Quest for big portfolio deals set to shift from UK to Continent, reports Jane Roberts.
When hotelier David Fattal completed a €400 million sale and leaseback of his German Leonardo Hotels to Swedish investor Pandox in December, he was looking forward to the partnership continuing to expand and taking advantage of Europe’s hospitality recovery.
With the exception of Moscow and Istanbul, hotel trading expectations for European cities are reported to be strong in the short and medium term. In December, JLL’s most recent Hotel Investor Sentiment Survey showed that underlying hotel operating fundamentals remain robust.
Investor sentiment softened slightly in the face of recent market volatility, but “debt and equity availability remains at a multi-year high”, says JLL. So given this appetite, 2016 is expected to be busy, focused wherever most opportunities surface.
In 2014-15, that was in the UK. By value, up to 70 percent of European hotel sales and financings in the past 18-24 months were UK deals, brokers estimate, following a break-neck spell of multi-hundred-million-pound portfolio deals, on the back of UK trading fundamentals that picked up ahead of other European locations.
However, in 2016, Continental Europe could see more big portfolio deals, as opportunities in the UK start to dry up.
While institutional buyers and sovereign wealth funds remain leading competitors for stabilised hotels and trophy marques, private equity funds have driven the UK portfolio market by snapping up assets that suffered during the financial crash. The likes of Apollo, Cerberus and Starwood have all acquired chunky regional portfolios of mid-market hotels in the past two years.
Giorgio Manenti, head of Eastdil Secured’s European hotels advisory business, says that in early 2014 private equity capital started to believe in a big performance upswing in the trading fundamentals across Europe.
Private equity firms step up
“That, coupled with phenomenally attractive interest rates and a significant amount of debt available for hotel paper focused a lot of private equity firms to gently increase their hotel allocation,” he says. “Big private equity shops all aggressively chased portfolios with yield, as macro plays and because it was clear there were tools to improve operating performance. That way you get a double whammy of organic growth and asset management growth and you take assets from opportunistic to core/core plus.”
Eastdil’s view is that there are a handful of big UK portfolios still to trade this year. The firm has advised Lone Star on the ongoing sale of Atlas Hotels, a circa £620 million business including 47 Holiday Inns and one Hampton by Hilton. Atlas was put together via Lone Star’s acquisition of the Project Rock loan portfolio from the Irish Bank Resolution Corporation in February 2014 and consolidation of the former Somerston and Morethan hotel operations.
But Eastdil expects the pace of UK portfolio sales to slow. “The appetite remains as strong across Europe and with fewer UK opportunities, private equity firms are asking: ‘What can I do in France, Germany and Spain?’,” says Manenti. “In terms of big portfolios, you’ll see activity in Spain and Germany, France and potentially the Netherlands because large owners might make disposals.
“Everyone loves Italy’s market, but it’s fragmented, so it’s tough to do a sizeable Italian deal. There could be quite a bit of activity in eastern Europe, Poland, the Czech Republic, because trading performance there is incredibly strong. With that acceleration of performance, investors will start to look there, as they can get very attractive yields.”
Meanwhile, private equity firms that bought hotels in the past couple of years will be executing business plans. As chains are standardised and improved, individual assets will be sold from portfolios. For example, Apollo is under offer on one of two hotels it owns at Brussels airport, acquired from Ivanhoe Cambridge in May 2014 as part of the €520 million, pan-European Holiday Inn/Crowne Plaza portfolio.
“There will be a lot of small deals,” explains Manenti, “as private equity firms will start to retail a lot of assets. So smaller players will have plenty to do this year.”
Financing hotels requires specialist know-how, involving focusing on management and business planning, and metrics such as revenue per average room rate. It is more about earnings multiples than LTV ratios.
Though it is not an asset class for every lender, plenty of banks, insurers and debt funds have competed either to underwrite large portfolio deals or buy into them in senior and junior parts of the capital stack.
Blackstone’s BREDS 2 debt fund underwrote a £315 million whole loan for KSL Capital Partners’ acquisition of De Vere Villages in November 2014 and later syndicated £250 million of the paper.
One of Deutsche Bank’s biggest loans early last year was to buyers Goldman Sachs, Golden Tree and Avenue Capital, which paid Lloyds £520 million for 144 Travelodge hotels – another loan that was successfully syndicated.
Though the details of hotel financings are rarely made public, brokers say lenders have been happy to provide leverage at 65-70 percent for private equity buyers; institutional buyers typically add lower leverage.
In late 2015 pricing widened slightly– a trend seen across the commercial real estate market, particularly in the UK, as banks filled allocations and had less appetite for new loans unless they offered higher margins.
Asked if pricing will be keener this year, Manenti says: “We’re about to find out. With fresh capital, we think hotel spreads will hopefully come back to what they were earlier last year. We think the widening was mainly driven by a lot of hotel paper in the market and by allocations being achieved, not a worsening of appetite for hotels.”
Leonardo puts Pandox into German picture
Swedish hotel properties company Pandox’s €400 million acquisition of 18 Leonardo Hotels in December marked the first portfolio deal by a quoted company in Germany since the financial crisis.
For Pandox, which focuses on Northern Europe, it was a big debut in a priority market, following its June 2015 initial public offering. The upper mid-market Leonardo hotels, in 12 cities such as Dusseldorf, Frankfurt, Hamburg and Mönchengladbach, generate SEK 250 million (€27 million) of rent and a 6.3 percent initial yield. New 25-year, revenue-based leases were negotiated with Fattal Hotels, which was co-seller with the Leopard Group.
The deal was financed with new five-year debt and existing facilities with Pandox’s relationship Nordic banks, which include Handelsbanken and Skandinaviska Enskilda Banken.
Prior to the transaction, Pandox had around SEK12.9 billion (€1.4 billion) of debt at a 3.6% average interest rate. The deal takes Pandox’s gearing from 44 percent to 51 percent.