Highgate’s eyes focused on Iberian Peninsula

INTERNATIONAL REPORT -- Broader Europe has long been considered a market lacking in institutional ownership expertise and more sophisticated management, which eventually would lead to trading and opportunities for more sophisticated groups to control hotel inventory. This shift has been a long time coming, and in a post-COVID environment with many European independents struggling to profit, perhaps it is more likely to finally come to fruition.

One company recognizing and acting on the potential opportunity is New York City-based investor/manager Highgate, which is proactively focused on growth on the European continent – both owning and operating at scale.

To wit, in January 2023, a consortium led by funds managed by Davidson Kempner Capital Management, and including Highgate and Kronos, closed on the acquisition of ECS Capital in Portugal for a reported price of €850 million. Among the assets were 18 hotels, which led to the launch of HG Portugal, a Highgate company which now manages the assets with plans to pursue future opportunities throughout Portugal.

HG Portugal is one of the largest hotel operators in Southern Europe. Spanning the Algarve, Lisbon, Porto, and several other markets throughout Portugal, the portfolio includes hotels operating within the Hilton and IHG brand families, as well as several noteworthy independent hotels such as Cascade Resort, Salgados Palace, and Sao Rafael Atlantico. The portfolio includes lifestyle boutique hotels, urban full-service hotels, waterfront luxury resorts, and large convention facilities, each of which draws from core competencies across Highgate's global portfolio.

As a result of this deal Highgate appointed 30-year hospitality veteran Alexandre Solleiro as chief executive officer of HG Portugal. His team will build off Highgate's existing platforms and resources across Europe, the United States, the Caribbean and Latin America, while bringing dedicated Portugal-based experience.

Beyond Portugal, Highgate leadership stated it is taking an intentional approach to European expansion. A key area of focus will be expansion into Spain, including Costa del Sol, Balearic Islands, Canary Islands, and major cities including Madrid, Barcelona and Valencia. “We seek to grow the platform to become a formidable Iberian operator,” said Nicholas Mellis, vice president of Acquisitions and Development at Highgate.

Already with multiple years of experience in European development and a global portfolio that includes more than 500 owned and/or managed hotels ($20 billion of assets under management) comprising more than 84,000 rooms across the United States, Europe, Latin America, and the Caribbean, Mellis recently offered Hotel Investment Today more about Highgate’s further plans for Europe.

Hotel Investment Today (HIT): What more can you tell us about expansion plans and opportunities for Highgate in Europe?

Nicholas Mellis (NM): Highgate’s intends to grow via our key areas of expertise – leading investments in hospitality real estate and third-party management where Highgate has a differentiated ability to add value. We are optimistic about Portugal and in the top 25 markets throughout Europe (urban and resort).

With a diverse portfolio across North America, the Caribbean, Latin America and Europe - more than 500 owned and/or managed hotels with more than 84,000 rooms - we are looking forward to growth in our existing markets and expansion into additional new markets.

With a broad European platform based out of London, Highgate’s local teams on the ground bring local connectivity, operational expertise and networks. This blend of a global platform and local operating teams create the right mix of scale and regional know-how.

HIT: Do you see this as a particularly opportune moment to acquire assets at a discount?

NM: Despite volatility in the macroenvironment – including rising interest rates and inflation – the market is not showing significant discounts in Europe. Since our entry into Europe more than seven years ago, Highgate has remained disciplined in our investment approach, whether it be during high asset inflation periods or post-COVID recovery.

We actively look at all opportunities throughout Europe and will remain focused on acquiring assets where we see a differentiated ability to add value.

HIT: Will you do any greenfield development or strictly acquire existing assets?

NM: Our primary focus remains on existing assets with value-add business plans. However, given Highgate’s deep experience renovating and developing hotels, we do intend to develop a 5-star hotel in Vale do Lobo to complement the existing residential development in the area, and will consider development as opportunities present.

HIT: How much potential is there for local partnerships with capital players?

NM: We are always open to new operating partnerships with regional capital players and real estate owners and have been engaging with a broad range of capital, from high-net worth and pensions to sovereign wealth funds to family offices.

Our 30-plus-year track record speaks for the value we bring as an operating partner across multiple types of partners, investment parameters and return requirements.

HIT: Is there potential for platform acquisitions?

NM: We believe that there is an opportunity to replicate the ECS acquisition model in other markets across Europe, as it allows for scale and efficiencies – which are paramount in this market.

One of Highgate’s core strengths is our ability to acquire complex, large-scale platforms and either create a new best-in-class local operating team or integrate an existing team to manage alongside our existing operating team. We have showcased the successful outcomes of this approach in Europe through the ECS portfolio and with K+K Hotels (in partnership with Goldman Sachs, we completed a multi-country acquisition of a portfolio of 10 full-service hotels located throughout Europe’s top international gateway markets). In the U.S., we acquired six of Colony Capital’s select-service portfolios, acquired Corepoint Lodging, and took over management of six hotels in Peru owned by Urbanova – not to mention our acquisition activity in the global healthcare sector.

HIT: Is there potential to grow your newly acquired Viceroy brand in Europe?

NM: While I can’t go into greater detail until the deal closes, the European market is a key growth opportunity for Viceroy – with a strong asset already in Serbia (Kopaonik Serbia – the only luxury ski resort property in the village) and a new asset opening this year in Portugal’s Algarve region.

HIT: Talk about timing for growth and how quickly Highgate will move?

NM: Timing is opportunity dependent. We don’t have specific volume or growth mandates. However, we are proactively focused on European growth, both owning and operating at scale.

Due to its less institutional operating nature, we see Europe as a market where we can leverage our global reach and expertise, creating value through operational improvements and unique business plans.

HIT: Is there potential for alt-lodging, hybrids, short-term rentals in any of these markets?

NM: In addition to growing our portfolio with traditional 3- to 5-star hotel products in urban and resort markets, we are also interested in adjacent verticals including hostels, aparthotels and other similar alternative lodging options.

HIT: What is the biggest challenge to Highgate’s growth in Europe?

NM: The most significant challenge we face in terms of European expansion are the macro headwinds – from rising interest rates, inflation, energy crisis prompted by the Russian/Ukraine war and labor/retention issues.

On the positive side, there are significant amounts of capital earmarked for hospitality investment, and hospitality continues to be an attractive asset class in an inflationary environment, in which consumer preferences have clearly shifted towards services spending.

HIT: In 2021, Highgate added two hotels in the UK, the Dorsett City London Hotel (owned in partnership with Cerberus) and Grosvenor House Suites in London's Mayfair District (third-party managed). What more can you tell us about these hotels?

NM: Each of the London hotels are well-located in strong submarkets, allowing for independent success, therefore, they will not be franchised under a major brand. Dorsett will soon be rebranded, remaining independent, and Grosvenor House Suites will remain independent.