Recognizing the value of scarcity, new equity players pursue the creme and lift valuations for potential sellers.
SAN FRANCISCO – Family offices and high net worth
individuals have dominated investment in small, ultraluxury hotels for years. But
Ad Altius CEO Thomas Brown says that is starting to change with institutional capital
recognizing the value of scarcity and since COVID pursuing more of these
assets, creating a very different pricing environment and lifting valuations
for potential sellers.
“Scarcity is the only moat left. You can always build
another tower. You cannot build another clifftop, another centuries-old
vineyard, or another shoreline where zoning will never allow a repeat,” wrote
Brown, who’s San Francisco bay-area firm places ultraluxury hotels with less
than 100 keys. “That’s why family offices and institutions are competing
head-on for the same assets. Families lean in for identity and legacy.
Institutions lean in because they’ve realized scarcity — not scale — is where
returns hide.”
Among the deals Brown has worked on more recently: arranging
equity financing for the expansion of the famed Inn at Little Washington (new
keys and spa) where but both institutional and family capital were at the
table—and the family won. “That transaction shattered domestic records on
valuation on a per-key basis,” he said.
I’ve seen is a lot of people suddenly thinking, maybe this is a time where we can find the right investor, the right buyer, the right person with whom to place the baby.
Thomas Brown
Brown is currently arranging the LP equity financing for the
One&Only Hudson Valley, Kerzner’s flagship U.S. development with Nolan
Reynolds. “Who will win this round—family or institutional? Ask me in a couple
of months because both are at the table,” Brown continued.
On the sell-side, Brown is co-marketing Berlusconi’s former
estate in Sardinia, Villa La Certosa, Italy, with Sotheby’s and Knight Frank—a
€330 million repositioning opportunity, he said.
Brown believes it is still relatively early days for institutional
capital coming into the small ultraluxury space, but he expects more and more
deals to get done with EBITDA multiples that have been 8x to 12x maybe increasing
to 9x to 13x.
Working with Picasso
What has spurred this change, Brown said, is the pandemic,
when smaller ultraluxe hotels defied big picture macros and hyper-performed. It
drew a lot of attention from capital markets and what started as a trickle of
capital coming into the space has continued to intensify.
On the sell side, even artists who create these unique, true
luxury assets have noticed an opportunity to cash in.
“I’ve seen is a lot of people suddenly thinking, maybe this
is a time where we can find the right investor, the right buyer, the right
person with whom to place the baby,” Brown said.
They [GPs] can serve their investors by serving this sector of the market because as luxury is commoditized and they honor and preserve and uplift what is unique about this sector, it will augment their returns because they will rise above.
Thomas Brown
At the same time, buyers understand they are not Picasso
operator and maybe they want to buy 80% and keep the artist engaged, according
to Brown. “The artist gets some chips off the table, which might have relevance
because it gives them that ‘placing the baby’ kind of trajectory,” he continued.
“Maybe it gives them some liquidity after all these years of working like a
slave and also gives them the ability to continue stewardship of the baby.”
What needs to happen to make more of these deal truly work,
Brown said, is for institutional capital to have longer investment horizons –
at least eight to 12 years, and even better if 15 years.
“With institutionals that have these longer timelines they
can start, at least in theory, to resemble the same attributes seen with
families,” Brown said. “And where I feel best about having the conversation is
when I have an institutional that’s been around long enough where that’s not
just words on a page – I can actually see that’s what they’ve done.”
All this said, Brown said family offices and high net worth
investor can still hold the advantage in negotiations because of their
investment philosophy, and they don’t have accountabilities to LPs. “So, if
they bump that multiple up to 14x, they can still hold and reap and harvest
returns from the same investment philosophy,” he said. “Institutional capital
coming into this space is still an experiment and I think there are limits to
how far they will go because they still have to look at IRR. They still have to
look at cap rates in a very different way than family offices.”
Nonetheless, the time has arrived, Brown believes, and more
deals bringing in institutional capital will happen.
But he is quick to advise institutional players that the things
that make small ultraluxury hotels attractive now are the things they have to
preserve and protect because that’s where they are going to harvest real value
for LPs.
“It’s not something to be exploited. It’s not something to
be pimped out. It is something that can be leveraged in a good way,” he
continued. “GPs are not here to serve this sector; they’re here to serve investors.
I understand that. But they can serve their investors by serving this sector of
the market because as luxury is commoditized and they honor and preserve and
uplift what is unique about this sector, it will augment their returns because
they will rise above.”