Investor Profile: Blue sky thinking leads to new era at Azora

Tivoli Marina Vilamoura
Tivoli Marina Vilamoura. (Simon Callaghan Photography)

Insight Comment
Real estate firm Azora Capital spent years building its reputation in European hospitality before finally raising its first closed-end fund this year, in a true milestone for the team. With strong demand for its strategy, investors will likely be closely watching Azora’s efforts to match the successes with which it made its name in the sector. 

Raising the upper limit – or hard cap – of a closed-end fund can be a tricky conversation for investment teams and their investors. On one hand, strong demand for firm’s strategy – and more firepower for deals – broadens opportunities for the vehicle. 

On the other, investors already committed to the fund will understandably be eager for the team to wrap up fundraising and focus on putting their capital to work.

Madrid-based real estate manager Azora Capital was among the fortunate firms when its investors gave it permission to increase the hard cap for its first closed-end European hospitality fund -which held a final close in September - from €750 million
to €815 million.

“It helped that we had a healthy pipeline and were executing on deals,” said Javier Arús, a partner at Azora and head of its hospitality strategy. “It gave them comfort we were going to be deploying their commitments in a timely manner so they trusted us in that sense.”

The fund beat its initial €600 million target to reach the €815 million total, plus additional co-investment capital, according to a statement from Azora.

“It was well in excess of our original expectations and we were very fortunate to be joined by four large anchor investors with very significant tickets, each one of them,” said Arús.

Taking debt financing into account, this provides the fund with an implied total investment capacity of more than €1.8 billion, of which Azora has already invested about €730 million.

The acquisitions bring the fund's total portfolio to 4,600 keys in tourism-focused hotels. 

They include the five-star Vilalara Thalassa Resort hotel in the Portuguese Algarve region, which Azora bought in August. The hotel, run by operator Blue & Green, has 118 rooms and suites.

“It is a fantastic hotel with very good performance, we are analysing now with the operator potential improvements in the [food and beverage] outlets and some other common areas,” said Arús.

In July, Azora completed the acquisition of two five-star hotels in the Algarve region of Portugal, through a sale and manage-back deal for €148 million with hotel operator Minor International (MINT), which bought the NH Hotel Group for €2.3 billion in October 2018.

NH Hotel Group will continue to manage the two hotels - the Tivoli Marina Vilamoura resort and the Tivoli Carvoeiro resort – on MINT’s behalf under the Tivoli brand for 20 years, with options to extend for another 10 years. 

At Tivoli Vilamoura, refurbishment works will take place over the next 12 months, while Arús anticipates no significant capex at Tivoli Carvoeiro in the near future; the hotel was fully refurbished in just 2019.

In April, Azora bought the Arenas Resort Giverola in Spain’s Costa Brava from Swiss hotel group Arenas the Resorts. The beachfront resort comprises a hotel complex with 213 apartments and a large campsite. Here, Azora has embarked on a major refurbishment.

Azora’s first closed-end hospitality fund represents a distinct shift from its early strategy after its formation in 2003, when it invested in rented residential property.

“Now, everybody’s looking to do rented residential and build to rent but in 2004, people in Spanish real estate were doing pure development,” said Arús. “The team thought the market was overpriced and they came out with this more defensive product…”

Azora is a familiar name in the European hospitality market. It made its foray into the strategy in 2010, when it turned around the distressed Carey fund - then over-levered in the wake of the global financial crisis. The firm raised €20m to inject into the fund as working capital, fully realised the vehicle and generated a 2.6 times return for Carey’s investors.

From 2014, Azora built up what it describes as a sun and beach portfolio within its Spanish real estate investment trust, Hispania. On completing Hispania’s investment period in December 2017, Azora was faced with an unsolicited takeover bid for the REIT from US buyout firm Blackstone Group.

Blackstone took the vehicle private for about €2 billion in 2018, after Azora developed a portfolio of hotel, office and residential assets. The sale generated an internal rate of return – an annualised measure of performance - of 19% for Hispania’s shareholders, according to Azora.

The Spanish firm said that at the time of the sale, Hispania was the biggest owner of hotel rooms in Spain. As of December 2018, it owned more than 13,100 rooms across 46 hotels.

Today, the team behind the Hispania portfolio is working on the new fund, Azora European Hotel and Lodging. It invests in European tourism – a sector it says has positive long-term growth prospects amid a “clear post-pandemic recovery scenario”. It targets traditional beach and mountain destinations, as well as the continent’s primary tourist cities.

“We’re looking for prime locations in the market, not trying to discover the next destination,” said Arús. “We’re investing mostly in those country markets, where they have diversified demand, they’re not relying on a single market and ideally, of course, large resorts with prime locations.”

“Prior to covid, the diverse markets were at different moments in the cycle, the underlying dynamics were completed disrupted by the pandemic,” said Arús. 

“For us today the question is when we will recover pre-covid levels, we need to differentiate across hospitality sub-segments. Our initial estimate was that the leisure component would recover by 2024, today we think that this scenario is going to be anticipated. This summer it was clear that people wanted to travel, if they stayed at home it was because of the restrictions.”

In July last year, Azora said in a statement about the launch of its new fund that the sector would benefit from constrained supply, driven by an approximately 1.1% compound annual growth rate in the number of keys since 2009. It said this compared with an approximately 4.9% CAGR in international tourist arrivals in Europe. 

It said: “Furthermore, it is a highly fragmented market which has attracted limited institutional capital investment to date, with 62% of the European hotels being independently owned compared to just 30% in the US, resulting in an opportunity to source underinvested and undermanaged assets for repositioning.”

Azora already has assets in Portugal, Spain, Italy and Belgium and it’s eyeing up opportunities to expand its geographic footprint.

“We are targeting the entire Mediterranean; we have a significant presence in Portugal and Spain as well as in Italy,” said Arús. “We are not present in Greece, but it is an important market and we would like to be active in the country.

“It doesn’t make sense to have just one asset in one market. We want to have a meaningful presence in that market.”