PEG Closes $120M Fund

The fund is entirely dedicated to converting older extended-stay hotels into apartment buildings in suburban-urban markets.

Avia Sanctuary at Highland Mall. Image courtesy of PEG Cos.

Avia Sanctuary at Highland Mall. Image courtesy of PEG Cos.

Commercial real estate investment firm PEG Cos. has successfully closed its third fund, PEG Extended Stay Conversion Fund, LP, a value-add fund with $120 million in LP commitments. The fund is focused entirely on acquisition of older extended-stay hotels for conversion into Class B attainable multifamily housing.

The fund presently has 17 properties in various stages of conversion, lease up and stabilization. Spread across 11 states, the properties are situated in highly-sought markets that include Austin and Dallas, Texas, Atlanta, Ga.; Kissimmee, Fla.; Seattle, Wash.; Boston, Mass.; and Philadelphia, Pa. The addition of two more properties is expected by next year, according to fund management.

Early hurdles

“The challenges related to the fund were more in the beginning versus the closing of the Fund,” Rachel Oh, PEG Capital Partners managing director, told Multi-Housing News.

“We launched fundraising for the fund back in April 2020, smack in the middle of the start of the pandemic. Uncertainty with anything in the hospitality industry became a hurdle for investors to get comfortable with to invest in the idea. However, it turns out the pandemic helped further support the thesis for acquiring these aging hotels, now at a steeper discount, built like apartments for much-needed workforce housing across the U.S. It took a bit of education to help investors work through the underwriting of these acquisitions in multifamily vs. hotels. And we also needed to guide the lenders through the conversion process as well. We were one of the first groups to tackle this strategy, starting back in 2018, but had not yet had a round trip to disposition so the challenges were earlier on. Fast forward to 2022, and we will have our first sale–on an asset still under lease up–and expect the IRR to exceed expectations.”

PEG Cos.’ vertically integrated structure made it possible to directly address obstacles immediately, Oh said. For example, for assets with entitlements not fully in place at time of acquisition, PEG Hospitality Group is able to operate the hotels until the entitlements are granted. At that time, PEG Development and PEG Construction can launch construction. “All properties are managed by PEG Property Group. Once assets are stabilized, PEG Capital Partners will move forward with the disposition,” she said.

She added fund managers have witnessed first-hand how much investors appreciate a good deal, particularly when it involves a large arbitrage between the per-door value of a hotel and of an apartment building. “While these extended-stay conversions can be tricky to navigate, it’s the perfect strategy for us here at PEG because of our company structure and comprehensive in-house capabilities,” she concluded. Earlier in August, ZMR Capital acquired the Sonoma Pointe multifamily property in Kissimmee, Fla.

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