How can owners, operators and brands align interests around a transaction or major investment programme to create more value? What is the relationship between owner and brand, how can they (re)build synergies, and what is the role of the brand when transactions take place or agreements near expiry?
Owner-operator communication in these volatile times is “fundamental” to align interests, stresses Richard Dawes, director – hotel capital markets EMEA, Savills.
Financing is “causing a drag on transaction volumes” in some markets, he explains: “There are deals happening but not necessarily in the open market environment and transactions are taking longer.”
The last few years have taught us to listen and understand all stakeholders’ positions, suggests Theodor Kubak, managing partner at Arbireo Capital - Value One Hospitality, and to consider where “shifts in the paradigms” may be beneficial.
“We have to put in place new strategies taking into account that financing and capex are going to be more complicated,” agrees Dominique Ozanne, chairman of Hova Hospitality, which asset manages 135 hotels across Europe with a value of approximately €1.4 billion, and signed a €27 million Alps ski resort earlier this year.
Co-investing for alignment
Ozanne says that Hova is pursuing lease and management contracts and on both fronts is asking partners to co-invest to ensure all parties are invested in the success of the asset, for instance asking brands to co-invest between three to five years’ worth of fees. “It’s not easy… but I think it’s the future,” says Ozanne.
“It means the tenant is one of the equity partners,” he says. “It’s better to have the operator and the tenants at the table in order to fully understand each other.”
Prakash Krishnamurthy, director of owner relations & portfolio management for IHG Hotels & Resorts, says the brand is open and flexible to explore structures that give comfort in the long-term to owners and ensure a secure cashflow.
“If everyone’s going in with this investment upfront [and] there’s a return on the exit, then everyone reaps the rewards. “As long as we can all accept that as the way forward, then there is alignment to say, ‘we’re all entering the agreement’ and there is alignment on what the end goal is,” he says.
“At the same time, we need to ensure our reputation and drive for growing the top line, that alignment needs to be there,” he adds.
A preference for flexibility
He emphasises that, to ensure healthy long-term relationships with partners, brands must be pragmatic about the current situation and stay focused on the long-term: “If you have that view you can get along together… if you start fighting with each other, there’s never going to be alignment,” he says.
However, while long-term, aligned relationships are of course the ideal, alignment does not necessarily equal being locked into an inflexible 20-year management contract without an exit option if it’s not working. Erik Jacobs, partner at Vertiq Capital, says that while alignment is preferable, so is flexibility. Vertiq was involved in one of the UK’s biggest hotel deals last year: the sale of the Bankside hotel in London.
“In an ideal world, you want your operator to co-invest into the deal – perfect alignment. But of course, the minute the operator co-invests, you’re also tying yourself into the operator, it’s pretty difficult to dismantle that,” says Jacobs.
Dawes, meanwhile, says the main area where mutual understanding and support is needed is yields: “People are struggling at those super tight yields, so they need to see a little bit more revenue, a bit more income to help with that dividend, and that’s where the operators and the tenants are trying to finesse and push some of those revenues back to the landlords to help that yield.”
He adds that, as deals are currently harder to get over the line, transaction partners need to offer flexibility and support.
“They need to be flexible on timing, because otherwise it’s not going to stack up and the confidence in the capital partner isn’t going to be there to sign that deal with that partner,” he explains.
“And the banks need to be comfortable that there is flexibility to support the liquidity point, otherwise the value’s not going to get covered. So, we are seeing a huge amount of flexibility from the operating businesses and the investors are equally very cognisant of the value that those operators bring in terms of distribution, social value in terms of local community etc.”
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: Capital Events: Support through Change.