The hotel sector has taken the most severe battering of all asset categories since the onset of the COVID-19 pandemic, and it is likely to be the sector that takes the longest time to recover, given the certainty of reduced business travel for quite a while to come.
A big brewing deal across the Atlantic caused waves in the sector and led to many analysts pondering what implications this might have for potential acquisitions in Europe. Two global private equity giants, Blackstone and Starwood Capital, teamed up in a 50:50 joint venture to buy Extended Stay America for $6bn, in the largest hotel transaction anywhere since the outbreak of the pandemic. Extended Stay America is the country's largest owner and operator of extended stay hotels.
While a niche category within the hospitality sector, the sub-sector was the best perfoming in the industry last year, and the price offered by the JV reflects pretty much the valuation before the COVID outbreak, at about 11 times EBITDA. In any event, the sheer size of the deal says a lot about what two heavyweight investors are seeing in fresh potential for the beleaguered sector in the medium term, at least.
Both companies know Extended Stay America well, with Starwood buying an 8.5% stake just last year, while Blackstone has actually owned the company - TWICE - having last taken it public in 2013. Blackstone has publicly declared travel, leisure and hospitality to be one of its major investment themes. Starwood's CEO Barry Sternlicht said in the JV's press statement that Extended Stay had "demonstrated resilience over the past year despite persistent challenges due to government lockdowns and travel restrictions."
While the extended stay sector operates on different metrics to classical hotels, business or leisure, due to its hybrid nature, it is true that hotel REITs have rebounded strongly in the USA since the announcement and subsequent rollouts of the vaccines, with many stocks having nearly doubled in price since November last year.
So far in Europe there has been little in the way of distressed hotel dealflow, although anecdotally we hear there is plenty of investment capital waiting for the right opportunities. There have been few forced sales so far, apart from some sale-and-leaseback deal or the hiving off of non-strategic assets arising from situations which were already going bad before COVID. One recent deal was Invesco Real Estate’s new tie-up with hotel owner Westmont Hospitality Group for a portfolio of 13 hotels in Germany and the Netherlands after the incumbent tenant and Invesco's co-investment partner, Event Holdings, filed for insolvency with the portfolio.
A recent report from UK hotel advisory group HVS estimates that European hotels have fallen up to 15% in value over the last twelve months, as the Revpar collapsed by 70% compared to the prior year 2019. Mattia Cavenati, associate at HVS London, said valuation write-downs were of the order of 5-15%, with higher-grade hotels suffering more as group stays and conference gatherings disappeared.
Germany has probably suffered slightly less, but there is still plenty of devaluation. In transaction terms, Germany saw about €500m of hotel deals in the first quarter of 2021, half the volume of 2019 at the same time which was over €1bn, and 15% below the rolling 10-year average. But it was still 44% higher than in the last quarter of last year, indicating a willingness to trade, at least.
René Schappner, head of hotels at brokers Colliers, said recently, "High-quality hotels in good locations with solvent operators, and in the best cases with other possiblities for alternative uses, are still very tradeable on the market. Otherwise we're looking at price reductions of up to 25% on the market." Price visibility is still poor, however, with many owners not yet forced into fire sales. Heidi Schmidtke, managing director of JLL Hotels & Hospitality Group said recently that her group was seeing no shortage of interest or capital looking for opportunities in the sector, but people aren't prepared to sell at just any price. "There is also a heightened degree of off-market activity, which enables owners to test the waters without attracting too much attention and giving the impression of being distressed."
One hotel company that is facing up to the reality of its situation is the Maritim Hotel group, headquarted in Bad Salzuflen in North Rhine-Westphalia. A report from Deutsche Presse Agentur (dpa) cited owner Monika Gommolia saying the family-run business was facing a loss of liquidity of €140m, and was being forced to sell off some hotel assets. The group owns and runs 40 hotels, of which 29 are in Germany. Last year saw a collapse of 90% in turnover, with the group unable to get more than €2m in state support.
At a press gathering of several mid-sized German hotel groups last week, the news of Maritim's forthcoming forced sales was being taken badly by the other hotel groups present. A big concern was the lack of government support for the embattled businesses. All were demanding that the German government do more to save them from their current predicament. Dirk Iserlohe, supervisory board member at Dorint Hotel Group, said the hospitality industry was the biggest victim of the state-imposed lockdowns, and there was nothing like adequate compensation for the hotel closures, with promised help capped at far too low a level and even then not paid out in time. (He cited his own group's non-receipt of December payouts, and that he's been waiting for months for €10m.). Even with state help, Dorint will have lost €30m last year, and this year will be the same, he said.
Other hotel groups speaking at the gathering were Lindner Hotels, H-Hotels, Dormero Group and Althoff Hotels - and all had the same grievances. They were all eating up their reserves, were faced with major investment hurdles to ensure hygienic compliance, and would be paying off interest on fresh loans for years to come.
It is well known that groups like B&B, Motel One and Premier Inn have well-padded war-chests to take advantage of bargains when weakened competitors are forced to concede good properties and locations.
One investor ready to put its foot back into the market is fund giant Union Investment, which has just bought a hotel project development in Stuttgart's Europaviertel on a forward funding deal for €137m. The 21-storey landmark tower development, scheduled for completion in December 2021 will be allocated to the group's UniImmo:Deutschland open-ended mutual fund. The seller is STRABAG Real Estate. The operators will be Adina Hotels, with its apart-hotel concept, and Premier Inn, with its premium budget hotel offering.
Interestingly, Adina Hotels, which will occupy floors 7-21 of the new hotel complex, have seen all their European hotels remaining open without exception throughout the pandemic, and have been solidly booked throughout, says the company. With its apartment-hotel concept, it's close to the model operated by Extended Stay America, subject of the Blackstone/Starwood joint-venture takeover, as described above.
