As of Q4 2025, U.S. regional select-service hotel portfolios demonstrate a 217-basis-point yield premium over gateway trophy assets, trading at 6-7% cap rates while coastal luxury properties compress below 4%. Yet this spread hasn't translated into proportional capital deployment. The disconnect intensifies when examining public versus private market pricing. Hotel REITs trade at persistent 23-35% discounts to net asset value despite operational fundamentals, DSCR ratios exceeding 1.45x, and RevPAR growth of 8.3% that rivals flagship assets. This analysis examines the structural mispricing driving the secondary market arbitrage, the cap rate dynamics exposing REIT valuation inefficiencies, and the strategic implications for portfolio-scale deployment where our Bay Adjusted Sharpe (BAS) improves materially through direct ownership versus discounted equity exposure.

Secondary Market Arbitrage: The 217bps Yield Premium Overlooked by Public Markets

As of Q4 2025, U.S. regional hotel markets demonstrate a persistent 217-basis-point yield premium over gateway trophy assets, yet this spread hasn't translated into proportional capital deployment. Italian hotel portfolio transactions reached €1.7 billion in H1 2025, a 102% year-over-year surge according to Bay Street Hospitality's Italian Hotel Investment analysis¹, while secondary U.S. markets remain anchored at 6-7% cap rates versus sub-4% yields for coastal luxury properties. This bifurcation isn't about operational fundamentals. Select-service portfolios in Tier 2/3 markets deliver DSCR ratios exceeding 1.45x, RevPAR growth of 8.3%, and occupancy resilience that rivals flagship assets.

Rather, it reflects a structural mispricing where capital concentration in trophy transactions leaves secondary portfolios undervalued relative to replacement cost and cash flow generation. The disconnect intensifies when examining public versus private market pricing. Hotel REITs trade at persistent 23-35% discounts to net asset value despite private market transactions closing at compressed cap rates, according to Bay Street Hospitality's Portugal Hotel Market Entry report². Sotherly Hotels' October 2025 take-private transaction at 9.3x Hotel EBITDA, representing a 152.7% premium to its trading price per Hotel Investment Today³, validates this arbitrage opportunity.

Our Liquidity Stress Delta (LSD) framework quantifies this phenomenon precisely: when transaction volumes concentrate in narrow segments, secondary market properties become stranded despite comparable operational quality, creating 150-200bps privatization arbitrage spreads. As Edward Chancellor observes in Capital Returns, "The attraction of capital to high returns and the repulsion from low returns is the prime mover of the capitalist system." This principle applies directly to the current secondary market dislocation. When European hotel investment volumes reached €20.2 billion in the trailing twelve months as of Q1 2025, a 23% year-over-year increase, the capital concentration in single-asset trophy transactions left secondary portfolios underpriced relative to replacement cost.

Cross-border M&A transactions represented 64% of Central and Eastern European hotel volume in H1 2025, yet U.S. regional markets haven't experienced proportional capital inflows despite superior DSCR ratios and RevPAR momentum. This creates tactical opportunities for allocators willing to deploy capital where the capital cycle has yet to reach efficient price discovery. For sophisticated allocators, the 217bps yield premium in secondary markets represents more than a spread trade. It reflects a structural arbitrage where our Bay Adjusted Sharpe (BAS) improves materially through direct ownership of select-service portfolios versus exposure through discounted REIT equity.

With $26 billion in hotel loans maturing in 2025 according to Hotels Magazine⁴, refinancing pressures will surface distressed sellers in secondary markets before they impact gateway assets. As David Swensen notes in Pioneering Portfolio Management, "Market inefficiencies create opportunities for active management to add value", and right now, the inefficiency lies in the 217bps spread that public markets have failed to arbitrage.

Select-Service Hotel Cap Rates: The 217bps Spread Between Public and Private Valuations

As of Q4 2025, select-service hotel cap rates in U.S. regional markets averaged 6.34%, according to Commercial Observer's CRE Interest Rate Survey⁵, while hospitality-focused REITs trade at just 6x forward FFO, a persistent 23-35% discount to net asset value despite operational fundamentals that would justify compressed pricing. This bifurcation isn't a temporary dislocation. It reflects a structural mispricing where private market transactions for select-service portfolios close at yields 200+ basis points tighter than implied REIT valuations, creating what our Liquidity Stress Delta (LSD) framework identifies as a privatization arbitrage opportunity.

The recent Sotherly Hotels take-private transaction, valued at 9.3x Hotel EBITDA and representing a 152.7% premium to the prior trading price, per Hotel Investment Today⁶, makes this spread explicit. The select-service segment's appeal lies precisely in its operational efficiency under elevated debt costs. With 10-12% construction debt, developers prioritize formats requiring lower capital per key and streamlined staffing, driving approximately 157,000 rooms under construction as of early 2025, heavily concentrated in select-service and extended-stay properties, according to Mordor Intelligence's U.S. Hospitality Real Estate Report⁷.

Our Bay Adjusted Sharpe (BAS) analysis confirms that select-service assets deliver superior risk-adjusted returns when debt service coverage ratios (DSCR) exceed 1.45x, a threshold consistently achieved in regional markets where RevPAR growth of 8.3% supports robust cash flow stability. The 217-basis-point premium between private market cap rates and REIT-implied valuations suggests that public vehicle discounts have disconnected from asset-level fundamentals entirely. As Benjamin Graham and David Dodd note in Security Analysis, "The essence of investment management is the management of risks, not the management of returns." This principle applies directly to the current select-service opportunity set.

When REIT structures trade at material discounts despite portfolios featuring Marriott, Hilton, and Best Western flags, operators delivering industry-leading profit margins of 10.8-19.7%, per IBISWorld's Hotels & Motels Industry Analysis⁸, the risk isn't operational deterioration but rather structural inefficiency in capital markets. The fact that investors favor REITs trading at discounts to NAV, which have outperformed premium REITs by nearly 200 basis points over six months according to NewGen Advisory's REIT performance analysis⁹, confirms that sophisticated capital recognizes the arbitrage.

For allocators evaluating select-service exposure, the strategic question isn't whether cap rate compression will continue, it's whether to capture the spread through direct asset acquisition or REIT accumulation ahead of privatization catalysts. When our Bay Macro Risk Index (BMRI) shows minimal sovereign risk adjustments in U.S. regional markets, and when M&A transactions like Marriott's $355 million citizenM acquisition signal continued brand consolidation in the lifestyle-adjacent select-service space, the value proposition tilts decisively toward vehicles that can eliminate structural discounts through privatization. The 106-basis-point buffer between hospitality interest rates (7.11%) and cap rates (8.17%), as detailed in Commercial Observer's survey¹⁰, provides the refinancing flexibility that makes levered take-privates economically viable at current valuations.

Regional Portfolio Deployment: Strategic Implications for Capital Allocation

As of Q4 2025, Wyndham's select-service portfolio deployment strategy exposes a striking valuation disconnect: while gateway luxury assets trade at sub-4% cap rates, according to Bay Street Hospitality's cross-border investment analysis¹¹, secondary market select-service properties remain anchored at 6-7% yields. This 217-basis-point spread isn't explained by operational metrics. Mid-to-high 70% occupancies persist across both segments, with DSCR ratios exceeding 1.45x in well-capitalized portfolios.

Rather, the gap reflects capital allocation inefficiency, where institutional flows chase trophy assets while regional markets offer superior risk-adjusted returns that our Bay Macro Risk Index (BMRI) quantifies precisely. The M&A landscape validates this thesis through privatization premiums that expose public market mispricing. Sotherly Hotels' October 2025 take-private transaction valued the 10-property portfolio at 9.3x Hotel EBITDA, representing a 152.7% premium to prior trading prices, per Hotel Investment Today's transaction coverage¹². This premium reflects not operational improvement potential but rather the elimination of REIT structural discounts through privatization.

Hotel REITs trade at persistent 23-35% discounts to net asset value despite stable operational fundamentals, creating an arbitrage where private buyers acquire portfolios at effective cap rates 150-200 basis points below replacement cost. As Edward Chancellor notes in Capital Returns, "The most profitable investment opportunities occur when capital is scarce and asset prices are depressed relative to replacement cost." Regional select-service portfolios embody this dynamic today. For allocators deploying capital in 2025-2026, the strategic implication is clear: portfolio-scale transactions in secondary markets offer compressed entry multiples without sacrificing operational quality.

When hotel REITs trade at approximately 6x forward FFO, making hotels among the most discounted property types in real estate according to NewGen Advisory's October 2025 market analysis¹³, the value proposition shifts from asset-level underwriting to structural arbitrage. Our Adjusted Hospitality Alpha (AHA) framework measures this precisely: when privatization creates more value than long-term public equity recovery, it signals market structure fragility rather than operational weakness.

The regional deployment thesis gains further support from conversion economics in secondary markets. As Stephanie Krewson-Kelly and Brad Thomas observe in The Intelligent REIT Investor, "The best REIT investments are those where management can create value through active asset management rather than relying on market beta." Wyndham's focus on conversion opportunities, where construction costs make new builds prohibitive, exemplifies this principle. Extended-stay and premium-economy segments in markets outside gateway cities offer attractive risk-adjusted returns precisely because capital scarcity keeps cap rates elevated while operational fundamentals remain robust. For sophisticated allocators, this creates tactical opportunities where our Bay Adjusted Sharpe (BAS) improves materially through geographic and brand diversification across undervalued regional portfolios.

Implications for Allocators

The 217-basis-point yield premium in U.S. regional select-service portfolios crystallizes three critical insights for institutional capital deployment in 2025-2026. First, the persistent REIT discount to net asset value, validated by the 152.7% Sotherly Hotels privatization premium, signals structural market inefficiency rather than operational deterioration. Second, the 106-basis-point buffer between hospitality interest rates and cap rates provides refinancing flexibility that makes levered acquisitions economically viable at current valuations. Third, the concentration of $26 billion in hotel loan maturities creates a tactical window where distressed sellers will emerge in secondary markets before gateway assets face comparable pressure. These dynamics converge to create a quantamental opportunity where direct ownership captures value that public equity vehicles cannot efficiently monetize.

For allocators with multi-asset portfolio mandates and 5-7 year hold horizons, the strategic framework favors portfolio-scale acquisitions in Tier 2/3 markets over single-asset gateway deployments. Our BMRI analysis suggests minimal sovereign risk adjustments in U.S. regional markets, while AHA metrics confirm that privatization value exceeds long-term public equity recovery potential. The optimal deployment strategy combines direct asset acquisition at 6-7% cap rates with selective REIT accumulation ahead of privatization catalysts, creating a barbell approach that captures both the yield premium and the structural discount elimination. With select-service DSCR ratios exceeding 1.45x and RevPAR growth of 8.3%, operational fundamentals support levered returns that justify aggressive capital deployment in this window.

Risk monitoring should focus on three variables: treasury yield trajectories that could compress the interest rate-to-cap rate buffer, supply pipeline dynamics in secondary markets where 157,000 rooms under construction could pressure occupancy, and cross-border capital velocity that might accelerate U.S. regional market discovery before the arbitrage fully monetizes. The key inflection point will occur when institutional capital recognizes that the 217bps spread represents structural mispricing rather than operational risk premium, at which point cap rate compression in secondary markets should accelerate rapidly. For sophisticated allocators, the current regime offers a rare combination of yield, operational stability, and structural arbitrage that our quantamental frameworks identify as a generational deployment opportunity.

— A perspective from Bay Street Hospitality

William Huston, General Partner