Investment, consolidation target extended-stay sector
Investment, consolidation target extended-stay sector
24 JULY 2017 7:34 AM

Investors and consultants agree the extended-stay segment is primed for private equity investment and consolidation.

LONDON—The serviced apartments/aparthotels industry still has a ways to go in Europe, but increased involvement from institutional capital will soon yield consolidation, especially as serious investors begin to understand the upside on the operator side of the sector, sources said.

“In the last couple of years, professional money has joined the space, but the sector requires a seminal moment, along the lines of the hostel sector’s seminal moment when Queensgate Investments bought Generator, and with that will come the bulk of investment,” said Andrew Harrington, partner at business consultancy AHV Associates, during a panel titled, “Investment and finance: The institutional investor and private equity picture” at Serviced Apartment Summit Europe.

“Extended-stay/serviced-apartment units are hotel rooms with better margins, so what’s not to like?” Harrington added.

Dominic Seely, director of acquisitions at Westmont Hospitality—which is predominantly in the hotel space and has approximately 500 assets—agreed with Harrington.

“Serviced apartments need a little less operational complexity, but they are attractive,” Seely said. “What will be fundamental is the further building of scale.”

Harrington added the sector is attractive from a revenue prospective, with about 70% gross operating profit and a more diverse revenue stream.

Panelists agreed that it was the operator side of the sector that will attract private equity and institutional capital, so much so that they expect to see increased consolidation.

“Three to four years ago, we were asking if capital would come in. It now has,” said Max Thorne, managing director at business consultancy JLL.

Panelists said Oaktree Capital Management’s merger with SACO (The Serviced Apartment Company) in March 2015 was a huge boost for the sector, while Mapletree Investments’ February 2017 purchase of Oakwood Worldwide added more impetus.

Still, panelists said more education for lenders is required.

“Senior debt does not understand the sector’s OpCo side and asks for (earnings before interest, tax, depreciation and amortization) numbers that I feel are slightly off-kilter,” said Vedrana Bilanovic Riley, founder and CEO of Ciel Capital.

Harrington said investors’ familiarity with ideal extended-stay loan structures varies.

“Traditional investors ask why they can’t borrow at (London Interbank Offered Rate) +2%, but you simply can’t,” he said. “That said, there are a range of alternative investors that will give 5%, so go there if you do not want to waste a year looking at debt. Make a bang now and refinance in three years.”

Riley said that with the swirl of optimism evident for the sector, owners risk much if they consider selling too early.

“We see (the sector) as a huge opportunity as the competition is low,” Riley said.

And more investors are waiting to enter the pool.

“We will see private equity get more involved,” Seely said. “Private equity will transform the space.”

Seely added his firm sold a lot of United Kingdom real estate in the last 24 months, looking more toward southern Europe, especially Spain and Portugal.

Bumps in the road
Panelists said the sector is still seeing fragmentation, and the landscape could change if private equity investors unleash their cash.

Again, those in the sector understand it but have to go through many steps with third parties who do not, at least not as thoroughly, sources said.

“Getting planning approval is becoming easier,” Riley said.

Harrington agreed, adding from what he had seen, Dublin-based Staycity Aparthotels did get excellent covenants.

Thorne said he considers covenants an issue for the sector, adding that JLL is currently reviewing between £1 billion ($1.3 billion) and £1.5 billion ($1.9 billion) worth of sites.

Riley suggested one solution to the covenants issue.

“Increased supply will improve covenants,” she said.

Moderator Marc Finney, head of hotels and alternative markets at business consultancy Colliers International, said a lack of distribution within the sector hinders it, while Seely added that guest loyalty is not as developed as that of the hotel sector.

George Titlow, business development manager for the U.K. and Ireland at STR, the parent company of Hotel News Now, gave a performance review of the sector before the start of the panel. In May 2017, London’s serviced-apartment sector reported a year-over-year occupancy increase of 4.7% to 78%, while average daily rate increased 10.9% to £181 ($235) and revenue per available room rose 16.1% to £145 ($188).

Titlow added that there are approximately 20,000 serviced-apartment units in the U.K., with London having 10,717 of them, while the 5% pipeline projected for the sector through 2019 outpaces the market’s hotel pipeline.

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