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GLOBAL HOTEL
NETWORK (SM) REPORT
Hotel
Financing Trends in Europe |
This week's GLOBAL
HOTEL NETWORK (SM) REPORT provides an outlook on Hotel
Financing Trends in Europe.
Stephen Potel, M.A (Oxon) F.R.I.C.S. Director InterBank Capital Partners
Ltd. (London), writes:
One of the most important recent trends in the European hotel financing
world over the last year is the increased interest from the larger funds
and particularly from banks to participate with equity into the hotel
and leisure sector. Until recently the investment funds have shown a
very limited appetite for investing in hotel assets and most finance had
to be raised the traditional way, namely through senior mortgage debt or
corporate bonds and -for the public listed companies – equity issues.
So, gone appear to be the days when banks made loans and investors
invested equity. "Nowadays, lenders that used to tiptoe quietly
into mezzanine territory (calling it quasi-debt or quasi-equity
depending on their credit committees) are boldly crossing over into
fully fledged equity investment" says Chris Eddis, Managing
Director of Mornington Capital ltd.
“But that’s not what banks do!” exclaims one prominent English
banker, with expertise in the hotel sector. Well, they have been doing
precisely that for many years in other countries, such as Germany, so
it’s nothing new.
“And banks are there to help their customers, and this is a different
way of doing just that" says Trevor Ward, Managing Director of TRI
Hospitality.
In the USA, according to Brendan Sullivan, President of Interbank Brener
Hospitality, “It is almost unheard of for a commercial bank to make a
direct equity investment in a single asset, portfolio or hotel company.
In the States the traditional sources of equity are pension and
opportunity funds, investment banks such as Lehman Brothers, insurance
companies, high net worth individuals and the public markets.”
In Europe there are three main conduits for the commercial banks and
equity investment funds to put equity into this sector – Sale and
Leasebacks, Joint Ventures and Limited Partnerships.
Sale and Leaseback Transactions.
Although the sale and leaseback structure has been widely used for the
property sector for decades, it is only recently that this method has
been openly embraced by lending banks for the hotel sector. Already in
2001, over £2.5 billion has been invested through variations of the
Sale and Leaseback structure.
The most electrifying instance of the surge in sale and leasebacks was
shown by Nomura’s sale and leaseback of the major part of the Meridien
chain last month. The Royal Bank of Scotland invested £100 million of
equity in the portfolio and entered into a £1.25 billion sale and
leaseback of the hotel assets, thus enabling Nomura to win the hotly
contested public bid to acquire this chain. Shortly before this
transaction was the Hilton sale and leaseback, again backed by RBS,
where Hilton’s rent is based on 25% of turnover of which only just
over 4% is guaranteed. The new and interesting feature of these
transactions is that the linking of the lease rental obligations to
turnover, with a low guaranteed rent, enables RBS to benefit from the
above average growth prospects they see in the hospitality sector.
So, rather than just sit back and collect interest payments, the banks
that are wise to the hotel sector – as RBS and BoS certainly are -
appear to be merely benefiting from their insider knowledge of the
sector and familiarity of management, and in turn are rewarded by
earning returns on their own equity that are far in excess of those
earned from straight lending.
The downside from the operator’s point of view is that it is committed
to a 20 year lease obligation, which in the States would need to be
classified as a contingent liability on its balance sheet, plus such a
structure would result in the operator losing out on the capital growth
of the asset. Marriott makes a good job of hoarding the best of both
worlds by using its pure asset-owning company Host Marriott to enter, as
owner, into a straightforward management contract with its operating
company Marriott International, wherein there are no long term financial
obligations of either entity which might adversely affect the credit
rating of either.
Joint Ventures.
Joint Ventures present another means of achieving a similarly symbiotic
relationship between financing the “bricks” (property assets) and
incentivising the “brains” (management skills) of the hotel
business.
Typical recent examples of JV’s include the £140 million fund
established between Thistle Hotels and Morrison construction, or the
50/50 JV of MacDonald Hotels with Bank of Scotland to acquire Heritage
Hotels, where each side invested £31.25 million, in which instance the
bank also has the chance to provide senior debt (in this case, £210
million) , and the operator is able to book long term management fee
income. Other examples are the JV between Hanover International and Bank
of Scotland, called Tweed Investments, which has already acquired a
hotel in Manchester; Bank of Scotland last year also backed the Scotsman
Hotel Group, owner of the famous boutique hotel 42 The Calls in Leeds,
and current developer of the Scotsman Newspaper building in Edinburgh.
In this instance BOS have provided debt, equity and mezzanine finance.
RF Hotels, Sir Rocco Forte’s carefully groomed hotel company, has also
recently announced a £270 million JV with Bank of Scotland, with each
side investing £35 million, supported by a further £200 million of
debt (primarily from…. Bank of Scotland) in order to continue
expansion of the luxury chain of hotels across Europe. We await with
bated breath news of similar JVs, including that of a similar JV
involving Jarvis Hotels.
Limited Partnerships.
The relative lack of liquidity for buying and selling partnership
interests has not hampered the growth of LP’s in recent years. The
advantages of tax transparency, and the higher gearing that the LP
structure affords for the larger equity funds (who are not able to
borrow on their own balance sheet) often make this a more attractive
play for large equity investors than buying of a hotel company’s
shares on the stock market, particularly when the majority of hotel
companies trade at a discount to net asset value. The quality of the
management team is clearly of vital importance in this equation, as a
means of unlocking capital gains and equity value growth for the
underlying hotel portfolio. Marylebone Balfour Warwick and BAA Lynton
have pioneered this form of institutional co-investment, in the UK at
least. In particular, this method has enabled BAA Lynton to exploit the
value of its airport real estate – at the effort and with the
expertise of hotel partners - without having to relinquish control. BAA
Lynton’s Airports Hotel Partnership was launched in 1999, anchored by
a 30% passive investment from Scottish Widows, plus the Coal Industry
and the Shell Pension Fund. BAA has taken 10% and is the general
partner, while BAA Lynton acts as the investment manager. So far the
portfolio consists of 8 hotel assets, including three airport Hiltons
(at Heathrow, Stansted and Gatwick Airports), the Meridien at Gatwick
and a Travel Inn and Stakis at Edinburgh airport.
The Way Forward
The banks, especially Scottish lenders Bank of Scotland (which will
soon be further empowered with an even greater war chest after its
proposed merger with Halifax) and the Royal Bank of Scotland, appear to
have been neck and neck in leading the charge of lending banks into
hotel equity investment territory. One of the questions being asked by
lenders and potential borrowers sat south of the border is, is this just
a two horse race, or rather a sign that the floodgates are due to open
to larger and ever more innovative forays by banks into equity
investment? Stay tuned.
__________________________________________
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