A&O Hotels & Hostels will invest €500 million ($538 million) toward expansion across Europe in key locations such as Berlin, Lisbon, London, Madrid and more.
The German budget hotel firm attracted new owners in November 2023, when the company was sold by TPG Real Estate to investment firms StepStone Group and Proprium for €800 million.
In an interview with Hotel News Now, Oliver Winter, founder and CEO of A&O, said the new owners and capital investment will provide the Berlin-based firm more firepower and leases, but that the “focus is to acquire.”
The firm currently has 38 hotels in 25 cities across Europe. Its next hotel to open is the 121-room A&O Florence, which will debut later this spring in a 1960s office building.
In addition to the hotel in Florence, A&O has an owned asset in Barcelona for which it is awaiting a conversion permit.
“Hopefully, that will open in two years. We also have a site in Brighton [England], which we will announce quite soon, a takeover from an existing brand.
The company has identified as many as 50 European cities for possible expansion, Winter said.
“The United Kingdom is a focus. We’d like to see something in London, Manchester and Glasgow, and we have negotiations in Dublin. Spain and Italy are focuses, too,” Winter said.
Macroeconomics are leading the company's decisions on acquisitions, Winter said.
“We have more appetite to buy due to the high inflation and consumer price indices and because the rents on leases have increased by 10%, 12%, 15%. With freehold, you know your costs,” he said. “Our biggest appetite comes from the expectations from shareholders. We will accelerate to three new assets per year.”
A&O has contemplated an initial public offering, which might still be under consideration, Winter said. He added there's appetite among shareholders beyond just asset-light hotel companies.
“I would predict a planned IPO, but not for 10 years. Institutional investors now have fewer problems to invest in the lower segments if the returns are good,” he said.
The focus for A&O now is conversions in transportation hubs, but not in cities only reachable by plane, Winter said.
“For the next two to three years, this is a golden moment for us with the office crisis in good destinations,” he said. “We are very flexible in terms of size and floor plans, which gives us a head start and makes it easier and faster to implement.”
Headwinds and Operational Challenges
There's been much talk about the effect of remote work making city centers look a bit desolate. But in Europe, that's not the case, Winter said.
“City centers are attracting good earners, and we’re definitely seeing a few office workers come back. In Germany, I think the mood is worse than the real economy. There is uncertainty, and business likes certainty,” he said. “European demand is very strong, and that is true of Germany, too. What is slower is the recovery of non-European guests. We have several underperforming airports in terms of flight lift.”
A&O’s best year was 2023, when the brand had a record 6.1 million overnight stays in 2023, occupancy of 76% and revenue of €217 million. Winter said the first month of 2024 already topped the same month in 2023.
Winter attributes A&O's success to the brand’s recent refurbishment and the introduction of a new revenue-management system.
“Now it is all hands back to the deck, so to speak. The biggest change in 2022 was that guests bounced back faster than staff. Staff is not such the problem now. Our training initiatives have resulted in higher retention,” he said.
He added the No. 1 challenge is operational costs.
“Food costs are still crazy, as are those for heating. In Cologne, for example, heating has increased in cost since last year by 40% and 200% from 2019,” he said.
Another of the firm's initiatives is to attract more leisure business from families.
“Gen Z is skilled and educated, but it has the highest demands of any generation we have seen so far. The majority of our guests are aged 16 to 35, but we are definitely seeing more families,” he said.
Quest for Sustainability
A&O Hotels and Hostels is putting in place the final steps and investments that will allow it to have net zero carbon emissions by 2025, with the intended savings being equivalent to the CO2 emissions of approximately 30 years of operation.
When compared to new builds, Winter said hotel conversions are an obvious route to reduce CO2 emissions.
“Currently, A&O’s CO2 footprint is 3.73 kilograms per night, which is approximately 80% lower than industry competitors,” he said.
Staying at home is a less environmentally conscious decision, Winter joked.
“The average home uses 25 kilograms. So, it is much better to move to A&O and live there,” he said.
Gen Z travelers are also very conscious of sustainability and food sourcing.
“Scandinavian school groups are not allowed to use a plane anymore. That region is 10 years ahead of anyone else,” Winter said.
Winter said he is heartened by industry efforts over environmental, sustainability and governance issues.
“The bigger companies on top of the subject own it, even if they have different approaches. Motel One is doing well. As long as you go down this road, you will do good. We still have to learn, and I am happy to learn from others. [A&O does] not do everything right, I am sure,” he said.