BERLIN—An increase in the numbers of investment opportunities in European hotels means European hoteliers must do more to make their projects attractive to investors.
Sources speaking on the “Making your project attractive to investors” panel at the recent International Hotel Investment Forum discussed what investors want to see up front. That wish list is headlined by greater alignment between the players in a project.
“I look for opportunistic returns, predictable income, so the only people I’d look for are those with perfect alignment,” said Edward J. Rohling, CEO and founder, TRC Hotel Advisors LLC—the investor.
That alignment must take different business models in Europe into account, panelists added.
“The leasehold model has been so popular (in Europe) since, well, maybe forever. … (but) this is being challenged,” Rohling said. “Now there is more of a need to offer investors vacant possession and more predictability concerning surety of returns. Maybe a classic owner with white-label management and a franchise with a major chain.”
Rohling said that vacant possession can be difficult to find, but it is becoming increasingly important.
Kenneth McLaren, executive VP of Interstate Hotels & Resorts, said having different options is good news from his perspective.
“Developers and investors previously had little flexibility, but now there is far more choice in how they want to operate their hotels,” McLaren said.
McLaren said the different players need to be aligned in how they exit an investment, and he said this relates to a trend of third-party management companies offering shorter-term contracts than brands.
“We offer (owners) the chance of telling us what their objectives are, and then we tailor our terms of the deal to that. What costs we can take out, and what revenue per available room is workable? We’ll put a team behind a portfolio if that is what it takes,” McLaren said.
Allan Davidson, director of Vision Hospitality Asset Management and moderator of the panel, said investors and hoteliers can’t lose sight of the big picture.
“Remember you are part of the (hotel) cycle, so performance is what it is all about,” Davidson said.
Panelists said it isn’t always a given that investors will consider hotels the best asset class as the cycle progresses.
Graham Mitchell, senior development and asset manager at investment firm McAleer & Rushe, said when his company buys land, he does not always think a hotel is the best answer.
Those looking for partners and capital must first do what they can to minimize risk. He said it helps to find experienced partners, hire analysts and consider options for a project, possibly even outside the hotel industry.
“Other sectors cannot be ignored, and investors will want those considered, even if they are set on a hotel. It is about confidence, and the ongoing equation of risk against reward,” Mitchell said.
Huw Zachariah, head of hotels, U.K., HSBC, said a property should have experienced management if the owner and/or developer do not have hotel experience.
Competition for cash
The competition for capital will be won by those who have done their homework, panelists said.
“Data is so much more available. Projects can be evaluated as never before. It all adds more value,” Rohling said.
Zachariah said groups seeking investment should be able to thoughtfully explain why they partnered with third parties and brands.
“We’d ask why has this particular borrower decided upon a management agreement, and is it appropriate? Why that brand? Is the asset appropriate for that destination and target market,” Zachariah said.
Mitchell said hoteliers must also explain what they’re investing in the project.
McLaren said more thought should be put into the structure of each deal.
“What options are actually available to me? If it doesn’t work, it is not necessarily the brand above the door but often the management in place,” McLaren said.
McLaren forwarded the case for white-label management in that it was usually very close physically to the hotel and concentrated not on branding but the bottom line.
“Performance clauses need to be strong and robust,” McLaren said. “Do not give away all the family silver just because you are told this is how management agreements are done.”
Experience
Successful experience within the industry remains one of the most attractive qualities from an investor’s point of view, sources said.
Attractive projects derive from owners who have a good track record of keeping an eye on valuations and cash flow, Rohling added.
“This is what the next investor will look at,” Rohling said.
He added that he liked third-party management that was willing to exit sooner than expected if a sale derived a greater multiple by doing so.