Having launched its latest hospitality fund in 2019, Madrid-based European real estate investment manager Azora is in a position to take advantage of hotel ownership opportunities as Europe emerges from the pandemic.

Speaking exclusively to Hotel News Now, Javier Arús, Azora's managing partner for hotels, said that while there is significant amount of capital waiting to be deployed, not everyone is ready to invest.

“It still is hard to underwrite some hotels," he said. "There will be competition, but there also will be some edge to those who have been investing there already.”

Arús said Europe is underdeveloped in regards to institutional money invested in hospitality, at least compared with the U.S. and Asia.

“The share is lower than it is in other real estate classes, but we will see more," he said. "I hope we see more institutional spending on a permanent basis. I think that will happen in the longer run, that we will see more core capital exposed in hospitality. To get there, the industry needs more aligned managers capable of channeling that money.”

Even Spain's hotel industry — in which ownership has become less family-oriented in the last half a decade or so — remains fragmented, Arús said.

When Azora owned real estate investment trust Hispania Activos Inmobiliarios, its hotel portfolio consisted of 13,100 rooms in 46 Spanish hotels, a small share of the overall rooms count.

Arús said the complexity of hotel ownership can be a barrier to development, but that can be eased by knowledge and institutional capital.

“The underwriting is not a hassle if buying a London office from Munich, but owning a hotel is far more complex," Arús said. "That being said, the [hotel] investment side is going to grow over the next few years. There will be consolidation opportunities."

Arús said some opportunities will come from owners not necessarily wanting to sell from distress but rather proactively aligning themselves with the right partners for the next period of an asset or portfolio’s timeline.

“After COVID, the industry will not be relying on fixed leases," he said. "They are not going to hold. If you are an investor, you have seen your fixed leases being renegotiated or canceled, and they have become exposed. They are also not benefiting from any upside, so you will see it evolve more to the U.S. system. Everyone will have to expose themselves to operational risk.”

Azora created its former investment vehicle, Hispania, in 2014, with 60% of its fund being invested in hotels. It was publicly listed until the end of the first quarter of 2019 and gave Azora an internal rate of return of 19% when it was sold to Blackstone in July 2018 for approximately 2 billion euros ($2.4 billion).

Its current fund, the Azora European Hotel & Leisure Fund, is valued at 1.5 billion euros. It was created in 2019 to mostly target sun-and-sand assets, with 150 million euros of seed money permitting the acquisition of 11 hotels — comprising approximately 2,800 rooms — owned by Spanish firms Med Playa and Palladium. The fund also acquired four buildings in the city centers of Bilbao, Brussels, Lisbon and Madrid that will be converted into “smart hostels.”

Earlier this year, Azora bought the 213-room Giverola Resort, on Spain’s Costa Brava, from Swiss hotel Arenas The Resorts. Its latest deal in July 2021 was the purchase of two flagship hotels owned by Thai hotel firm Minor International in a sale-and-manage-back deal valued at 148 million euros.

Those two assets, the 383-room Tivoli Marina Vilamoura and 248-room Tivoli Carvoeiro Algarve Resort, both on Portugal’s Algarve coast, will continue to be managed by NH Hotel Group, which Minor bought for 2.3 billion euros in October 2018.

“Our current fund has a strong view of global tourism, with a long-term investment strategy. We targeted 600 million euros but exceeded that, raising 680 million euros in our first closing on behalf of four large investors, including APG,” Arús said. “The final closing will reach the hard cap of 750 million euros."

Arús said the structure of the fund allows for more flexible strategy.

“It is a private equity vehicle, a FCR, not a REIT, so it has more flexibility in where it can invest and in the type of contract,” he said, referring to the Spanish acronym for a “fondos de capital-riesgo,” or “capital-risk fund.”

He added that COVID-19 has had some impact on the fund’s profitability, but that this impact will be more easily absorbed as it is only a year old.

“If [the pandemic] had to happen, it is better it does so in the first year of the fund’s life, rather than at the end of the fund’s term. In underwriting returns, we can absorb what happened and not deviate from our target returns," he said.

Azora is in a better position today to acquire hotels at lower prices, Arús said.

“Acquisitions also have a discount on their pre-COVID valuations. We ca­­n absorb lower results for 2020 to 2022, with underwriting targeting 2024 as the year we will return to pre-COVID levels, if not even sooner,” he said.

He said that while underwriting and financing fundamentally are more of a challenge right now, investors that have track records can be competitive and close deals.

“2019 was highly competitive, but now to some extent there is less competition. That is not to say we are alone,” Arús said. “If you are basing your returns on high leverage, [a deal] will cost you more. We have the resources and are not highly leveraged. We underwrite from a good position, and we will continue to be very active.”

Arús said that while the severity of the pandemic cannot be overstated, the Spanish hotel and tourism industry are in relatively good health, as are other European markets Azora is interested in.

“That comes out of two things: the furlough schemes, which took a huge pressure out of hoteliers; and the reaction of the [European Central Bank], which considered tourism as one of the strategic industries," he said. “Banks granted additional liquidity and there were government guarantees, which also took immediate pressure out of sector, so we did not see a huge volume of transaction activity."

With the pandemic lasting longer than initially anticipated, hotel owners not yet in distress are looking to avoid this outcome by proactively seeking partners or capital, Arús said.

“Transactional volumes will increase,” he said. “Right now, there are 5-million-euro deals in the United Kingdom, for instance, making the news. I think that will change after this summer,” he said, adding Azora has one asset in the U.K., the 121-room NH London Kensington.

Arús said he expects the big players — Blackstone, Starwood, KSL and others — to reappear, citing the ongoing attraction of the Spanish market, the continued existence of a fractional playing field and the considerable capital waiting to be spent.

“[They] always have Spain as a target,” he said. “The biggest difference between Spain and Italy or Greece is the size of the players. In 2015, when we did a deal with Barceló, Starwood did one with Meliá. They brought a lot of visibility to hospitality, but it always has been a competitive market."

Spain also needs to keep pace with other countries across the Mediterranean, Arús said.

“To capture the mass market, which is very relevant, hotels across all segments need to keep innovating. Most Spanish inventory is from the late 1970s to early 1980s, and it needs to be refurbished, but in terms of the position of Spain, we have a uniqueness in that some markets have 365 days,” he said.

Azora also will look at opportunities in sports and mountain resorts, Arús said, and in cities with high levels of leisure tourism.

“Post-COVID, we would expect to see pure leisure recovering quickly. Indeed, we are already seeing evidence of recovery now. People will not take fewer vacations, and I think the investment window is going to be slightly shorter [for this segment] in Spain and Portugal and also the rest of the Mediterranean,” he said. “We like markets with a good mix of international and domestic demand, but would rather choose international if we had to make the choice."

Demand is bound to recover, he added.

“The way we see it, people are only not traveling because they are currently restricted from doing so. You look at the German Baltic, at the Alps, they are having good years, and while in other destinations there are lower occupancies, there are higher ADRs,” Arús said. But what is “critical is discipline in terms of pricing.”