COMMENT While there have been increased levels of hotel transaction activity in the past few months, the deal valve is still quite tight.
This is likely to change in Q4 2021, when more owners will need to reach out for liquidity. With less government and bank support and a challenging trading environment – particularly for corporate and MICE hotels – there will be increasing levels of cash burn.
Many of the recent hotel deals have been instigated by owners for liquidity purposes (Melia Hotels and Minor International are examples) and most of these have been deals on the sellers’ terms.
These owner/operators have timed it well. The pricing levels have been robust through competitive or off-market bidding, and the structure of deals has enabled sellers to retain operational control through lease or management backs.
For hotels that would never normally be sold, owner/operators have been able to retain their modesty by keeping hold of the operation for another generation and raising much-needed liquidity.
The chief executive of Minor described its sale-and-leaseback of two Tivoli hotels in Portugal as a “strategic asset rotation”, while Melia’s chief executive was more direct on his company’s recent portfolio sale: “We are conducting asset sales to increase liquidity.”
Asset enhancement
These types of acquisitions would typically be described as “core” or “dry”, but the majority of investors, particularly private equity groups, are still waiting for core+ or value-add transactions where they can deploy their full range of skills: restructuring, business transformation, asset management, rebranding, repositioning etc.
In short, their aim is to identify and enhance assets and operations in any way they can to optimise returns for their investors. These types of deals were prolific once transactions started happening following the global financial crisis, particularly for larger platforms that presented a multitude of angles and future exit options for the larger PE players.
These are the types of deals that cash-heavy investors desperately want today, and which is why there is a “wall of capital” lined up for hotel investment – but the golden elixir is proving elusive, not just in Europe but globally.
Deal difficulties
Perhaps, as we get deeper into the year, it will be investors calling the shots rather than sellers, and strategic asset rotations will become distressed sales. Time will tell, but even now it is not all plain sailing. Some deals have been sticking or falling over, and anecdotally in a Spanish hotel portfolio that is currently in the market, the sellers have been very upfront in offering vendor financing or deferred payment to reflect the challenges in raising debt in the current environment.
For the time being at least, it is heartening to have seen a steady increase in hotel transactions and to see recovering trading performance, particularly in the drive-to leisure markets. The hotel industry is beginning to have purpose again, but is on high alert for the bumps in the road ahead.
Tom Oakden is managing director of Hilltop Hospitality Advisors
