The power of patient capital

Warren Buffet’s comment that ‘our favorite holding period is forever’ has always held true for us as a family office, and there are assets on the balance sheet we have owned for over 100 years.

With the limited number of compelling opportunities coming to the market, we find ourselves underwriting all the same deals as our competitors (as an aside, can we all just stop pretending that ‘off-market’ means anything anymore). But while the assets may be the same, the way we look at them as an owner operator is often quite different.

We track IRR, but our cost of capital is not predicated on IRR; we are equity multiple focused, as it’s the growth of NAV that moves the needle. You can do 10 deals with a great IRR, but if the multiple is 1.2x, then as the equity you're paddling hard to go nowhere very fast.

Historically, that has been a real competitive advantage for us; there were some transactions where there was more residual income on an office building, where we could comfortably sit on the yield for a couple of years. The time induced dilution to IRR would have prevented many types of investors from looking at it, and our patient capital approach meant we can use that time to our advantage, and de-risk the asset through design, achieving planning approvals and securing capex financing.

We also believe that taking a longer-term view means you are likely to create extra value in the physical asset itself; you are incentivized to do things properly. If you want to hold onto a building for a longer period of time, you want to build in ample redundancy. It’s almost the difference between building a house for yourself, and a developer building one for you; you know who is going to have specified the more reliable boiler! It’s not just that it makes sense to do things well, but our repeated experience has been that, inevitably, it leads to better performance.

We don’t entirely follow the Warren Buffet theory to the letter as we like to retain some flexibility. With our hotel portfolio, we have an ambition to continue to grow to a certain scale, at which point a liquidity event is possible and we will consider whether to list the business, sell it, or keep growing.

We always try to emphasize the lack of counterparty risk because we are a family where reputation matters not just from a financial perspective, but because there is nowhere to hide; it’s our name.

Jack Mactaggart

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In the interim, we are focused on cashflow and we have been really pleasantly surprised by how reliable and stable a cashflow producer hotels can be, despite the fact that rather than having a building with a ten or five-year lease, you have one where you might have a churn every other night. In fact, our hotels have come to be almost as reliable from an income perspective as our office portfolio.

There will always be people out there who can be more aggressive, who have a lower cost of capital, and we’ve come up against that historically; where our timelines were a little too slow, or our cost of capital was higher than some potentially ego-driven purchase, which you do get in the hotel space. But we lead on having been doing this for over 125 years, with the ambition to be around for at least another 125. If that’s your goal, then you end up caring an awful lot about being an excellent partner to your stakeholders.

This is perhaps best illustrated through our TripAdvisor Rankings and Net Promoter Scores (NPS). For example, the Resident Covent Garden was last year the No.1 ranked hotel in the U.K. (falling from a great height to No.2 this year) and has an algorithm-crashing NPS of 90/100.

We always try to emphasize the lack of counterparty risk because we are a family where reputation matters not just from a financial perspective, but because there is nowhere to hide; it’s our name.

With The Resident, the brand has lots of capacity to absorb more locations in London and in the U.K. and then we will look into Europe. And because we’re not heavily leveraged, we treat our teams really well and we have such good customer loyalty, it’s a strong position to be in when you are going into potentially more difficult trading environment.

Our other magic ingredient is David [Orr, CEO, Resident Hotels] and the team because they share our obsession with reputation, which has created a resilient, high-value business we can all be proud of.

So, maybe the tortoise was onto something after all; doing business properly, and having a bit of patience, often is the surest way to win.