Hotel Owners Share Investment Strategies

　　BERLIN—A successful relationship between owner and operator should be characterized by a bit of “healthy tension,” according to Mike Goodson, head of hospitality for sovereign debt fund the Abu Dhabi Investment Authority.

　　If there’s no tension, the owner isn’t doing his job. And if the tension turns unhealthy “that’s not so good” either, he said.

　　Finding that perfect middle ground is challenging but not impossible, especially as the relationship between the two parties continues to evolve in the global hotel industry, concluded panelists during a general session titled “Working with professional owners to ensure long-term ROI” during the International Hotel Investment Forum in Berlin.

　　In the past, owners were more standoffish, the panelists agreed. But today, they’re taking a more proactive, collaborative approach to their investments.

　　Frank Billand, member of the management board for Union Investment Real Estate GmbH, an institutional player, said the company has a dedicated team that meets with owned hotels exclusively to keep tabs on operating metrics and performance.

　　With leases that typically run for 20 years, the company wants to ensure its getting the most of its investment, he said.

　　Owner motivation

　　Not every owner has the same motivation, the panelists said. For some properties, the main reason to hold is because of the cash flow, said Ed Wojakowski, group CEO and executive chairman of The Tonstate Group.

　　“For other hotels, it’s a matter of prestige,” he said. “It’s very much because of their uniqueness. In that case, it’s like a piece of art. People like to own them to say they have this hotel and like to associate themselves with it.”

　　The Tonstate Group, a family-owned portfolio, views each asset as a combination of the two, Wojakowski said. As such, the company is willing to invest in properties but isn’t afraid to milk them to generate income. It’s when you fall into either extreme that you risk diluting the value of the asset, he said.

　　Billand has grown cautious of trophy assets in general, especially as so many operators handed over control of a property during the depths of the downturn. That’s one of the reasons the group shifted its focus from the 4-star sector to leases in budget hotels.

　　“We simply see how successful these operators are operating. Even under lease agreements, which many operators are hating, they make a lot of money with these kinds of hotels, centrally located in major German cities, not moving into major European countries,” Billand said.

　　Another concern involves the blurring line between 4-star and 3-star segments. Some 3-star hotel rooms are as nice or nicer than 4-star accommodations, Wojakowski said, though “it’s not necessarily accurate to say that the 3-star market will eat into the 4-star market.”

　　Bringing value

　　At ADIA, Goodson often brings value simply by building. The group’s unique selling proposition is cash, he said. ADIA is one of the few companies that can build a property where and when it makes sense but is just as willing to invest mezzanine debt, equity or other financing.

　　Last year, for example, ADIA invested in a large, undisclosed, limited-service portfolio in the U.S. in a preferred equity structure, he said. The group also is building two hotels and doing major renovations on several others.

　　“We start with a hypothetical ‘hold’ as we do underwriting,” Goodson said of the group’s investment strategy. ADIA looks at each asset every day as if it’s buying it again and holds until it thinks someone is willing to pay more now than what it’s worth to hold, he added.

　　When eyeing potential investments, ADIA starts with the risk, he said.

　　That led to four investments and one sale during 2011, Goodson said. “We tend to look at things starting with the risk, pricing the risk, and if the deal makes sense to us, taking a look at all parameters, we will progress and advance it.”

　　However, good deals are hard to come by, the panelists agreed. Sellers aren’t selling and buyers aren’t willing to pay the asking prices, Wojakowski added.

　　“I think we’re in the early days most everywhere in the world. I do think it’s a good time to buy. But I do agree that there are not a lot of opportunities out there,” Goodson said. The opportunities that do exist primarily are distressed situations where the owner is forced to sell.

　　That’s one of the reasons why the “big six” hotel brands are showing a bit more flexibility in their expansion strategies, the panelists said.

　　Whereas those chains were opposed to long-term leases in the past, they’re now willing to commit to some hybrid scenarios, Billand said.

　　The “big six” also are more prone to throwing equity behind development to bolster distribution in key markets, Goodson said.

　　“What you’re seeing, though, is that for the most part what they’re doing is using their balance sheets to secure distribution when they need it,” he said, adding the next step is to get a player such as ADIA to buy it.

　　Whether the bid depends on the hotel, the panelists agreed every good property will find a good owner.

　　“If you run hotels properly, if you control them properly, it is very, very difficult to lose money,” Wojakowski said.