Record-setting Q3 2022 revenues and plenty of dry powder fast track EMEA, U.K. and Ireland portfolio additions, possible foray into North America.
After “exhausting” a 2021 $430 million funding round to capitalize on ownership and lease opportunities from Israel to Europe and the U.K. and Ireland in just over 12 months, Fattal Hotels reportedly is readying another capital raise to grow its current portfolio of 230 active hotels and 30 more in the pipeline. This time, there may be a new pin in the development map: the United States.
“I’ve been looking at possibilities in the U.S. for some time, none of which made sense to us financially—until now,” said Ronen Nissenbaum, CEO for UK/Ireland/Benelux/Spain/Portugal and U.S. Development, Fattal Hotels.
What’s different in 2023, in his view, ranges from macro market fundamentals to demographic shifts and the efficiencies engineered across its current portfolio and corporate resources.
His boss, David Fattal, owner and chairman of parent company, Fattal Group, isn’t banking on finding bargains to establish critical mass overnight in the U.S. Nor do he and Nissenbaum expect to cash in on distressed asset sales.
“I’d love to find a bargain, just like everyone else, but I don’t think I will. Bankruptcies are bargains, and it’s hard to compete with locals and companies with more boots on the ground to get in at these price points,” said Nissenbaum. “But I am finding and will continue to find opportunities. They’re not, ‘Oh, this is a no brainer with 20% IRR and a 10 cap’. What I think I might find is an 8 or 9 cap based on numbers I think I can achieve with that property and realize 13% to 15% IRR. Assets like this aren’t bargains but they are good deals.
A willingness to take some risk could be a driver. “Here in the UK for instance, when interest rates went up, the mortgage rates went down. That's not always correlated at 100%. So sometimes interest rates have gone up but the SONIA five-year swap has gone down and you’re thinking, ‘Wow that’s interesting. So there’s a risk-reward kind of scenario between the financing that’s available now and what happens when we get more solid about the future. When that happens, interest rates will come down and things will get a bit easier.
Refinancing is still front and center. “Everyone’s waiting for the refinancing that’s going to have to happen in the next 10 to 12 months,” he said. “That could make some owners understand they have to find a solution. If debt goes from 2% to 3% to 7% or 8%, that owner is no longer making money and the value of the property is going down. Owners may be thinking they’d better run now and get their equity out, and that will bring properties to the table.”
Fattal Hotels’ money also may go farther because of its somewhat contrarian view of what’s a hot market. Nissenbaum is currently focusing on the East Coast but he’s opportunistic. “Our investment approach is pragmatic. New York makes sense now [at a time when central business district real estate is weakening]. Washington, D.C., Orlando and Miami make sense, as does Chicago. Would I look at something in Los Angeles? Yes, definitely. But our focus is East Coast for now not only because I’m confident we can play well with our competitors but also because we can bring in a market that already knows Fattal Hotels and its Leonardo Hotels, Herrods Resort, NYX, U Splash and 7Minds brands, and travels extensively in the U.S.”
Single assets and portfolios are on the table. Generally, larger hotels with 100- to 200-rooms are the biggest blips on the radar. The focus will be on luxury and lifestyle urban, boutique and resort properties that fit with its core Leonardo Hotels portfolio.
“Strategically, it makes sense to make our brand more recognizable in the U.S.”
Ronen Nissenbaum
Capital access, flexible structures boost deal potential
Another advantage Fattal Hotels brings is access to capital—not only through a possible new funding found but also a broad range of relationships with financial institutions. He noted that recent deals have been done with six to eight different institutions. In a climate where even established lenders such as Credit Suisse can be bought out in a matter of days, that might be even more important.
Then there is Fattal Group’s flexibility in matching investment to opportunity and its willingness to make its move now when the U.S. economic outlook is troubled. While the cost of capital is driving all but the boldest U.S. investors toward a wait-and-see approach, Fattal’s overall infrastructure and customer base serve as risk mitigation for Nissenbaum.
For example, the company counts over half its portfolio as leasehold properties, giving them expertise in a rights structure Nissenbaum feels may catch on in the U.S. in response to the cost of capital. ‘Right now, it’s a minute number of deals that utilize leaseholds in the U.S., and success would depend on how it’s structured. Yes, my liabilities go up and my balance sheet goes up, but I don’t have to put the capital down now, which is a way of circumventing that area. As long as I provide a lease that allows the owner to meet their debt service and other requirements, I think it’s a win-win,” he said. Seller financing also may become more widespread, he added.
What differentiates Fattal’s U.S. narrative
The U.S. market historically has not been welcoming to overseas-based hotel groups. Nissenbaum points to the success of the group’s U.K. and Ireland to explain the differentiators that could change Fattal’s story.
The group’s plan is to build its U.S. strategy in a way that interweaves newly acquired properties with the company’s established customer base and demand drivers. “Half of the business in our hotels in Israel is North American and so is 20% to 30% of our business in Europe,” he said.
“Strategically, it makes sense to make our brand more recognizable in the U.S.,” he said. “It’s important for us to lock ourselves down in America, get our brand more visible, so that when people stay with us in the U.S., they will recognize the brand and we will be even more success in Europe and in Israel. And secondly, I think that the people that know us in Germany and in Israel, in other parts of Europe and the U.K. and Ireland. When they travel to the United States, we might have a little bit of an up there with them and they will stay with us.”
He sees U.S. hotels capitalizing on interest from the existing customers and driving new business from North America to the rest of the portfolio. So, one guiding principle for potential U.S. locations is, “Where are they a lot of direct flights to and from Israel? Again, that points to the East Coast,” he said.
Nissenbaum contended that Fattal’s operational integration will be key. He noted that the group’s rapidly expanding U.K. and Ireland portfolio proved the company’s ability to scale its footprint while leveraging operational efficiencies that lower the administrative workload of bringing new hotels into Fattal’s portfolio.
“When I joined Fattal about a year ago, the company had just raised the $430 million fund to fuel expansion mostly in Europe, the U.K. and Ireland,” Nissenbaum said. “Approximately 70% of that fund went to my region because those hotels we added, including, in the last few months such as the Grand Hotel in Brighton and the Dilly London are extremely lucrative.”
He estimated that one-third of Fattal’s Q3 2022 record $500 million revenue came from its 54 (at the time) U.K. and Ireland properties. In his boss’s view, that could be scaleable to the U.S.
Despite this exploration of U.S potential, Fattal Hotels is not slowing down in its core markets. Ten hotels added in Nissenbaum’s region included a six-hotel portfolio in Majorca and Ibiza. Two ground-up projects, one in Edinburgh and one in Dublin are in development and are among the four hotels (three owned and one leased) Fattal expects to open by 2025.
The balance of ownership structure is flipped in Germany, where the company is scheduled to open six hotels by 2027, five leased and just one owned. Partial ownership allows the company to bring four hotels in Greece and Cyprus online in 2023 and one in Portugal in 2024. A fully owned Portuguese property is slated for 2025. Two fully owned and five partially owned properties will expand Fattal’s presence in its home market of Israel by 2027, along with a further 10 through management or lease structures.
“David [Fattal] and I have been talking about growth. How big do we want to be? Is ‘big’ about increasing our platform, increasing the dots on the map, increasing the geographies that we’re in to strengthen our ecosystem and strengthen the existing hotels? The answer is not 300 or 400 or 500 hotels; there’s no number. It’s about being smart about the company’s aims. If optimal growth is 20 hotels a year that's fine. If it’s 100 hotels a year, that’s fine too. It’s what’s best across the board,” Nissenbaum said.