• StarCap to kick start Yotel

Starwood Capital is to invest USD250m in Yotel, giving it a 30% stake in the group.

The company will now pursue expansion in North America, Asia and Europe, as well as the renovation of existing properties.

Barry Sternlicht, chairman & CEO, Starwood Capital, said: “This strategic partnership and investment highlights Starwood’s longstanding passion and commitment to invest in innovative hospitality platforms. Yotel is an exciting brand focused on technology, smart design and a distinct guest experience at an affordable price, which is the right strategy amid the current wave of digital disruption.

“Yotel has global appeal and can be easily scaled up with key strategic acquisitions and developments in desired city centre and airport locations.”

The company currently has a pipeline of 15 hotels in various stages of development. Starwood Capital has already secured city centre sites in Edinburgh, Glasgow and Amsterdam which are expected to open as Yotels by 2019.

Cody Bradshaw, managing director, head of European Hotels, Starwood Capital and Sarah Broughton, SVP, Starwood Capital Group will join the Yotel board, alongside the Al-Bahar Group, IFA Hotels & Resorts, United Investment Portugal and Kuwait Real Estate Company, which jointly own 65% stake in the company.

Yotel CEO Hubert Viriot told Hotel Analyst: “We always knew that at some point we would have to validate our concept. We needed to have an institutional investor to help us move forwards. We’re constantly on the lookout for new opportunities, we had been in touch with Starwood Capital over specific opportunities and we found one in Edinburgh which allowed us to get to know each other and we came to the conclusion that we should work together and this led to a greater discussion.

“The majority shareholders have been there at the beginning, through the difficult times and through the more successful times. For a brand like ours it’s important to remain independent and in the medium to long term that will be how we stay. We have strengthened our balance sheet significantly.

“We think that now, with very large partners, we have a great concept, which has already been validates around the world  – now it’s time to get married and grow that platform and that segment around the world.”

The company is taking a nuanced approach to its expansion. Viriot said: “We are an asset-light management company, the best way for us to work is through management agreements and Starwood Capital appreciates this. Their investment is in two layers; it will strengthen our balance sheet and the rest is to acquire real estate – both of these investments will be held on separate balance sheets. The intent is to fuel our growth and to identify projects which fit the brand. It could be a conversion of hotels or offices, or it could be a new build.

“We are looking at North America, Asia and Europe, we’re attracted by capital cities, hubs, global gateways. It’s the same areas of interest as Starwood Capital, we’re all looking for the same thing. We’re about to announce a number of new deals, in the UK, Amsterdam, Portugal, Spain and France. We are also excited about the opportunities in Australia and Japan – the latter has very low brand penetration. Australia has very high barriers to entry, which is why it’s useful to have Starwood Capital and our other partners to work with.”

The company describes itself as affordable luxury and has faced criticism in the past for what were perceived as high fit-out costs. Viriot said: “There is a common misunderstanding that we’re a budget hotel. Our focus is on gateway cities, which has a cost implication. What is going to happen is that our pipeline is going to be predominantly in Europe and this will give us a better strategy to reduce cost and modularise our construction. A lot of elements, provided we have sufficient volume, can be modularised.”

In joining forces with Starwood Capital, the company is bringing itself closer to Hotel Tonight, in which Sternlicht has an investment. Yotel’s airport model currently sees 85% direct bookings, its city sites less so.

Viriot said: “We are building on our capabilities to improve bookings. We had already gone down the line of exploring the potential with Hotel Tonight. The fact that the chairman of Starwood Capital has a personal investment might help.

“We remain an independent company, but Starwood Capital has a vested interest in helping us grow.”

HA Perspective [by Katherine Doggrell]: And grow it seems it, after more than a decade, just might. One of the primary points of concern at Yotel relates to its longevity in the marketplace – some of those hotels have been around for a while, something which is now being addressed by the company. The owner at the New York property has agreed a soft refurb, starting next month and taking 18 months, while a refurb of the airport hotels, where it all began for the group, is due, also within the next 18 months.

And now onwards, to try and create the scale from which true brands are created, but, after such a long gestation, what does the Yotel brand really mean? And haven’t flags such as Citizen M leapfrogged them to do it better? Viriot told us that in the US, the company is building a corporate following, which he saw as a vindication of its branding and culture, with a strong following from technology firms. An area previously untapped by the company, which could add to this fresh impetus.

Viriot was determined that the brand worked best as an independent entity, taking as its inspiration airlines rather than the traditional hotel and we will be interested to see whether, once at scale, buyers do not come sniffing around. Yotel started life as an oddity and what the global operators are currently on the hunt for is something out of the ordinary to add depth and choice to their ever-expanding portfolios. It is unlikely to be alone for long.

Additional comment [by Andrew Sangster]: At last week’s Hotel Investment Conference Europe, now owned by Northstar Travel Group, Starwood Capital’s Cody Bradshaw talked about his firm’s investment in Yotel. “There is still confusion about what Yotel is. We believe it is going to get another pop,” he said.

One of the big appeals for Bradshaw was what he called the “arbitrage on the traditional key count”. So for example the George Street site in Edinburgh can have 280 rooms rather than the 170 that would be possible in a more traditional hotel.

This means that there is a much higher return on cost, argued Bradshaw. It also opens up possibilities such as using functionally obsolete office buildings.

It remains to be seen whether Yotel will be able to deliver on this vision. A key challenge will be getting room fit out costs under control. While it is certainly true that the brand can fit more rooms in a given floor plate, if each room costs the same as a conventional hotel room – maybe even more given the high-tech finishes – then the return on cost starts looking less attractive. It could be a case of real estate vision meets operational reality.

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