• Call for shared risk grows

Sobriety and responsibility are not just the watchwords for the New Year's new intake at the gym this week, as a new era marking a return to an old era has been called for by Internos Real Investors.

The group is looking to operators to shoulder some of the risk after the boom years which followed the bricks and brains split and saw management contracts move into favour and an equal share of exposure fall out.

The call is a familiar one to anyone attending any conferences featuring bankers in any volume since the start of the downturn. They are eager to see skin in the game in the form of guarantees, loans, or even equity stakes taken by brands looking to hoist their flags at a rapid rate.

According to Internos' Schäfer-Surén,  partner and head of Internos' hotel and leisure division: "The trend for hotel groups to disengage from the capital side of the business was neither welcome nor healthy, for it led to an abdication of accountability and loss of expertise and control. For hotel groups to grow there needs to be a greater alignment."

He further told Hotel Analyst: "It used to be commonplace that the banks were asking for the hotel operator to provide a loan or guarantee or take a stake. They would say: ‘If you want our money, put some money on the table'. Then came the covenant-light loans.

"In today's world where capital is constrained, it's more difficult to grow and convince people to grow with you if you don't put something up yourself, whether cash, providing a loan, or making your fees relate to your results.

"It's very difficult to champion an industry that you don't want to invest in. It's a bit of a contradiction: ‘Let's grow quickly, but with your money, not mine'."

In a paper released by the group, Internos has predicted an end to asset-light as investors demand more capital commitment, in line with the thinking prevalent before the big property sell-off in the years following the Millennium.

Looking back over the evolution of the hotel sector, Schäfer-Surén said: "When you put it into historic perspective, Holiday Inn started branding in the 1950s and 60s and they came up with the idea of management contracts and franchising, because it was a capital intensive business. However, initially they owned them.

"Since then the industry has grown with investment partners providing some of the capital, be it equity or debt. Traditionally hotel chains had leases or real interests in key destinations, the anchoring blocks of the chains. In high risk countries you didn't want to take the risk, so you gave them the benefit of the brand in exchange for fees.

"Asset-light doesn't work in today's world. The big chains are not known for their cost control. They all talk about how they have the highest revpar, well what I care about its profit par. As an investment manager I want the best return on investment."

Taking a greater cut of the risk is likely to be of less interest to the listed players, Schäfer-Surén conceded, where, despite having greater to access to capital because through listing, the short-term results' focus and new accounting rules like IAS17 of the market does not suit the investment.

But he sees an evolution towards innovative forms of leases and management contracts allowing operators to commit yet in a more acceptable way to listed hotel groups under future reporting and accounting requirements.

Internos has identified in particular the branded three and four star segment, which it says has performed more robustly during the downturn. The sector is one typically favoured by Schäfer-Surén's former employer, Invesco Real Estate, where he was head of hotel and leisure fund management and was responsible for founding the hotel and leisure fund management business.

Invesco has acquired properties on long leases that are mid-market, modern hotels near city centres, airports and convention centres in the Euro zone, with brand name operators.


HA Perspective: There is no question that brand owners and hotel operators are being asked to put more into deals. But it is too early to call an end to asset light.

Operators remain focused on fees rather than ownership and, for the quoted chains and hope-to-be-quoted-at-some-point chains, it is highly unlikely they will fully embrace direct ownership again.

What there will be more of is short-term ownership participation. Hotel Analyst has previously highlighted Hilton's move to provide mezzanine financing. Similar moves can be expected from most operators, be it mezzanine, key money or guarantees.

But the emphasis will remain on what Marriott describes as "capital recycling". Cash will be used to secure important sites and flags and then, in turn, the property interests in these hotels will be sold on to investors.

For the launch of new brands, this is particularly prevalent: Witness Marriott's investment in London with the Berners for its Edition brand or IHG's use of its balance sheet for its Indigo in San Diego.

By and large, however, operators will want to stick to a capital light structure for the overwhelming bulk of their deals. And they will want a clear exit strategy for any ownership position they take.

In the meantime, the current pressure will at least better terms are increasingly available for investment partners.

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