There is M&A happening at the top end
and in the budget arena, but it’s much harder for mid-market assets.
There is M&A activity on the European
hotel scene. That much is obvious from the freshly updated list of deals
prepared by Hilltop Hospitality Advisors, the London-based consultancy. Year to
date, Tom Oakden, Hilltop’s CEO, lists 84 deals of various kinds, including
offers, sales, and refinancings.
Among the eye-catchers is Dubai Holding’s
deal to take full ownership of The Westin Paris – Vendôme, giving an implied
value for the hotel of €650 million ($700 million). The Gulf investment
conglomerate describes the 400-room property as being “in the heart of the
busiest luxury district in Paris... overlooking the Jardin des Tuileries,
the River Seine and the Eiffel Tower.”
Tom Oakden reminds us that TPG, the private
equity investor, is preparing for the sale of the A&O hostel business,
which includes 39 assets (13 owned, 26 leased) with 28,500 beds. “The core
location is Germany with 25 hostels,” Oakden writes, which “TPG acquired in
2017 for €250 million, when the business included 31 hostels which were
predominantly leased.” Still at the pre-sale stage, Hilltop says the pricing
range is estimated to be €800 million to €1 billion ($860 million to $1.1
billion).
Generator, another hostel operators, and RF
Hotels (as in Rocco Forte) are two other recent additions to Hilltop’s handy
checklist.
Frustrations for leveraged buyers
Oakden said that equity buyers are
dominating the hotel investment market while “frustrations grow for leveraged
buyers unable to meet sellers’ prices.”
“Meanwhile,” he added, “highly traded
markets this year have been Spain and Italy with the best assets in the best
cities or resorts achieving robust pricing from long-term capital or owner
operators.”
This assessment, which may be aptly
described as ‘glass half full, rather than glass half empty’ is echoed by Ascan
Kókai, head of hotels for ECE Real Estate Partners, the Hamburg-based firm with
more than €5 billion ($5.4 billion) under management. “Transaction volume is
somewhat muted thanks to the sharp increase in interest rates over the last six
to eight months,” he said.
Hopes for a strong second half of 2022 were
dashed as investors adopted a wait-and-see approach, Kókai said. There are
still plenty of projects in the pipeline, he added, but we are in “holding
pattern mode.”
Kókai added that M&A is not completely
dead but compared to the capital available, especially out of the private
equity space, there is relatively limited activity.
“Sellers,” he said, “are still looking to
2019 valuations… the changed interest rate environment means asking prices have
to come down.”
By how much? Some kinds of assets, Kókai said, notably at the luxury end, are enjoying sustained valuations or even
climbs. As a broad observation, though, he said prices need to come down by up
to 20%.
The big factor is interest rates
An intricate set of competing forces is
exerting finely balanced pressures on hotels M&A in Western Europe. The big
factor is interest rates and while the uncertainty is negative overall, there
are positives.
Concerted rate-raising policies from
central bank are making life hardest for those who have bank debt or would like
to re-finance. Floating rate debt costs more while borrowers with maturing
fixed-rate facilities have faced, or will face, expensive wake-up calls.
Higher rates spell double trouble because
of the effect on bank balance sheets. Higher rates alter the book value of
banks’ capital buffers thereby impeding their willingness to lend. As some
older debts are written down or written off because borrowers can’t afford the
new financing climate, banks’ approach to deals becomes more cautious still. As
circles go, that’s pretty vicious.
Conversely, higher rates are feeding
enthusiasm elsewhere. Providers of private credit – fellow travelers of private
equity – have few, if any, bank-style systemic risks to manage and that frees
the hands on these financial levers. It helps that bank debt alternatives are
harder to come by, of course, while rising rates make the returns, at least in
nominal terms, more attractive.
As for the equity piece, it appears that
the appetite among owners of traditional publicly quoted M&A is thin.
Short-term operating uncertainties coupled with short-term investment horizons
makes hotel real estate a hard sell for many of the owners of FTSE, CAC, Dax
and other euro-markets.
Sellers are still looking to 2019 valuations… the changed interest rate environment means asking prices have to come down.
Ascan Kókai
It’s a different story for sovereign
wealth, family offices, and pension and endowment funds delegated to closed
private equity style managers. Cash buyers with investment horizons that see
through economic cycles have come to see hotel assets as relatively dependable.
Gone are the days when hotels were seen as cap-ex hungry, op-ex risky, and
worryingly exposed to fickle business and consumer tastes.
Investor confidence
Hotels are still cyclical, still with
operating cost risks, make-or-break consumer judgements rapidly conveyed over
social media channels, and macro-economics, but they seem to enjoy investor
confidence of a sort which once, say 20 years ago, seemed impossibly out of
reach.
The biggest challenges are in the middle
ground. As the Hilltop listed examples above suggest, there is M&A
happening at the top end and in the budget arena. It’s much harder for
mid-market assets.
Two years ago, with rates near zero,
survival was a question of operational stamina. Now, financing costs means that
however patient, however determined, at least some of the mid-market players
may find themselves selling their way round rising interest rates.