Despite its current challenges, the hotel industry remains very attractive as an investment vehicle, according to executives at ActivumSG Capital Management.

CEO Saul Goldstein said the firm, founded approximately 14 years ago, is the manager of discretionary investment funds that are agnostic of brand and asset class, flexible and eager to add value in the markets that show the most opportunity for growth.

January has been busy for the Jersey, Channel Islands-based company.

Deals in the hotel space include the acquisition of the 259-room Nobu Barcelona for an undisclosed price from Spain’s Selenta Group and the purchase of operating firm Odyssey Hotels Group. The latter is based in the Netherlands and has 12 hotels and approximately 1,950 rooms in operation and 20 in the pipeline, mostly in Northern Europe and mostly in franchise deals with Marriott International and InterContinental Hotels Group.

If all those properties open, the Odyssey platform will have approximately 5,200 rooms.

Other ActivumSG projects in Spain include the Hard Rock Madrid, the Palacio Solecio in Málaga and three additional hotels in Barcelona, all of which combined will have a total room count of approximately 1,400 once opened.

The Nobu and Odyssey deals are so far the only acquisitions from its latest financing round, Fund VI. The other hotels are owned either by ActivumSG’s Iberia Fund I or ActivumSG Real Estate Fund V.

In putting together Fund VI, executives said ActivumSG has moved into a pan-European strategy for hotels, whereas previous funds were focused entirely on Spain.

Prior to setting up ActivumSG, Goldstein's real estate investing career was at Cerberus Capital Management, spanning deals in multifamily housing in Germany, Japan, Korea, Thailand and Mexico.

In Mexico, he met Brian Betel, who opened ActivumSG’s office in Madrid and has since become head of direct investments.

ActivumSG began by targeting value-added office opportunities in Germany, a strategy that morphed into residential conversion investments. This led the firm to acquire two development companies, which it combined and then took public. In parallel, the firm opened an office in Madrid and in 2014 made its initial investment in Spain, which was not in the hotel sector.

“Every few years, we raise a new discretionary fund — now some 2.1 billion euros ($2.54 billion) of equity in total — and we have local teams able to scout out interesting deals,” Goldstein said. “We have the general philosophical issue of finding attractive real estate deals, country specific and then asset classes."

During the pandemic, he said, opportunities for hotel investment are "accelerating because of distress, with a lot of groups needing liquidity."

"Everything is relative, and compared with other asset classes like residential or offices, right now [hotels are] extremely attractive,” he said.

Betel said over time and in markets where property values have become expensive, ActivumSG has gravitated to investing more in operational companies.

“We like to add value and integrate companies. The travel trends existing in general now, and emerging wealth, will strengthen and continue to grow over time. In a few years, we will see new records set,” he said.

Goldstein said Luis Miguel Martín, one of the firm’s managing directors in Spain, is charged with growing the Spanish hotel portfolio to a value of approximately 500 million euros ($608 million), and the firm’s expanding Frankfurt, Germany-based mergers-and-acquisitions team is looking at pan-European opportunities to grow the Odyssey platform.

“We have grown (in Spain) directly buying single assets. We have taken whole office buildings and converted into hotels, put together land assemblages and done some ground-up developments,” he said.

A previous financing round included the development of the Platja del Fòrum site in Barcelona that originally was earmarked for a Hard Rock International hotel.

“We’re progressing with developing the asset, but some of the conditions we agreed cannot be met. The funding looks a little different at the moment, and we are considering our branding options, but we have a good relationship with Hard Rock and would be pleased to work with them,” Betel said.

Goldstein said ActivumSG’s Fund VI is investing in single assets, like the Nobu Barcelona, in public market debt and in companies, such as Odyssey, as part of a hospitality theme focused on massive dislocation.

“The nice thing about our fund base is that we can invest in anything in real estate, period,” he said.

Betel said if not for the pandemic, an asset like Nobu Barcelona might not have come onto the market.

“And if it did, at a different price for sure. Our team on the ground in Spain was able to act very quickly,” he said.

The firm also is looking at other European countries where they think there is an under-penetration of hotels and brands, and local teams will be critical there, too.

“The London-based hub-and-spoke private equity real estate model does not always work,” Goldstein said of his preference for offices in the markets where the firm’s funds invest.

Hotel development also is being done in-house now.

“We’re providing liquidity solutions, lifting an asset acquired at non-optimal prices. Of course, currently operations are shut down. No one knows when things will come back, so we are taking that risk on,” Goldstein said.

He said when COVID-19 is over, the sector will see a major shift in landlords, and transitional capital will play a transformative role.

Speaking generally of the industry, Goldstein said firms such as his can provide cash to help the industry weather the next few turbulent years.

“There will be a shake-up as (the industry) resets. There will not be smooth sailing,” he said, predicting new rental agreements, management agreements and lots of mergers-and-acquisitions activity.

“The sector’s transition started well before this pandemic," Betel said. "The industry will be evaluating alternative structures and models to create value for both owners and guests.”

Goldstein said his company is well-positioned for the recovery.

“Everything will heat up soon, and we have a little bit of a head start, which is the case when we invest. Right now in the industry there is an element of people trying to get organized, and with some smaller deals, the large firms cannot always go for them. Smaller groups can look at individual countries and tend not to have a pan-European view, and we have capital that is flexible,” he said.

“We are planning to weather a fairly long storm, and a lot of capital is needed. Certain assets in the hospitality space, such as luxury and resorts, will snap back, dependent on countries’ macro-policies."

Betel said Mediterranean resorts and core markets in Germany and the Netherlands "remain attractive" and "have always been the first to come back from multiple recessions.”

Goldstein said some opportunity will come from distressed assets, and distress will depend on how well capitalized assets are.

"I do not see a massive wave of distress happening. Our entry point is via a variety of different methods, and we’re doing it,” he said.

“We go in early, and yes the stomach tightens a little, but that is our DNA. We tend to be conservative, looking at conviction-led investment decisions based on historical data,” he added.

Betel said ActivumSG started to look at hotels in Spain well before the pandemic, noting 70% of hotels there are family-owned, meaning international brands have insufficient penetration in the world's second-largest tourism market for international visitors.

At that time, other investment firms were mostly interested in other real estate sectors in Spain, which were “hotter than hotels.” With the Odyssey acquisition, he said he increasingly sees hotel opportunities in secondary cities to grow the pan-European footprint.

Goldstein said hotels are not ActivumSG’s only major strategic thrust, noting acquisitions of residential assets and a Dutch development company, VanWonen.

A third investment theme may be rooted in Germany’s senior housing sector, particularly in nursing homes.

“In each fund, three investment themes will emerge,” he said, adding that the firm deploys capital through “debt, equity or corporate platform” investments.

“We have a broad remit. We are sector and brand agnostic, and we do not jump on the bandwagon,” he added.

The Hard Rock Madrid and Palacio Solecio, Málaga, are points in case, he said.

“The Hard Rock site was an old, empty office building. We bid on it, and there was competition from office investors, and after we won we bought the land behind it from a family and had the vision to turn it into a hotel. There also is sufficient outside space for what will be a need post-pandemic. We’re hoping to open in June,” Goldstein said.

“The Málaga hotel was a dilapidated palace in ruins for decades, and we turned it into a luxury hotel and are enlarging it with expansion into adjacent family-owned land plots for a new total of 120 rooms,” he said.

That hotel will also reopen later this year, as will a 240-room Hampton by Hilton in Barcelona directly opposite the Fira Gran Via Convention Center.

“That is a different model — a lease with a hotel operating company, a hotel right in front of the convention center developed on the site of a former gas station with zoning for either a hotel or an office,” Goldstein said.

“We want to understand where the best risk-reward is, to get something more than just what the market offers. In certain cases, there already are attractive return profiles. Others might require some investment, but in the end will deliver,” he said.