London-based Patron Capital has reaped investment rewards with its broad, sometimes adventurous investment strategy. Now, with a new €1-billion fund, it remains bullish about hotels in the U.K. as it heads towards Brexit and Europe.
LONDON—Investment firm Patron Capital remains bullish on the United Kingdom—and mainland Europe—following U.K. voters’ decision to leave the European Union.
In the immediate aftermath of the Brexit vote, the company has raised a €949 million ($1.05 billion) Fund V to invest in real estate.
According to Camil Yazbeck, partner and investment director of hospitality at Patron, the firm represents €3.4 billion ($3.75 billion) of capital across several funds and related co-investments.
“Our new fund alone gives us the financial firepower to invest in around €3 billion ($3.3 billion) of assets,” he said. “We like hotels for many reasons. A stabilized hotel business, which is normally the end game for us after we have implemented the business plan, becomes a favored asset class for buyers, where the medium-term outlook for profit increases is normally strong. Hotels act as a hedge against inflation, and they provide diversification in a commercial real estate portfolio.”
Yazbeck said a main challenge is that hotels are management-dependent and—as they are not as straightforward as pure real estate—need focus at all times.
“But this is where we get in, acquire a hotel business and/or platform, add value, improve the cash flows through best-in-class management partners and (capital-expenditure) initiatives and stabilize the profit,” Yazbeck said.
Patron Capital, though, is keeping a wary eye on Brexit.
“Many believe that there will be some economic slowdown, and uncertainty looms further,” Yazbeck said. “The view is also that hotel transaction activity will likely slow down, but in the longer term, we are optimistic the U.K. will remain an attractive source of investment for global investors.”
He added that this week’s polarizing United States elections and the rise of nationalistic governments in some European countries are also concerns.
“The positives are that investor appetite for Europe remains high, where property markets are increasingly supported by global investment and reliant on healthy overseas economies in order to grow,” he said, “(but) weighing up how drastically things could change has never been more important.”
Yazbeck said Patron, which was founded in 1999, will continue to identify hotel opportunities with decent asset-management angles and make the most of significant distress and growth opportunities in Western Europe.
Fund V, which originally targeted €750 million ($828 million), attracted investors from nine countries and has already deployed €140 million ($154.6 million), including hotel assets, he said.
Patron’s exit strategy, he said, is to sell to investors who will continue to reposition the assets or to long-term holders who see hotels as yield cash-on-cash generating assets.
“(Our) strategy is to back local partners and management teams in growing their respective business, investing in property, hotels, corporate operating entities, credit-related businesses and debt-related instruments whose value is primarily supported by property assets and is typically driven by a liquidity event with one of the existing parties,” Yazbeck said.
“Our returns over our 18 years average 15%,” he said.
Patron’s 2007 investment in the then-fledgling Generator Hostels brand raised eyebrows, but the firm’s hunch has proved extremely beneficial, Yazbeck said.
Generator is “innovative, stylish, social, affordable … exactly what millennials want,” he said, and Patron continues to believe in the brand as a new generation nears the market.
“It is a boutique, experience-led offering that has become a dominant player in a fragmented hostel market,” Yazbeck said. “Most importantly we identified a niche that none of the hotel brands or others have looked at before. The upcoming Generation Z is more than one-sixth of the world’s population.”
Patron’s other investments—including 60 hotels in 13 countries—show similar broadmindedness and include standalone assets, such as Hotel Arts Barcelona; Luxury Family Hotels; an owner-franchise model with management company Jupiter Hotels 26 Mercure-branded properties; and InterContinental Hotels Group’s Staybridge Suites and Holiday Inn brands.
“We are agnostic and rely mainly on making sure that the alpha (management) get the job done, rather than relying on the beta (market improvements),” Yazbeck said.
To date, Patron has undertaken more than 100 transactions across 68 investments or programs—involving more than 65 million square feet of assets in 16 countries, he said.
Nearly two decades’ experience has taught Yazbeck some hard truths about the investment landscape.
“One of the key lessons learned was that as markets begin to bubble, we have found a mispricing in both liquidity risk and duration risk,” he said. “This becomes far more acute in generally thin markets, which historically (have) not had a lot of liquidity.”
He added this is a particular concern with pure ground-up development when there is planning conditionality.
“We simply have to estimate or guess the timing of local official response. This became an acute problem in Central Europe where individual development projects simply took three to four times longer than expected when we first made the investment,” Yazbeck said, adding such a scenario resulted in Patron reducing its exposure in such deals in that market.
Patron has strict criteria, he said, when considering at investment opportunities. That criteria demands:
- “Possess a clear vision, not only with what we are doing with the investment and the value add we will bring, but also to whom we exit to;
- “Look carefully at the revenue per available room/revenue generator index differential to market and cost benchmarking. If we see that the micro market is improving say +10%, the key question is always, are there any further asset-management opportunities, and can our local partner/hotel management do better than that?
- “Identify cost-improvement and revenue-generation measures, opportunities to reposition via targeted capital expenditure, more keys and management improvements; and
- “Have the right local partners to make sure interests are aligned, synergies and upside potential are understood, platforms and bolt-on deals can be created and environment performance and forecasts, cap rates and investment cycles all improved.”