BERLIN — Since the start of the COVID-19 pandemic, more and more hotel-focused capital has gathered on the sidelines, with owners and investors increasingly seeking hybrid concepts or at least hotels with elements of co-working, sheltered apartments, food and beverage, and other revenue streams.

At the recent International Hotel Investment Forum, Gaël Le Lay, deputy CEO of Hova Hospitality, said his company has found opportunities by being creative and flexible.

“To play on our net worth, we have to be competitive, with partnerships, with off-market deals where possible and on pricing,” he said on a panel titled “Connecting You to the New Capital: The Changing Investment Landscape.”

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May 16, 2022 10:26 AM

2022 International Hotel Investment Forum

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He said developing partnerships and maintaining flexibility are critical to lessen the risk curve.

“We’re concerned by interest rates and its relationship with inflation,” he said, adding many non-core investors remain scared of what they see as hotel sector volatility.

Lily Wecker, vice president of investments and head of hotel realization at Zetland Capital, said her firm manages opportunistic funds, which is “creative, flexible capital, not competing head-to-head.”

Wecker said she concentrates on the midmarket segment and assets owned by generational families.

“We partner with them to understand their aspiration and support the specialization of their platform. We are happy to take a minority stake and work both on the [operating company] and the [property company],” she said.

She added big-box hotels are still worth of investment consideration.

“They will do better than they did in 2019, urban hotels that have a sound mixture of leisure and business demand. We’re concentrating on the rebound, even if it might be a little slower,” she said.

Luc Boschmans is managing director of Tristan Capital Partners, which on April 7 bought a majority stake in 10-asset Point A Hotels for 420 million pounds sterling ($551 million). Boschmans said on the panel that possessing a reputable track record is vital.

“We look at stress, not distress, which it is fair to say has not come and probably will not. And leisure has been the focus because there was so much more visibility as to when the recovery would come,” he said, adding it is likely the firm’s next investment will be in Spain.

Wecker said Zetland Capital welcomes co-investment from operating partners.

“The covenant is the best vehicle to show co-alignment, and also there is the value-add premium from a strong management team," she said. "If a product fits a market and local management, that can be very strong. Sometimes it is deal by deal for micro locations."

Le Lay said increased costs have put more strain on stress-testing hotels.

“Now the stress test is 1.5 times to 1.7, close to two in the Mediterranean. Yes, there is less margin due to higher utility costs, but if you start with 1.2, well, it is even more of a struggle,” he said.

There has been a mental shift in underwriting caused by these pressures, Boschmans said.

Will Duffey, head of hotels and hospitality for Europe, the Middle East and Africa at business advisory JLL, said operators have a part to play as well.

“Operators increasingly are being aggressive as to what they can bring,” Duffey said.

Investors are considering existing hotel assets, as new-builds face more cost pressures, panelists said.

“The spread between [conversions and new-builds] will increase in the future," Le Lay said, adding that rent coverage is crucial.

Rising interest rates are another cost pressure, Wecker said.

“In the U.K., interest rates are 65 basis points higher than in 2020, and that is something we’re factoring into exit and underwriting," she said. "The price tag of hospitality assets has not adjusted after rate increases.

“There is a bifurcation between assets with good locations and more demand and those where rate does not fully cover these [interest rate] increases."

The other “gap” hoteliers seek is hotels where value can be added, but it is also a very crowded gap, said Henri Wilmes, chief investment officer at LRO Hospitality.

“We closed our latest fundraising procedure in December with a clear mission: to position ourselves in the value-add space, with a slight tendency to midscale and luxury," he said. “Then again, no one [last December] would think inflation would be 8%, so we have to be quite picky and look for strong dynamics, to partner with those who have that track record so that we feel a little less pressure."

Wilmes added capital improvement plans have been completely rewritten in response to the external factors at play.

“High utility costs, especially in Germany, and will it or will it not be cut off from Russian gas? The [capital expenditure] plan you formulated three months ago might have completely changed in terms of cost,” he said.

German and United Kingdom institutional funds have bounced back quickly, Duffey said. They are looking to deploy capital and financing has picked up pace in the last few months.

He added that in 2021 capital in Europe was dominated by private equity investors, who deployed more than 50% of all hotel capital.

Resorts are no longer off limits, either.

“Six or so years ago, people were scared of resorts, maybe because of the seasonality, but of course that argument has disappeared," Wilmes said. "There is still a lot of stock that is old. Maybe city developments are less crowded with buyers at the moment."

Post-pandemic pressures have increased the need for diligence, panelists said.

“We all have a duty of care to our investment partners, to split responsibilities on cutting costs and driving sales,” Wilmes said.

He added that responsibility goes both ways.

“Some brands might not be relevant in 10 years,” he said.

The past two years have produced valuable learning experiences, Le Lay said.

“We’ll never again negotiate a long-term [hotel management agreement] with no exit clauses. You learn from mistakes," he said.

Investors are also seeking alternative accommodations such as lodges, caravan parks, camping and glamping.

“Camping achieves two-times, 2.5-times [earnings before interest, taxes, depreciation and amortization], but if you lose your talent, you are left with an empty field,” he said.

Wecker said she is seeing more blurring between other asset classes, which gives capital more security.

“Flexibility is key,” she said.

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