LONDON — With the macroeconomic landscape remaining relatively frothy, more hoteliers are choosing to enlarge their spheres of influences over their hotels or portfolios by having complete ownership in them.
The risks multiply, but so do the opportunities and flexibility, according to panelists at a session titled “Asset intense” at the Hotel Industry Development Event.
Ben Farnell, partner of real estate at legal firm Baker McKenzie, said data suggests being asset-light aids overall performance for hotel companies, but the panelists disagreed.
Whitbread's portfolio is just shy of 900 hotels mostly in the United Kingdom. Mark Anderson, Whitbread's managing director for property and international, said his firm’s freehold ownership of approximately 540 hotels presents a strong investment case.
“That allows us to raise debt at good pricing and better terms than most. We have control over our development and investment. We can move capital, and we can recycle cash,” he said.
Ronen Nissenbaum, CEO for Western Europe at Fattal Hotels and Leonardo Hotels, said his firm is unapologetically asset-heavy. He added such an approach permits moving rapidly in more markets.
Fattal is a publicly listed company, but Nissenbaum said public earnings reports do not always show the full picture, such as if an asset's profitability adds to its valuation.
In this environment of unstable geopolitics and gross domestic product growth, being more asset-heavy allows control over the hotel company's value chain and destiny, he said.
“I worked for brands for 20 years, so I appreciate the distribution, but now we save that 15%, and with scale we can compete. We have five hotels in London, and the [revenue generation index] is 115. And we’re not being told when [property-improvement plans] are needed,” Nissenbaum added.
Martijn van der Graaf, chief operations officer, for Western Europe at Essendi — which has 96% of his hotel investment portfolio of approximately 500 properties in Europe — said that having full control in a hotel allows his firm “to do the right thing for the asset.”
“Control of the asset gives you control over the timeline of that asset, including investing in the asset during short downturns. We believe this leads to better returns,” he added.
Van der Graaf said that control also helps in environmental, social and governance strategies and goals.
“We do not need a flag in every city now, so we can concentrate on the value of those we have,” he said, adding Essendi is also acquiring some of the properties in its books.
Lily Wecker, CEO of Aethos, said company culture plays a huge part in comfort levels.
“We manage all assets on behalf of our capital partner, [Limestone Capital]. We focus energy on our strengths, and ours is growing value on premium equity. Limestone is great at fundraising. Together, this makes for a better risk-reward profile,” she said.
Graeme McCormack, head of fund management, hotels and leisure at Principal Asset Management, said hotels are the current performance stars of real estate, so there are numerous levers in hospitality to help enhance a hotel's value. He added that many investment vehicles in Europe are restricted in what they can invest in and cannot have ownership operations.
With a little help from my friends
But there are concerns that the asset-light hotel model is too commoditized, Wecker said.
She said branded hotel-chain fees are part and parcel of the industry, and there should not be any conflict, but when those brands “offer something absolutely interchangeable with any other brand,” she begins to doubt the strategy,
Wecker said her preferred approach is to charge a higher base fee for a hotel product that is innovative than to operate in the end of the sector she believes might be more susceptible to compression.
McCormack likened that approach to that of Liverpool’s famous mop tops.
“The Beatles were good because John and Paul got along, albeit with occasional tension, which is not always a bad thing,” he said.
Wecker added the cross-pollination of ideas helps bring complementary attributes, not identical ones.
Being open to new ideas, or tweaking existing ones, is never a bad idea, panelists said.
Anderson said Whitbread does have management agreements in the Middle East.
“We’re flexible, even if most of the estate is not that way. If we potentially move into other markets or segments, we might look at asset-light, if we saw our finances being stretched. That’s not an immediate plan,” he said.
In February, Whitbread signed a memorandum of understanding with Dubai-based owner Equitativa Real Estate to develop between six to eight Premier Inn hotels in the United Arab Emirates and Saudi Arabia, with up to 3,500 rooms.
Nissenbaum said “we’re still one phone call away, even if we are publicly listed. Speed, access, flexibility, to lease, to manage, to own, to part-own … and one day, perhaps. we might consider franchising,” he added.
Anderson said 10 days after signing a £50 million asset in London, he had paid out the cash.
“Sometimes we’re not the highest bidder but still get the asset,” he added, referring to the overall strength of its investment case.
“Pairing the right capital with the right asset. We do not want to add debt to an asset,” Wecker said, adding that if this means her firm does not grow as fast as it could, so be it.