• Asset managers opt for co-investing

Freo Group, the European real estate investment and asset management business, has acquired a 25% stake in management group Michels & Taylor for an undisclosed fee.
The deal allows M&T closer participation in deals, with the group telling Hotel Analyst that it expected to see greater alignment as a result.
Andrew Hunter, managing director, Freo Management (UK), said: “Freo believes that expertise in managed real estate is critical for future development and asset management. Hotel operations is a very important part of this and we are privileged to be able to enter into a strategic partnership with the class leading group of M&T. This relationship will open up significant opportunities for Freo and its investment partners across the full value chain of hotels, from initial feasibility through delivery to long term operation.”
Hugh Taylor, M&T CEO, told Hotel Analyst: “This means that Freo are effectively able to have a hotel platform across Europe to help with their investment strategies and we can utilise that to be part of the investment. We wanted to remain independent, we’re looking to develop our relationship with our investor clients, through acquisition to operations and exit”. Taylor described the model as close to that of Westmont, taking a small equity stake “for interest and alignment and we can control the deals. It’s important to us that nothing changes with the platform – but now we can participate.
“We’ve always been in the deals business, since before M&T and since we set up M&T all our clients have been investors. The asset management business is the smallest part of the business now. We’re a one-stop shop for investors – we never thought that the asset management model would be enough – there aren’t enough fees.”
Commenting on the shifting profile of the hotel sector, Taylor said: “Our company wouldn’t have been as successful as it had been had owners not divested their assets. The investors have become a very important part of the industry, but don’t always have the depth of knowledge and we’ve taken it one step further.”
As Taylor pointed out that M&T was not solely an asset-manager, the sector has seen a growing number of groups seeking to provide more comprehensive services to investors, most recently with the launch of Arbireo Hospitality earlier this year. The platform was created through a joint venture between Arbireo Capital and developer and operator Value One.
Arbireo Capital, which has EUR360m of assets under management and a projected investment volume of EUR500m, said that the platform would cover most hotel-related businesses, from sourcing and acquisition to structuring and active asset management, as well as exit strategies.
Theodor Kubak, managing partner, Arbireo Hospitality, said: “The cooperation is not just exciting but also simply makes sense for everyone involved. The synergies achieved by linking development, operation, asset and investment management are substantial. This way we can provide better products and services both to hotel guests as well as to investors.”
He told Hotel Analyst: “It is important to have a platform which covers the value chain of the hotel industry. We have the investment, we have the management, and the possibility to operate hotels. We are working with a developer with long and outstanding international experience, who we have worked with them on a number of different enterprises.”
Investors have also been getting deeper into operating, with Aprirose launching its own hotel operating platform. CEO Tim Shearman has experience of the model, having been VP, asset management for Westmont Hospitality Group with responsibility for European hotels.
Shearman said: “The creation of our own hotel operating platform is an exciting new development in the growth and evolution of our hotel portfolio as we have further expansion plans nationally and internationally. It demonstrates our long-term commitment to the sector and will allow us to recruit industry leading talent and drive value for our clients. By initially working with the experienced Kew Green Hotels team it will allow us to hit the ground running and offer a seamless and best-in-class service to our customers.”
Aprirose bolstered its hotels team at the end of last year with the appointments of Kym Kapadia as chief commercial officer, joining from M&T, where she was a founding partner and board member for 11 years.

HA Perspective [by Katherine Doggrell]: As Taylor said, asset managing alone doesn’t provide enough fees-based joy – I paraphrase – and a growing company such as M&T needs to do more and in more areas throughout the investors’ journey. And now it’s an investor itself.
The blurring of the lines in the multi-layered stack that now forms the modern branded hotel should come as no shock as investors have educated themselves about this increasingly-mainstream asset class and seen that there is plenty to be gained from getting deeper into operations, particularly as yields tighten.
With everyone seeking deeper participation, what does this mean for the brands, which have sought to distance themselves from the real estate of hotels and, increasingly, from their operation? Should a slowdown threaten their pipelines, will they seek to increase their holdings again or will we see more of the panacea of the collection and conversion brands?

Additional comment [by Andrew Sangster]: I’m not sure that asset management is unviable as a discipline economically. But it is clear that gaining exposure to the assets being managed is going to deliver a bigger scale business.
And it makes a lot of sense. After all, if you’re expert enough to look after the investments of others, why wouldn’t you have a little bit of your own capital in the mix as well? The business schools would call this “alignment of interests” and M&T have clearly been reading the right textbooks.
The problem though is how do you ringfence your fees from asset management from the returns you receive from your exposure to the asset being managed? There is no easy answer. And it is perhaps a good thing that there remain dedicated asset managers who are in business to earn a fee rather than become co-investors. This at least gives a benchmark for where fees should be set.
More broadly, there is a clear trend for real estate investors to gain greater exposure to the operating company that supports the rental payments. This is being driven by the hunt for yield which is encouraging investors to move up the risk curve.
There is also a defensive move, alongside the offensive one of seeking better returns, and that is the need of real estate investors to understand more fully how the rent will be paid. And if you are taking the time and trouble to do this, you might as well share in the upside too.

Share →