News for the Hospitality Executive
Investors See Upside: Lured by continued distress, more realistic values and attractive trailing twelve-month yields, hotel investors doing deals in Europe now stand to benefit most. While most reports show that hotel transaction levels dropped off during 2012, this was driven by outside factors and influences such as lack of financing, lack of product, and economic uncertainty, rather than a lack of desire to participate in steep discounts to valuations from the last cycle peak. Of course, availability of debt proved the greatest constraint in 2012. It is expected that 2013 will show the greatest availability of new debt in Europe since the last peak - even if it is not coming from traditional sources like large banks - paving the way for higher transaction volume but also stiffer competition for acquisitions. Well-capitalized players should beat the curve, investing in Europe now to earn the most attractive risk-adjusted returns.
The most important outside influence is the economic uncertainty in Europe. Perceived market risk - together with bank and owner distress – is putting downward pressure on hotel values. At a minimum, it means there is more for sale now than ever before. Often, the perceived risk is the debt behind the property or portfolio of hotels, but this can still be a route to asset ownership, or indeed, an investment opportunity in its own right. What is clear is that many of these property opportunities are not being promoted through traditional channels, e.g., brokers or agents. Rather, acquisitions need to be coordinated directly with banks or their affiliated parties. In this cycle, it is important for investors to recognize that Europe is one to two years behind the US. The fact is that while banks in North America were marking-to-market and writing-off losses following this most recent downturn, European banks were far less obliging. A “fire-sale” in Europe never happened, but recent deal activity does show that European banks are more willing to entertain deals now than anytime since the downturn began. Finding the right banks and the right assets, then identifying the real decision makers within those banks, is probably the greatest obstacle facing willing investors.
Private equity, in particular, is increasing its focus on Europe and also its acquisition pace in the hotel space. According to a recent New York Times article, the Blackstone Group, Lone Star Funds and Colony Capital have all been beefing up their resources in Europe. Blackstone recently purchased Dublin’s famed Burlington hotel, which signals confidence in a European capital city that was one of the hardest hit by the recession. Meanwhile, NH Hotels’ board reports to have received a purchase offer from KKR, who also reported their intention to invest up to $500 million in European deals in the near term. Another major player, Starwood Capital, recently announced a Q4 2012 IPO of its new European property debt investment platform, estimated at around $500 million. Institutional investors, such as REITS, have also begun to focus in on Europe, a trend that is expected to continue in 2013. In late 2012, US hotel REIT Host Hotels & Resorts acquired five European hotels for €440 million from Goldman Sachs' Whitehall Real Estate Funds unit.
Despite the many negative headlines about Europe’s economic woes, within the markets themselves tourist arrivals and hotel performance are actually increasing. In many markets, the drop-off in domestic travel has been replaced by leisure demand (driven by new outbound markets), and to a lesser extent, a return of corporate travel. A November 2012 UN World Tourism Organization report indicates European tourist arrivals increased 3% year-over-year. Good growth was recorded in core markets: Germany (+7%), France (+5%) and the UK (+4%). The reality is that people are still visiting Europe and will continue to do so. Hoteliers are benefitting from the current environment in two ways, top line performance increases and improving margins.
According to STR, European RevPAR (in Euros) was up 5.1% through October 2012 versus the same period last year. This was led by Northern and Eastern Europe, as both areas boasted RevPAR improvements over 9%, but RevPAR also increased in Southern (+1.3%) and Western European (+2.8%) through the first 10 months of the year. Figures show the increases were driven almost entirely by improving average rate, and this has benefited hotel margins. Naturally, the markets that suffered the most from the downturn – Greece, Spain, Portugal and Ireland (Italy, to a lesser extent) – now show the highest valuation discounts and greatest potential for recovery. While RevPAR improvements are coming from a low base, distressed acquisition opportunities in these markets are plentiful. Years from now, analysts will regard the RevPAR peaks to troughs of this cycle as once in a generation. To the right cash investors, there is great upside potential.
While politicians across Europe were implementing austerity measures over the last several years, European hoteliers implemented their own set of austerity actions. Now with improving top-line performance, hotels are benefiting from these measures by showing higher EBITDA levels. Even if costs are also returning, they are generally coming back at a lower rate than top-line growth. This is a major factor for investors calculating investment upside, and it may also only be true for deals happening in the near term. The greatest proportion of the recovery can still be modeled into current deal underwriting. However, as we move through 2013 and into 2014, the growth curve in many markets is likely to become far less enticing. As debt financing also loosens, more investment players are likely to enter the market, and it may be too late to really capitalize. Sellers will become more robust in their value expectations, and few real bargains will remain. Therefore, savvy investors should be looking to take advantage now.
i Pristin, Terry. “American Real Estate Investors Seek Opportunities in European Debt Crisis.” 19 Sep. 2012: B7. Print.
ii Devin Banerjee and Cristina Alesci. “KKR Seeks to Invest at Least $500 Million in Europe Deals.” Bloomberg News 18 Jul. 2012.
Zachary Schwartz is a leading European Hospitality Consultant and Principal of Atlantico Hotel Advisors, a boutique consultancy with offices in Dublin and Amsterdam. Zachary has held leadership roles with brands, ownership groups and consulting firms in both Europe and North America. His management background spans tenures with Marriott, Host Hotels and PKF – ensuring a comprehensive understanding of the brand, real estate and advisory perspectives. Prior to leading Atlantico, Zachary was managing the due diligence and valuation process for acquisition and disposition targets for the world’s largest lodging-focused REIT, where he modeled approximately $2 Billion in hotel real estate transactions. His areas of expertise include hotel investment analysis, feasibility studies, valuations, due diligence, asset management and vacation ownership/ resort mixed-use projects. He holds a B.S. in Hotel Administration from Cornell University and a M.S. in Real Estate from Johns Hopkins Carey Business School. He is a member of Cayuga Hospitality Advisors.
Reprinted with permission from Cayuga Hospitality Review. All rights reserved.
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