The hotel sector offers some of the strongest returns in real estate, alongside some of the greatest complexities.
These are operating businesses where the rate charged changes daily, even hourly. Hotels cater to a diverse range of clientele that also can change, if not hourly then certainly at different points during the week.
Operating a hotel comes with risk. It is a daily trading business with food and beverage, branding and reputational risk. As we have seen in the past few years, there is the risk that trading can stop altogether, but at the same time we have seen how essential hospitality is to people’s lives and how it is impossible to replace virtually, unlike offices and retail.
The other thing about hotels, which is very different from a more traditional asset class, is that there are more stakeholders and more ways of making the transactions interesting.
It involves operators, managers, franchisees and franchisors, and if you are in a partnership with people who are good and where interests are aligned, those extra slices of opportunity could result in more cash flow and more yield.
It is tempting, if you are newer to the sector, to be put off by the many different layers in the hotel operations stack and to bring in a brand or a management company, or both, and remove yourself from the operations of the property. That can work well for some investment models.
I believe that building the right team around the right brand offers the chance to create those slices of opportunity that make the sector a bit more interesting and financially rewarding. By educating themselves, hotel operators can add an element of control and flexibility that enables them to make the most out of such an operationally fluid sector.
The operational partner is critical — they can be very dry on the investment side — say, with low leverage — but very dynamic operationally. The two are very complimentary.
Combining real estate fundamentals, best-in-class locations and operational risk is a good equation for an increased return, which can be further enhanced by brand value.
At The Resident, we have a dynamic team led by David Orr, creating an operating platform which we own solely.
With the Resident model, we have been able to remove one key risk: food and beverage.
Food and beverage is more difficult and volatile to convert revenue from very efficiently. We have instead created a model that is rooms-led and converts revenue to earnings before interest, taxes, depreciation and amortization very well indeed; and guests love it.
We have been building on this expertise with the growth into Edinburgh of our core brand as part of our strategy to add 1,200 to 1,500 rooms in the United Kingdom in the next seven years through management contracts and joint ventures. We have another controlled opportunity in Farringdon, London.
Last year, we grew the portfolio further with the purchase of Sleeperz Hotels and its sister brand Cityroomz.
You have to work with a brand for at least a year before you can learn how best to integrate it and gauge how it will work with the rest of the business.
Our team is getting there with Sleeperz, and I continue to believe that it is a good fit with our investment in Resident and underlines our faith in the hotel sector and, in particular, city-center hotels. We believe there is great scope for expansion in vibrant city-center hubs at a different price point to the current Resident estate.
It seems that each new day brings with it a fresh hotel brand for owners to consider.
The very complexity of the hotel stack lends itself to opportunity for those who are prepared to get closer to it.
William Laxton is CEO of family-office real-estate investor Mactaggart Family & Partners.
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