In a step affirming its confidence in London's hotel market, specialist European hotel investment vehicle Archer Hotel Capital recently completed the acquisition of the Hoxton Shoreditch and the Hoxton Holborn for £215 million. During an exclusive chat with Hospitality Investor, Archer managing director Dominic Seyrling shared the reasoning behind the purchases and teased further acquisitions over the next few months.
Why The Hoxton?
Seyrling stated that London's status as Europe's largest and most diversified market, combined with a proven track record of sustaining growth through economic cycles, makes it an ideal location for such an investment.
He adds: “We target the 15 top markets across Europe, of which London sits right at the top. It also has one of the healthier supply pipelines of the larger markets and has a really strong track record of growing, which makes it really interesting.”
Drilling down into Archer Hotel Capital’s interest in the Hoston hotels, Seyrling notes they were two assets that didn’t need much in the way of capex.
“We're doing so many capex projects across the rest of our portfolio that it made sense to go a little bit lighter on capex. So it made sense when the opportunity for these two hotels came up, to go after them because we felt the yield was right given where interest rates are, and we feel long term growth in the London market has been proven to be the case.
The nice thing about this particular investment is that this is not a turnaround story where we are trying to fix it. There is a tweak here and there, and we’ll renovate both hotels over the next few years but there won’t be a complete game changer. This is a limited risk transaction relative to the rest of our portfolio where we have higher capex risk and we're taking on quite a bit of operating responsibility. And so it balances quite well with the rest of our portfolio.”
How?
So how exactly did Archer Hotel Capital snap of these properties in this very attractive investment location? Seyrling says it was a combination of a great relationship with the seller Norlake Hospitality as well as the perception of a good reputation.
Interestingly, it seems Archer was not the highest bidder for these properties but came out on top largely due to the strong relationship built with Norlake Hospitality over time, including past negotiations for properties in Paris and Amsterdam, properties which Seyrling revealed were snapped up by Schroders instead.
“I think we’d just established a good relationship with the seller. I don't know what the gap was with the other parties but I think there was a degree of desire to do a deal with us. We initially only submitted a bid for one of the two hotels but we were then then asked if we could add another property and we were delighted to come to an agreement on the Hoxton Holborn,” he says.
“It's about strong relationships and making sure you are a credible party. Every transaction usually throws up a surprise and we try to find a solution when a surprise comes up. We may not always be the highest price but we try to develop that reputation of being reliable. And I think that helps at this point in time, especially,” he adds.
Pricing and debt financing
In the current environment, financing throws up a lot of challenges when it comes to dealmaking. Seyrling says that while it was remarkably easy to find debt, the lending environment wasn’t as competitive as in the pre-pandemic period. Archer successfully secured offers from multiple lenders, eventually partnering with Singaporean bank DBS, with the choice influenced by parallels between Archer's ownership base – having been jointly formed by Dutch pension firm APG Group and Singapore-based GIC Real Estate - and the lender, providing a sense of reliability and mutual understanding in a fluctuating market.
Pricing, Seyrling notes, was fair, stating “It's really hard to come across a transaction where you feel the price is right, especially in an environment where interest rates have shot up the way they have. So what excites me is that this feels going in like it's priced fairly, which is quite often not necessarily the case.”
Operational strategy
Both hotels will continue to be managed by Ennismore, a decision Archer Hotel Capital has made as a result of the success of Ennismore’s business model, one which Archer has little to no intention of tampering with.
“Looking at these hotels on a on a per square meter bases, they're probably some of the most profitable hotels I have seen. So Ennismore has clearly established a business model that combines a lot of things; the customer satisfaction is good and they’ve managed to make it profitable. They’ve done an excellent job so from that point of view, we just want to make sure we continue on that path. And clearly, their mindset is exactly what we'd like from an operator. So, I am very optimistic about our relationship going forward and hope we get to do more with them.”
Looking to the future
But it’s not all smooth sailing as challenges like higher inflation, margin erosion, and uncertain revenue per available room (revpar) trajectories, especially post-Covid, remain key considerations.
“I personally don't believe that the kind of revpar trajectory that we have seen in the last couple of years is sustainable. However, it is almost certain that pressure on cost will continue, so margin erosion is probably the single biggest concern that we have. We as an organization are quite conservative about what we think 2024, 2025 and 26 will bring in terms of revpar performance and so it's definitely a key consideration for us,” Seyrling says.
Moving on from the Hoxton hotel acquisitions, he says Archer Hotel Capital is considering other potential acquisitions and is “reasonably close” to another investment, noting “we're quite hopeful to be able to add to our portfolio in the next few months.”
While he’s hesitant to share too many details, it seems Archer’s focus over the next couple of years will be in markets in which its already established.
“We have established ourselves as operators in a few markets; we now operate in Stockholm, we operate in Brussels, we operate in Paris. We're adding Madrid as a market where we operate in, we're adding Amsterdam as a market where we operate in over the next couple of years. From our point of view, it makes sense almost to double down in these markets. We want to increase the exposure to the specific markets that we've got and the key markets that we've picked out, rather than trying to add a completely new market.”
Archer’s portfolio currently comprises 13 hotels across Spain, Belgium, France, The Netherlands, Sweden, England and Ireland.