BERLIN—2014 has begun with sellers basking in sunshine, warmed by compelling sale opportunities and increases in termination options and bidders.
“It’s a different sales environment than six months ago. Assets are not under as much pressure,” according to Charles Human, managing director, HVS Hodges Ward Elliott, who moderated a panel on exit strategies during the International Hotel Investment Forum this month at the InterContinental Berlin.
Acute pressures might have eased, but panelists urged there should be no relaxation in how the business cycle of assets is analyzed and exit strategies are formulated during the underwriting of deals.
Common sense in entry and exit strategies should still be decided upon at the same time to best maximize value and cash flow, said the panel.
“The truth often is that you only realize the value of a property when you have successfully gotten out,” Desmond Taljaard, managing director, hotels, London & Regional Properties, said.
Panelists added it should be possible to ascertain likely future buyers even at the time of purchase, and asset managers should think mostly of turnaround situations within five years. Most hotels are not bought as trophy assets but as real-estate plays within shorter cycles.
“The ideal scenario is to make the return that you calculated on the asset and then not be paranoid about what happens when it is out of your hands,” Gabriel Petersen, managing director of Blackstone, said.
“You make the money on the buy, not the sale, although occasionally there are ‘bad’ properties that are part of a rag-bag portfolio but turn ‘good,’” Taljaard added, “but I agree that it’s interesting culturally that we often are not prepared to accept that the next guy will make more money.”
“The real-estate play sits in the space where hotels can be repositioned with capital expenditure,” Matthieu Evrard, chief development officer, Louvre Hotels Group, said.
Owner-operator relationship
Exit policy as a strategic play to increase cash flow and potential buyers can be complicated by assets being aligned to brands, which worry about precedents being set and the difficulties of re-establishing themselves in key markets. Panelists said unencumbered assets often garner more potential buyers.
Break clauses on long-term management agreements must be negotiated to enhance flexibility and ease exits where they made sense, they said.
“There’s always a minimum length of contract that operators require if only to save face,” Elie Younes, senior VP, head of group development, Rezidor Hotel Group, said.
“From a lender’s perspective, we’re interested in the transaction’s broader view. All parties try to secure the most flexibility and not to sign non-disclosure agreements,” Andy Lancaster, head of hotels, U.K. sector coverage, Royal Bank of Scotland, said.
Scenarios that require flexibility in regards to exit strategies include the brand perhaps losing a couple of years of income but the owner potentially losing all equity, the value of the business being in stark contrast to the contract’s value, and the increasing pressure to accept shorter-term contracts and contemplate that franchises can be terminated.
Easy pieces
Blackstone, Petersen agreed, is one company known for turning around assets within a defined life cycle. An operator who knows that would be eager to help add value to the asset. The more all sides can influence the profit-and-loss account, most likely the better the bottom line will be. Exit strategies negotiated and formulated in the first couple of years of an asset’s life can play an important role in not restricting owners’ ability to augment value.
“The industry has not grappled much in regards to forgiveness and building trust, especially if capital expenditure has in the opinion of the brand cost them revenue in the short term,” Taljaard said.
“Hotels traditionally were not commodities, but even though they mostly are now, still there needs to be education for the new era of owners,” Younes said.
Lancaster added, “in the U.K., (banks) are finding ways to merge these interests, collectively finding a way to work through what is a complicated arena.”
Sale strategies
The panelists shared their top considerations for successful exits:
- Younes: Is the asset in good condition, and has capital expenditure been well spent?
- Petersen: Is the asset’s structure and back office fully in order? Even if you sell an asset, if it has issues, they will come back and you will pay for it later.
- Evrard: What is the equity story, and who is the buyer?
- Taljaard: Do not always insist on seeing stabilized income after capital expenditure but before the sale, and do not be scared of a “rifle shot”—that is, going directly to your top 10 buyers rather than to thousands who mostly will waste your time.