Queensgate’s Generator buy marks new hotel-hostel era
 
Queensgate’s Generator buy marks new hotel-hostel era
14 MARCH 2017 9:26 AM

Queensgate Investments has agreed to buy the pioneering hotel-hostel brand Generator in a deal that sources said constitutes a second era for the fledging segment amid expansion plans into Asia and the Americas.

LONDON—Generator, the hostel-hotel hybrid that put the sector on the map when purchased by Patron Capital in 2008 for an undisclosed amount, now is being sold to private equity firm Queensgate Investments for €450 million ($480 million) in a deal expected to close in May.

The deal includes Invesco Real Estate’s 2014 investment in Generator, which business consultancy HVS Hodges Ward Elliott said constitutes a 23% stake, for €60 million ($64 million).

The deal marks the second era for Generator and the entire hostel-hotel segment, sources told Hotel News Now.

According to a press release regarding the sale, Generator has annual current revenues of approximately €70 million ($70.7 million).

Jason Kow, CEO of Queensgate Investments, said in a note emailed to Hotel News Now that “Queensgate intends to work with incumbent management to optimize customer experience and invest in excess of €300 million into adding more hostel assets. We are currently exploring multiple options for expansion.”

Kow is forthright in his expectations for Generator.

“The Generator hostel product … can now invade budget hotel and lifestyle hotel territory,” he said. He added that in his estimation, the hostel market is the fastest-growing segment in the hospitality sector, helped by cool social spaces, capital city locations, 24-hour security and an emerging millennial customer base.

Sources hinted that the upside for Queensgate will be expansion for the brand in Asia and the Americas.

Patron and Invesco’s time is now done at Generator, but Keith Breslauer, managing director at Patron Capital, told Hotel News Now he is proud of the nearly 10-year period the firm has held the Generator portfolio—a period he acknowledged was far longer than its normal holding pattern of about four to five years.

“When we set up Patron, the general private equity pattern was to buy distressed assets, strip them and sell on, but in the 18 years of our history we’re very proud that we’ve not done that. We have always grown, built platforms and then sold them, usually to strategic buyers or a (private equity) shop, who knows what to do with it,” Breslauer said.

“What also happened when we bought Generator in 2008 was the (economic) crisis. The big difference in what we do in private equity is that we do not borrow a lot of money, so when those times came we did not want to give it up. I would say we did pretty well, and our long investment has been a very good commentary on doing the right thing for our investors,” he said.

Breslauer said Invesco’s involvement had been a strategic step in Patron’s vision for Generator.

“At that time, we could not further finance Generator at the local level via individual banks in Ireland (and) France. We needed capital across the platform, and we could not do that. We needed to find it in the traditional debt sense, and Invesco provided good mezzanine debt,” he added.

Marc Socker, managing director of Invesco’s hotel fund management team, said Invesco had been “the first institutional investor into the hostel sector … clearly seen as a first mover in what has now become a very active and liquid sector.”

Harry Douglass, associate director at advisory firm HVS, underlined the importance of Invesco’s cash, which he said was the “first time a second unconnected party had co-investing in the hostel business.”

Queensgate’s takeover is as important, according to Douglass.

“It’s being viewed as a barometer for institutional investment. It is having a huge fanfare, although what seems to have taken place with much less exposure is the acquisition of A&O Hotels & Hostels by (private equity company) TPG (two months ago),” Douglass said.

“Two private equity organizations now are owners of hybrid hotel-hostel groups based in Europe, and both have potentially huge markets to capture in all regions. This latest sale adds to the institutional acceptance of this asset class,” Douglass said.

Generator has 14 assets—12 in operation and two under development—that are predominantly freehold assets with a total of 8,639 beds in Amsterdam, Barcelona, Berlin (two properties), Copenhagen, Dublin, Hamburg, London, Madrid, Miami, Paris, Rome, Stockholm and Venice.

A spokesperson at Generator said the company declined to comment. In January, Generator CEO Fredrik Korallus spoke to Hotel News Now about the profitability of the sector, and its growth plans outside of Europe. The brand’s first U.S. hostel will open in Miami, Florida, this year.

Queensgate upside
Breslauer said he is sure the sale will be a win-win for both sides, but is not sure what Queensgate’s next step with Generator will be.

“Generator is no longer a collection of cheap real estate turned into assets. It now has to make major decisions. What is the next step? Where do you go now?” he said.

“Now what is interesting is that you could argue many of the hostel assets we bought have no alterative use going forward, although it is obvious hostels are good in the eyes of the world.”

When Patron Capital—private equity—bought Generator, it was considered the first deal in the market in which hostels became a viable asset class, or at least had grown up, sources said.

“The hotel sector always is interesting, with the major question being what type of hotels do you buy and at what time of the cycle. What remains interesting for a group like ourselves is that the industry remains volatile and thus provides opportunities,” Breslauer said.

As an example, Breslauer pointed out the rise in average daily rates over the last few years in the regional United Kingdom, which he said few people had predicted.

HVS’ Douglass said the rumor is that Queensgate sees a gap in the market in Asia and China. But in conversations he had had with Chinese travelers at the recent ITB Berlin tourism trade show, it was not evident where Generator will fit in in a market already well-served by competitively priced budget and economy properties, he said.

“Chinese travelers I spoke to could not see the benefits of a Generator, but of course they do not know (the brand) yet,” Douglass said.

“That is Asia in isolation, though,” he added. “There is Europe, too, and increasingly the U.S. … Generator could capture midmarket demand at the same rate, and the value of the brand will lead Queensgate to expect some kind of (revenue per available room) premium, which is not an unreasonable expectation.”

Douglass said Queensgate’s strategy for return on investment might be less aggressive than that of some private equity.

Recently, a delegation from hotel-hostel brands, including Generator, visited New York City, where they “made some progress for the sector,” he said. “New York still has some archaic laws about hostels dating from the 19th century that were put in place to stop overcrowding.”

“Overall, it is exciting, with lots to keep them busy. Who would not want to be involved in Generator’s expansion in Asia and the Americas?” Douglass added.

Patron Capital’s last major portfolio sale was in 2015 when it exited Jupiter Hotels Limited, the lion’s share of which comprised 26 AccorHotels’ Mercure-branded hotels to a Thai consortium for approximately $244 million.

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