Execs on how deals reshaped two European portfolios
Execs on how deals reshaped two European portfolios
14 MARCH 2019 8:29 AM

Executives from Starwood Capital and Ireland-based Tifco Hotels explained how their portfolios have evolved during a session at the recent International Hotel Investment Forum.

BERLIN—As attendees prepared to hear tips on revenue management at an International Hotel Investment Forum session titled “Asset management: What’s it worth?” two industry stalwarts instead provided in-depth analyses of two notable deals.

Rastko Djordjevic, EVP of asset management services for Europe, Middle East and Africa at JLL’s Hotels & Hospitality Europe, said the deals by Starwood Capital Group and Tifco Hotel Group displayed “innovative solutions to maximize return on investment and grow value.”

How Starwood Capital developed Principal and worked with Covivio
Cody Bradshaw, managing director and head of international hotels at Starwood Capital Group, described the turnaround and sale of a series of buys comprising three United Kingdom brands—De Vere Group, Four Pillars Hotels and Principal Hayley Group.

“In 2012 we were all told a double-digit recession was heading our way,” he said. “I was nervous going to our (investment committee) saying we’re buying a U.K. portfolio.”

Bradshaw said asset management has been crucial to Starwood Capital’s strategy even during the acquisition process, which coincided with U.K. banks being among the first globally to sort through bad assets.

“We took the plunge. We knew it was a great deal, and we liked that it was mostly urban assets,” he said. “We looked on it as the ability to buy the tail at next to nothing and then develop the core. We were not the highest bidder, but we did enough homework to convince the seller. Then we later sold the tail.

“Each portfolio, inclusive of management and brand, was purchased at a highly attractive cap rate and at a significant discount to replacement cost.”

Bradshaw said five properties were bolted on between 2015 and 2017, and 24 non-core properties from the portfolio were sold to local buyers that he said could secure value where Starwood Capital would not have had the time.

Those assets provided more than £200 million ($264 million) in gross proceeds. In addition, the initial deal resulted in £5 million ($6.6 million) in synergies, £200 million ($264 million) of CapEx and two brands—Principal Hotels and a relaunched, slightly different De Vere Hotels.

Bradshaw said those non-core assets obtained a 6.3% trailing 12-month cap rate and 12.7 times trailing 12-month enterprise value-to-earnings before interest, tax, depreciation and amortization.

Five De Vere properties were closed last October in sale-leaseback deals for £117 million ($154.5 million), with any outstanding loans covered with £250 million ($330.1 million) of debt, Bradshaw said.

The evolution of Principal Hotels is a standout in the whole story.

“The Principal Hotels properties were neglected,” Bradshaw said. “Everyone knew these hotels as where you went for a cheap gala event, but they were all landmarks. What I am most proud of overall is reviving those hotels.”

Not everything went smoothly, Bradshaw said, who added the entire story “took a few years off my life, I think.”

“We went through several branding companies, and we made mistakes, with some comprised of hipsters in Shoreditch who had never worked before on hotels,” he said. “And F&B is so difficult to get right. We were persuaded to move a bar in one hotel, but when we saw a 50% drop in revenue, we moved it back. F&B consultants get it wrong a lot, but the Manchester Principal (hotel) saw £5 million ($6.6 million) in revenue in its first year.”

The first exit of the portfolio came in May 2018, when French real estate investment trust Foncière des Régions, now named Covivio, paid £858 million ($1.13 billion) for 14 Starwood-owned assets including 10 properties that were branded as Principal Hotels.

Bradshaw said it’s bittersweet to consider the possibility of the Principal brand name disappearing. Principal properties in London and Edinburgh have already been changed into InterContinental Hotels Group’s Kimpton Hotels & Restaurants properties, and 11 assets remaining with Starwood under the Principal name likely will operate under the De Vere flag.

Bradshaw said more consolidation opportunities in Europe are likely, but he sounded one warning.

“I see a different type of cash coming in,” Bradshaw said, who added he thought this was due to the split between OpCo and PropCo and investors being more accepting of lower yields.

The growth of Ireland’s Tifco Hotel Group
Enda O’Meara, managing director of Tifco Hotel Group, spoke about Ireland’s second-largest hotel operator developing hotels and becoming Travelodge (U.K.)’s sole operator in Ireland.

O’Meara said he had a connection with Bradshaw.

“I worked 30 years ago at The Russell,” O’Meara said, referring to the Russell Square Hotel, part of which became the Principal London and now is the Kimpton Fitzroy London Hotel.

A few years later, O’Meara started Tifco.

“I founded it 21 years ago, with two employees, the first one being me,” O’Meara said.

The hotel firm began it latest repositioning and transition in May 2014, O’Meara said, when Goldman Sachs invested in Tifco and acquired its debt, which it converted into equity in December 2014.

“We since have pursued a disciplined and targeted acquisition strategy, focusing on sizeable, freehold and internationally flagged and franchised 3- and 4-star hotels, predominantly in Dublin,” O’Meara said.

Establishing an integrated owner-operator-developer platform, Tifco has opened 16 hotels over three years to grow its portfolio to 22 hotels and invested €150 million ($169.6 million) in CapEx.

“Our three core strategies are refurbishment and product development, brand-profile development and revenue-management strategy development,” O’Meara added.

The firm also became the sole developer and operator for the brand Travelodge (U.K.) in Ireland. In December 2016, Tifco bought all 12 Travelodge hotels in Ireland for €45.7 million ($51.7 million).

“Ireland was, perhaps still is, very unbranded in the 2- and 3-star hotel market. There are approximately 700 hotels in Ireland, and 97% is unbranded,” O’Meara said.

The company also bought the Hilton Dublin Kilmainham off-market and then invested €1.4 million ($1.6 million) in CapEx, and also acquired the upcoming Hard Rock Hotel Dublin.

“(The Hard Rock) faces City Hall, but it was a rundown hotel,” O’Meara said. “It is to open in the fourth quarter of 2019.”

And now another era begins, O’Meara said. In late 2018, Goldman Sachs sold Tifco to New York City-based Apollo Global Management for an undisclosed sum.

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