As of December 2025, hotel portfolio transactions reveal a structural dislocation that sophisticated allocators cannot ignore. San Francisco hotel investment volumes accelerate while public hotel REITs trade at 35.2% discounts to net asset value, even as private market transactions execute at cap rates 300-550 basis points tighter than public equity implies. This isn't cyclical noise. It's a regime shift in capital structure preferences where operational recovery in gateway markets fails to translate into equity revaluation, creating systematic arbitrage opportunities for patient capital. This analysis examines the mechanics behind REIT disposal programs trading at material discounts to private transaction pricing, San Francisco's RevPAR resurgence amid persistent public market mispricing, and the privatization premium now embedded in branded portfolio repositioning plays. Our quantamental frameworks reveal why vehicle structure, not asset quality, has become the dominant value driver in U.S. hotel investment.

Portfolio Acquisition Pricing and the REIT Arbitrage Window

As of Q4 2025, hotel portfolio dispositions by publicly traded REITs reveal a stark 300-550 basis point arbitrage between private transaction cap rates and implied public equity valuations. American Hotel Income Properties REIT's disposal program trades at a 7.7% cap rate and $97,000 per key, according to AHIP's Q3 2025 earnings release¹, while the same REIT's enterprise value implies a 9.9% cap rate on its remaining 37-property portfolio. This disconnect isn't noise. It's structural mispricing tied to liquidity constraints and governance drag that our Liquidity Stress Delta (LSD) framework quantifies precisely. When individual assets trade at materially tighter cap rates than the vehicle holding them, capital structure inefficiency becomes the dominant value driver.

The mechanics of this arbitrage are visible across transaction types. Apple Hospitality REIT disposed of seven properties at a 6.2% blended cap rate before capital expenditures, or 4.7% after accounting for $24 million in deferred renovations, per Apple Hospitality's Q3 2025 earnings call². Meanwhile, Summit Hotel Properties sold two assets in October 2025 at a 4.3% cap rate post-capex adjustment, according to Summit's Q3 2025 results³. Yet these same REITs trade at 35-40% discounts to net asset value in the public markets. As Edward Chancellor observes in *Capital Returns*, "The best opportunities arise when capital is scarce in one corner of the market and abundant in another." Right now, private capital sees stabilized hotel cash flows as underpriced relative to alternative real assets, while public REIT investors remain fixated on near-term occupancy volatility and interest rate sensitivity.

The strategic implication for allocators is clear. When Bay Adjusted Sharpe (BAS) improves materially through privatization yet the public vehicle persists at a discount, it signals market structure fragility rather than operational weakness. Sotherly Hotels' take-private transaction at $2.25 per share, a 152.7% premium to the prior closing price, reflects a 7.8-8.5% NOI cap rate and approximately $152,600 per key, according to Seeking Alpha's November 2025 REIT review⁴. This validates what the disposal data already showed: private buyers are willing to pay cap rates 200-300 basis points tighter than public equity implies. For sophisticated capital, this creates tactical opportunities in share repurchases at depressed valuations (IRRs materially exceeding organic growth) and strategic questions about whether REIT structures can ever close the NAV gap absent wholesale privatization.

Forward-looking allocators should interpret this not as a cyclical dislocation but as a regime shift in capital structure preferences. When debt yields converge with cap rates near 6.5%, as Bay Street Hospitality's October 2025 analysis⁵ documented for stabilized coastal assets, refinancing becomes more attractive than exits for well-capitalized operators. But for public REITs with governance constraints and liquidity drag, the arbitrage persists. As Aswath Damodaran notes in *Investment Valuation*, "The value of control lies in the ability to change how a business is run." In today's hotel REIT market, that control premium is worth 300-550 basis points in cap rate terms, and private capital is systematically harvesting it.

San Francisco's RevPAR Rebound and the 525-Basis-Point Arbitrage

As of Q4 2025, San Francisco's hotel market posted 8.9% year-over-year RevPAR growth, driven by a resurgence in technology conferences, concerts, and corporate travel, according to HVS's San Francisco Hotel Investment Outlook⁶. Yet hotel REITs continue to trade at 35.2% discounts to net asset value while private market transactions execute at 6.5-8.0% implied cap rates, creating a 525-basis-point spread between public valuations and private deal pricing, per Bay Street Hospitality's Q4 2025 analysis⁷. This structural dislocation reflects more than cyclical uncertainty. It signals a fundamental mispricing where operational recovery in gateway markets fails to translate into equity revaluation, even as private capital aggressively targets repositioning opportunities at compressed cap rates.

Our Bay Adjusted Sharpe (BAS) framework quantifies this disconnect precisely. When San Francisco CBD hotels deliver 19.4% RevPAR growth in Q3 2025, as RLJ Lodging Trust's Q3 2025 earnings call⁸ reported, yet public vehicles trade at yields implying persistent operational distress, the risk-adjusted return profile favors privatization over long-term equity recovery. This isn't about temporary market inefficiency. It's about structural vehicle-level constraints that prevent public REITs from capturing operational upside at the asset level, even when portfolio quality remains intact. As Stephanie Krewson-Kelly and Brad Thomas observe in *The Intelligent REIT Investor*, "The market's assessment of a REIT's NAV can diverge sharply from intrinsic value when liquidity constraints, governance issues, or capital structure rigidity prevent management from realizing asset-level value."

For allocators, this creates a tactical entry point where Liquidity Stress Delta (LSD) analysis becomes critical. When take-private transactions like Sotherly Hotels' $425 million deal close at premiums to public trading prices, as Cushman & Wakefield's U.S. Hospitality MarketBeat⁹ notes, the message is unambiguous: private capital sees value that public markets systematically underprice. The 525-basis-point yield differential isn't a temporary dislocation driven by sentiment. It's a structural arbitrage opportunity where patient capital can exploit the gap between operational recovery in markets like San Francisco and the persistent discount embedded in REIT equity valuations, particularly when RevPAR growth accelerates yet public vehicle pricing remains anchored to pandemic-era distress assumptions.

Portfolio Repositioning and the Privatization Premium

As of November 2025, take-private hotel REIT transactions closed at a median 152.7% premium to 30-day trailing equity prices, according to NewGen Advisory's REIT Acquisition Tracker¹⁰, with Sotherly Hotels' $425M acquisition pricing the portfolio at 9.3x Hotel EBITDA despite persistent NAV discounts in the public markets. This valuation gap, 525 basis points between REIT-implied cap rates (6.5-8.0%) and private market transactions (4.8-5.5%), reflects structural vehicle-level mispricing rather than operational weakness. When branded portfolios featuring Hilton, Marriott, and Hyatt flags trade at sub-replacement cost yet deliver industry-standard RevPAR growth, the disconnect becomes an arbitrage opportunity that sophisticated capital can exploit through structured privatization.

Our Bay Adjusted Sharpe (BAS) framework quantifies this premium precisely. In the Sotherly transaction, private equity sponsors Kemmons Wilson and Ascendant deployed $462M in total capital, $350M debt, $87M equity, and a $25M promissory note, to acquire a portfolio that public markets valued at $152,600 per key yet private bidders underwrote to low double-digit stabilized cash-on-cash returns post-repositioning. As Edward Chancellor notes in *Capital Returns*, "The cycle of over- and under-investment creates predictable mispricings that disciplined capital can exploit." This principle applies directly to current REIT discounts, where capital cycle dynamics have moved beyond efficient price discovery into structural dislocation.

Host Hotels' Marriott Transformational Capital Program 2 (MTCP2) illustrates the value creation potential embedded in these mispricings, per Host's Q3 2025 Investor Presentation¹¹. The program targets low double-digit stabilized annual cash-on-cash returns through enhanced owner's priority returns and RevPAR Index share gains, returns that private capital can capture immediately through take-private transactions while public shareholders wait for market rerating. When Liquidity Stress Delta (LSD) improves materially through privatization yet the public vehicle persists at a 35-40% NAV discount, it signals that vehicle structure, not asset quality, constrains valuation. For allocators evaluating entry points, this creates a tactical opportunity in near-term privatization plays and a strategic question about optimal vehicle selection for medium-term exposure to U.S. full-service hospitality.

Recent transactions demonstrate widening valuation gaps between well-maintained and capex-heavy assets, according to NewGen Advisory market signals¹². A Courtyard Amarillo sold for $20M at a 9% NOI cap rate with PIP completion scheduled for 2026, while Ashford disposed of two older Embassy Suites properties for $27M total, reflecting the discount applied to assets requiring immediate capital infusion. This spread, 400 basis points between stabilized and capex-intensive properties, creates an analytical framework for evaluating repositioning opportunities. When our Cap Stack Modeler identifies scenarios where privatization plus disciplined capital deployment creates more value than long-term equity recovery, it signals that the market is mispricing the optionality embedded in well-located assets with deferred maintenance rather than structural obsolescence.

Implications for Allocators

The 300-550 basis point arbitrage between hotel REIT equity valuations and private transaction pricing crystallizes three critical deployment insights for institutional capital. First, when operational recovery in gateway markets like San Francisco (8.9% RevPAR growth) fails to translate into equity revaluation despite private transactions executing at 6.5-8.0% cap rates, the mispricing is structural rather than cyclical. This suggests tactical opportunities in REIT share repurchases at depressed valuations, where IRRs materially exceed organic growth, and strategic positioning for take-private transactions that systematically close at 150%+ premiums to trailing equity prices. Our BMRI analysis indicates this regime persists until either public vehicles restructure governance constraints or private capital exhausts acquisition capacity at current leverage multiples.

For allocators with multi-year deployment horizons, the 525-basis-point yield differential between public REITs and private transactions creates a bifurcated opportunity set. Patient capital can exploit the NAV discount through long-only REIT positions if privatization catalysts emerge within 18-24 months, or pivot to direct portfolio acquisitions where well-maintained branded assets trade at 400bps tighter cap rates than capex-intensive properties. The Sotherly transaction's 9.3x Hotel EBITDA valuation and $152,600 per key pricing establishes a benchmark: when portfolios trade below this threshold yet feature Hilton, Marriott, or Hyatt flags in markets with demonstrated RevPAR recovery, the risk-adjusted return profile favors privatization over long-term equity recovery. Our Adjusted Hospitality Alpha (AHA) framework suggests this dynamic intensifies as debt yields converge with cap rates near 6.5%, making refinancing more attractive than exits for well-capitalized operators.

Risk monitoring should focus on three variables that could compress the arbitrage window. First, treasury yield trajectories: if the 10-year sustains above 4.5%, refinancing costs could force distressed REIT dispositions at wider cap rates, narrowing the public-private spread. Second, supply pipeline dynamics in gateway markets: San Francisco's RevPAR recovery remains vulnerable to new inventory additions if development financing improves materially in 2026. Third, cross-border capital velocity: when European or Asian institutional allocators rotate into U.S. hospitality at scale, as occurred in 2015-2017, private market cap rates could compress 50-75 basis points, reducing the relative attractiveness of take-private transactions versus direct portfolio acquisitions. For sophisticated capital, the current regime offers a rare alignment where operational fundamentals support deployment yet vehicle-level mispricing creates systematic arbitrage opportunities that disciplined frameworks can exploit across multiple entry points.

— A perspective from Bay Street Hospitality

William Huston, General Partner