As of November 2025, U.S. hotel investment faces a fundamental repricing dynamic that separates operational performance from valuation reality. RevPAR growth has stalled despite GDP expansion continuing at 2.8% annually, while hotel REITs trade at 6x forward FFO, the lowest multiple across all REIT sectors, even as private market transactions clear at 4.3% cap rates. This 280-basis-point spread between public market valuations and private market pricing creates a structural arbitrage window for institutional allocators willing to navigate liquidity constraints, governance complexity, and asset-level execution risk. This analysis examines the operational headwinds driving margin compression across select-service and luxury segments, the NAV-to-market arbitrage mechanics that value private market discipline over public equity structures, and the tactical privatization strategies that convert 35-40% REIT discounts into measurable alpha through asset disposition at prevailing cap rates.

Hotel Performance Reset Amid ADR Stabilization

As of Q3 2025, the U.S. hotel sector is experiencing a fundamental performance recalibration, with RevPAR growth stalling despite GDP expansion continuing at 2.8% annually. According to NewGen Advisory's Q3 2025 market analysis¹, RevPAR remains flat year-over-year while ADR gains lag inflation by 140-180 basis points, creating a margin compression dynamic that challenges traditional valuation frameworks. This disconnect between macro resilience and hospitality fundamentals represents what our Adjusted Hospitality Alpha (AHA) framework identifies as a structural repricing event, not merely cyclical softness.

The select-service segment faces particularly acute pressure, with properties unable to offset occupancy declines through rate premiums. Pebblebrook Hotel Trust's Q3 2025 earnings report² revealed same-property occupancy gains of 190 basis points offset by a 5.4% ADR decline, producing a net 3.1% RevPAR contraction. Critically, when excluding Los Angeles and Washington D.C., the portfolio achieved 0.6% total RevPAR growth, signaling that underperformance concentrates in specific gateway markets rather than reflecting systemic operational deterioration. As Aswath Damodaran notes in *Investment Valuation*, "The value of any asset is a function of the cash flows it generates, the expected growth in those cash flows, and the uncertainty associated with those cash flows." The current environment demands granular market-level analysis rather than sector-wide assumptions, a discipline our Bay Macro Risk Index (BMRI) enforces through localized discount rate adjustments.

Transaction activity reflects this bifurcated reality. Noble Investment Group's contrarian acquisition of a Courtyard property, per NewGen Advisory³, signals private capital stepping into pricing gaps created by REIT capital constraints. This dynamic aligns with Edward Chancellor's observation in *Capital Returns* that "the best time to invest is when capital is scarce and asset prices reflect genuine distress rather than temporary sentiment shifts." For allocators, the 2025 environment presents a paradox: operational headwinds persist, yet strategic acquisitions may capture value precisely because public market vehicles face refinancing pressures and dividend maintenance requirements that force suboptimal timing.

The forward outlook hinges on whether ADR stabilization translates into margin recovery or merely prevents further deterioration. With Apple Hospitality REIT facing downward pressure on Portfolio Assets and Operational metrics⁴, investors must weigh attractive 9% dividend yields against potential distribution cuts driven by sustained margin compression. Our Bay Adjusted Sharpe (BAS) framework suggests that risk-adjusted returns favor private market execution over public equity exposure when operational control and financing flexibility can mitigate the near-term performance reset. The coming quarters will determine whether this represents a temporary recalibration or a structural shift requiring fundamental revaluation of hospitality real estate as an institutional allocation.

Institutional Portfolio Valuation and the NAV-to-Market Arbitrage

As of Q3 2025, U.S. hotel REITs trade at 35-40% discounts to net asset value despite managing portfolios dominated by Ritz-Carlton, Park Hyatt, and Four Seasons flags that deliver industry-leading RevPAR, according to Bay Street Hospitality's 2025 CapEx analysis⁵. Meanwhile, private market transactions compress gateway city cap rates to 3.8-4.2% for luxury assets in Milan, Rome, and Florence, while U.S. trophy properties trade at comparable 4.2-4.7% yields. This disconnect isn't about asset quality or operational execution. It reflects structural fragmentation between private market pricing discipline and public equity vehicles burdened by governance complexity, interest rate sensitivity, and liquidity constraints that our Liquidity Stress Delta (LSD) framework quantifies precisely.

As Benjamin Graham notes in *Security Analysis*, "The market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism. Rather, it is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion." This principle applies directly to the current REIT discount phenomenon. When Host Hotels & Resorts maintains a geographically diversified portfolio of 79 luxury and upper-upscale properties totaling 42,500 rooms across the U.S., Brazil, and Canada, as detailed in Fitch's December 2025 credit analysis⁶, yet trades at 6x forward FFO (the lowest multiple across REIT sectors), the market is voting on structure rather than weighing intrinsic value.

The arbitrage mechanics become explicit when examining transaction evidence. Summit Hotel Properties disposed of two assets in October 2025 at a blended 4.3% cap rate based on trailing twelve-month NOI, according to Summit's Q3 2025 earnings release⁷, yet the parent REIT entity trades at a 35-40% discount to the implied portfolio value. When private buyers acquire individual assets at compressed cap rates while public vehicles languish at NAV discounts, it signals that privatization or asset-by-asset disposal creates more value than long-term equity recovery. Our Bay Adjusted Sharpe (BAS) improves materially through such strategies because transaction costs (200-300bps round-trip) pale against 3,500-4,000bps NAV discounts.

For institutional allocators, this creates immediate tactical opportunities and medium-term strategic questions about vehicle selection. As Edward Chancellor observes in *Capital Returns*, "The surest way of making money in the stock market is to buy assets when they are cheap and sell them when they are expensive." When foreign capital flows into Italian hospitality surge 102% year-over-year to €1.7B in H1 2025, compressing gateway city cap rates to 3.8-4.2%, while U.S. hotel REITs trade at historic valuation troughs despite comparable asset quality, the capital cycle has created a measurable dislocation. Allocators positioning for multiple expansion must weigh whether direct asset acquisition at 4.2-4.7% cap rates or REIT accumulation at 6x FFO offers superior risk-adjusted returns when Bay Macro Risk Index (BMRI) adjustments account for governance drag, liquidity risk, and exit optionality across both structures.

REIT Privatization as Tactical Arbitrage: When 6x FFO Meets 4.3% Cap Rates

U.S. hotel REITs trade at 6x forward FFO as of November 2025, the lowest multiple across all REIT sectors, according to NewGen Advisory's 2025 REIT sector analysis⁸. Yet asset-level transactions continue to clear at materially tighter cap rates. Summit Hotel Properties sold two upscale properties in October 2025 at a blended 4.3% cap rate, per Summit's Q3 2025 earnings report⁹. This disconnect isn't about asset quality deterioration, it reflects a structural mispricing where public market liquidity discounts exceed the value destruction from 200-300bps in round-trip transaction costs. For allocators, the arbitrage is transparent: acquire discounted REIT equity, privatize the vehicle, and realize NAV through asset-by-asset disposition at prevailing cap rates.

Our Bay Adjusted Sharpe (BAS) framework quantifies this opportunity by adjusting for liquidity stress and forced-sale dynamics that depress REIT valuations. When publicly traded hotel REITs trade at 35-40% discounts to NAV, the implied Liquidity Stress Delta (LSD) exceeds rational bounds, particularly when underlying portfolios consist of Marriott and Hilton-flagged upscale assets with stable occupancy in the mid-to-high 70% range. As Benjamin Graham notes in *Security Analysis*, "The market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism... it is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion." Right now, the voting machine is punishing hotel REIT structures irrationally relative to their intrinsic asset values.

Strategic deployment opportunities emerge when this arbitrage meets M&A execution capacity. Sotherly Hotels' pending privatization by KWHP, as reported by Hotel Investment Today¹⁰, exemplifies this strategy. Acquire the REIT at a structural discount, apply operational expertise to a 2,786-room portfolio concentrated in the Southeast, and exit via selective dispositions at cap rates that reflect hotel fundamentals rather than public market sentiment. The Adjusted Hospitality Alpha (AHA) potential is substantial: if you acquire at 6x FFO and dispose at 4.3% cap rates (implying roughly 23x trailing NOI for quality upscale assets), the spread funds transaction costs, capex deferrals, and meaningful equity returns without requiring operational miracles or market timing precision.

For institutional allocators, this creates a tactical window that may narrow as cap rates stabilize or REIT multiples re-rate. As David Swensen observes in *Pioneering Portfolio Management*, "Illiquidity provides a source of excess returns to long-term investors willing and able to tie up funds for extended periods." The current REIT discount reflects a liquidity premium that sophisticated capital can harvest, not through speculative timing, but through structural arbitrage where the public-to-private conversion unlocks value embedded in the asset base. When 6x FFO meets 4.3% cap rates, the math favors privatization over patience.

Implications for Allocators

The convergence of flat RevPAR growth, 35-40% REIT-to-NAV discounts, and 4.3% private market cap rates crystallizes three critical insights for institutional capital deployment in U.S. hospitality. First, operational headwinds are market-specific rather than systemic. Pebblebrook's portfolio excluding Los Angeles and Washington D.C. achieved positive RevPAR growth, signaling that granular market selection, not sector avoidance, drives alpha generation. Second, the 280-basis-point spread between public REIT valuations (6x FFO) and private transaction cap rates (4.3%) creates a structural arbitrage that favors privatization strategies over long-only REIT accumulation. Third, this dislocation is time-sensitive. As ADR stabilization either translates into margin recovery or confirms structural deterioration over the next two to three quarters, the valuation gap will narrow through either REIT multiple expansion or cap rate widening.

For allocators with M&A execution capacity and 18-24 month hold horizons, the tactical playbook is transparent: acquire discounted REIT equity, privatize the vehicle, and realize NAV through asset-by-asset disposition at prevailing private market cap rates. Our BMRI analysis suggests that portfolios concentrated in secondary gateway markets (Nashville, Austin, Charlotte) with Marriott or Hilton flags offer superior risk-adjusted returns versus coastal luxury exposure, where ADR compression and margin pressure remain acute. For allocators constrained to liquid equity strategies, selective REIT accumulation at 6x FFO multiples provides optionality on either operational recovery or privatization catalysts, but requires tolerance for near-term dividend volatility as Apple Hospitality and peers navigate margin compression dynamics.

Risk monitoring should focus on three variables: treasury yield trajectories (which drive cap rate expansion risk), supply pipeline dynamics in gateway markets (which determine whether ADR stabilization translates into margin recovery), and cross-border capital velocity (which signals whether the 102% surge in Italian hospitality investment reflects sustainable repricing or speculative froth). The current regime favors private market execution over public equity exposure, operational control over passive dividend capture, and market-specific deployment over sector-wide theses. For sophisticated allocators, the 2025 hotel investment landscape offers measurable arbitrage opportunities, but only for capital structures that can harvest liquidity premiums through patient, strategic execution.

— A perspective from Bay Street Hospitality

William Huston, General Partner