4.0%, the increased demand results in higher salaries and wages.

While all segments experienced an increase in average daily rates (“ADR”), Luxury hotels experienced the greatest gains at 3.7% growth, while Upper-Midscale properties experienced the smallest gains at 1.5%. According to STR, as of year-end 2018 there were 191,800 new rooms under construction, which would account for a 3.6% increase in the number of rooms open nationwide. Hotel construction had slowed briefly in mid-2018, however, the number of rooms under construction in December of 2018 exceeded that as of year-end 2017. While most industry participants expected 2018 to be the top of new supply additions, STR is reporting 188,753 rooms in final planning and an additional 258,385 speculative rooms in the early stages of planning. Upper mid-scale and upscale construction continues to lead the development pipeline, still representing 71% of all hotels under construction.

Assets Under Management:: $7.3 Billion
Total Private Placements: 237
Total Assets Purchased: $8.57 Billion
Total Equity Raised: $4.75 Billion
# of Properties Purchased: 644
# of Active Investors: 12,500
Years In Business: 50
Market Share: 28%

Residence Inn is one of many brands under the Marriott International ag. Marriott International, Inc. (NASDAQ: MAR) offers 30 brands and more than 6,900 properties across 130 countries and territories.1 Marriott International is the world’s largest travel company and its footprint covers more of the world than that of any other travel company, providing unique choices for guests across its many classes of hotel brands.2 Marriott International’s combined loyalty program, Marriott BonvoyTM, provides over 120 million members with access to more hotels and experiences in more places than anyone else in the hospitality industry.

The Residence Inn slogan, “It’s Not a Room, it’s a Residence”, captures the essence of the unique service model that recognizes the needs of longer-stay guests. It is optimally positioned to serve this busy Saint Paul hospital market.

Targeted Yr.-1 Cash-on-Cash: 5.75%
Targeted Cash Range: 5.00% - 6.25%
Targeted Cash Average: 5.94%
Projected IRR: 7.10%

All-In Price: $27,984,363
Purchase Price: $24,675,000
Appraised Value: $26,000,000
Loan Amount: $9,870,000
Equity Raise: $18,114,363
Trust Reserves: $550,000
Reserves to All-In Price: 1.97%
Net Load: $2,759,363
Net load to Equity: 18.27%
Net Load to All-In Ratio: 11.83%
Appraised Net Load: $1,434,363
Appraised Net Load to Equity: 7.92%
Appraised Net Load to All-In Price: 5.13%
All-In $/Ft.: $373.12
Sponsor Profit: 3.09%

Net Operating Income: $1,634,833
Purchase Cap Rate: 6.29%
All-In Cap Rate: 5.84%
Breakeven Exit Cap: 7.72%
Breakeven Exit Cap Rate Spread: 143 bps
Appraised Cap: 5.98%
Appraised Cap Rate Spread: 174 bps

Loan Amount: $9,870,000
Term: 10 Years Fixed
Interest Only Period: 5 Years
Amortization Period: 30 Years
Interest Rate: 3.556%
Prepayment: 1% of loan balance
Lender: First Merchants Bank
LTV: 35.27%
Non-Recourse: Yes to Investor

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