With hotel transactions still proving challenging, attention is turning inward to look at how best to position an asset for a sale when things start to open up.
The economic environment is now more uncertain than ever, and anyone looking to sell to an institutional investor is facing some interesting hurdles: What do these long-term investors look for in a hotel investment? What supports the move from a value-add private equity proposition to an institutional product?
Frank Hildwein, head of hotel acquisitions at Deka Immobilien Investment notes the institutional pipeline has really dried out and it’s going to be very difficult over the next few quarters to raise new capital. “The capital is there but it’s going to be very difficult,” he warns.
Strategise and familiarise
To navigate this landscape, Luc Boschmans, managing director at Tristan Capital Partners, emphasises the importance of a strategic approach.
“When I joined Tristan Capital two years ago, we had to work out a strategy and think really carefully about where we wanted to be active, what type of hotels we wanted to buy and where we thought we could be successful.”
This approach, he says, was instrumental to the company buying thirteen hotels.
For Camil Yazbeck, global chief development officer – premium, midscale & economy at Accor, the key to success lies in striking the right deal with the right investor in the right market.
“The key point is we’re talking to the right investor in the right market to make sure that we have the right strategy and joint venture that works for both of us.”
He adds that asking the right questions is crucial.
“We ask questions like ‘what's your cost of capital? What are you doing now? How much debt you're putting in? What's your ultimate exit?’. Based on that we try and structure a deal around your investment requirements and where you want to go and how you want to exit whether it's an exit or refinancing.
"And this is the key to good success. Because if we understand you and you understand where we're coming from and we try and strike a deal in between, it will be a successful deal.”
On the look out
Guy Pasley-Tyler, managing director at Archer Hotel Capital says the bid ask spread is the hardest thing to deal with at the moment, adding that the gap between sellers and buyers’ expectations means the likelihood is that there aren’t going to be that many deals done this year.
However, he says Archer Hotel Capital notwithstanding is actively looking out for deals.
“These windows in the market are exceptionally interesting times to invest. When a lot of people step back from the market, for us it’s logical to sit in a lot of processes. Suddenly we're looking at things in London at around 6 or 7 per cent and there hasn’t been a whole lot of that in the last 20 years. So it would make no sense for us to be out of the market at the moment.
“We want to make sure that we're still hanging around just to see if there is something interesting. I'd be surprised if we don't do one, maybe two transactions this year.”
Strong banking relationship
Dealing with challenges, such as refinancing risks and inflation, is also critical. Boschmans stresses the importance of good relationships with banks and having a robust asset management strategy.
“The relationship factor is very important. There’s confidence, there’s trust. You know what they will be looking for and what they will be asking for.”
He adds that although inflation has always been a positive for hotels because pricing can be constantly changed and ADR shoots up, costs also increase.
“That’s where asset management comes in. You need to be creative and ask questions like how can we be more efficient, how can we make the most of technology? How can we think about our utilities strategy?”
He stresses: “These are very important factors when preparing your assets for the long-term investor. So this is something we think about a lot and we really try to have a strategy in place so that when we sell our assets, the buyers aren’t going to say ‘you don't have a strategy in place, your utility costs are not hedged. We need to discount the price.’”
On what can be done to make mixed-use assets more attractive to institutional investors, Boschman says that while he would shy away from mixed-use assets due to difficulties when it comes to exiting, an asset which has a living mix such as student living could be interesting. However, he notes the challenge there would be finding a suitable operator.
Clear environmental strategies
Sustainability and environmental consideration is another area that long-term hotel investors are paying keen attention to, with experts highlighting the importance of clear sustainability strategies.
“It’s a major topic in our asset management strategy,” Boschmans says.
Hildwein adds that reducing the carbon footprint in Deka’s funds is a priority. "Every new asset we buy should be better than the average of our stock. The only way to get that is to get really nice, refurbished buildings with low energy consumption.”
And for Pasley-Tyler, energy intensity reduction and electrification are the main areas of focus. “Certification is a value protection measure. But the most important thing is reducing our energy intensity so that's what we're focusing on as well as electrification where we can.”
Show them the money
To make a hotel asset attractive to the institutional investor, Hildwein says rents and the lease structure are really important considerations.
“We want not just high rents but sustainable rents that can be paid by the operator for a long period of time. So we want to make sure it’s not overrented and what we’re looking for is minimum guaranteed rent and then an upside on the revenue base and the minimum rent has to give us a decent return.
He adds: “We want to see a projected income of not less than 80%, a long-term lease of maybe 20 years, a 12-month bank guarantee and a lease coverage ratio of 1.5.”
Looking to the future, the market seems ripe for the bold. As Yazbeck puts it, "Fortune favours the bold businesses who invest in building a sustainable relationship built on trust and understanding. We've seen in the last three, four years that anything can happen. But really betting on the alpha, what we can really influence and focus on is the way to go.”
The fact that operational markets are functioning well despite the ongoing challenges also provides a sense of optimism.
Hildwein says that even though the capital markets are under pressure, a swift recovery is possible thanks to the operational markets performing optimally. "The capital markets are really under pressure but because of the operational markets doing so well I think we can restart pretty quickly when pricing adjusts and things settle.”
All those quoted in the article appeared on stage at the International Hospitality Investment Forum held in Berlin between May 15 and 17, in a session called - Institutional Appeal: Position your Asset for the Long Term Buyer