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HAF "This [leisure] customer segment has been one of the big winners post Covid"

Tugdual Millet, CEO Covivio Hotels and Jaume Tápies, Founding partner & CEO Bosclat Hospitality, discuss their vision of hospitality asset investment in Europe. Between opportunity and repositioning, the hotel industry remains an attractive and profitable asset.

Jaume Tàpies, Boscalt Hospitality: Boscalt was born 9 years ago here in Paris. At the time, I was president of Relais et Châteaux and decided to change direction and invest. Nine years later, we have raised two funds and are in the process of launching a third. Our first two funds were value add opportunistic funds, the third one will be a corpus fund, so we find ourselves in some of the strategies outlined by Jochen Schaefer-Suren. To understand Boscalt, you first have to understand who our investors are. For independent investors, family office type investors, there was a binary strategy, when they wanted to enter the hotel business they needed a lot of capital to buy a hotel. We therefore decided to create, with a private bank, a product which would allow smaller investors to access investment diversification. We therefore proposed a system of investment by product in about ten European cities with mainly 4* plus and 5* assets. We are in the process of finalising the raising of our current fund, which has started to invest in London and Rome in luxury or ultra-luxury assets. These clients have very concrete needs related to taxation or more emotional aspects

Tugdual Millet Covivio Hotels: Covivio Hotels is a subsidiary of Covivio, specialising in hospitality investments. We operate with a mainly long-term institutional shareholder base with the idea of building a portfolio that is diversified. Geographically diversified in the UK and continental Europe (France, Germany, Spain, Italy, Belgium, the Netherlands) but also in terms of revenue sources. Historically, we invested in hotels through leases and we have gradually moved into direct management, which involves investing in properties and funds. This is a trend that will continue, and today 80% of our portfolio is in leases (fixed or variable) and 20% in properties and funds. We want to progressively strengthen our capacity to manage hotels directly and invest in hotels with the idea of creating value by repositioning them following works.

What is the medium and long term vision?

Tugdual Millet Covivio Hotels: Our shareholder investors have been able to assess the great resilience of this real estate sector. Our investors are real estate investors who have been extremely reassured, like all of us, by the sector's ability to rebound. September and October were also extremely reassuring months, particularly for business clients. We therefore have investors who are reaffirming their confidence in this sector. However, they are real estate investors and they are faced with a major change in their entire real estate portfolio. The evolution of interest rates is repositioning their asset allocation strategy. These investors have just come through a 10-year cycle of steady growth in value, which has never been so long in the real estate industry. Asset management came second to the work that could be done on hotels and real estate in general. With the phase of falling interest rates, the creation of value was almost mechanical. They are reacting by saying that it is no longer the market that will create value, so they are taking a break in terms of investment to see what will happen. They are also going to concentrate their investment capacities on their hotels. I lack visibility on the return on investment for new hotels, but I do have visibility on investment in my existing hotels. The investments we have been able to make in recent years to increase the size of the portfolio will be concentrated on our hotels. We have never had so many investment projects in the existing portfolio. We are listening to our leasehold partners to finance works and possibly reimagine the contractual relationship within the lease. For the hotels we manage, we rely on the various business cases to see what we can do in this new environment. Indeed, our customers' expectations have changed, so there are a number of hotels that need to be repositioned. It's not so much a question of investment capacity, today Covivio Hotels' situation is extremely solid. We have low leverage, no financing maturity and long coverage. What is at stake is our ability to project ourselves into the beginning of a cycle and a strong uncertainty on the evolution of values. By focusing on our hotels, we capitalise on the best guarantee of ROI. Moving into other positions would require a visibility that we do not currently have.

This strategy for us is a change of priorities, the portfolio has grown enormously over the last 5 years. We have gone from 4 to 6 billion euros held in 5 years. We are strengthening our skills to get more into the product, so we can be in the business of fine-tuning concepts that work, the necessary work, and repositioning, including in terms of the brand. All of this while maintaining the desire to create value and secure cash flow for our shareholders, which remains our priority objective.

Jaume Tàpies, Boscalt Hospitality: We come from the hospitality world and a large part of our team is made up of hotel operators. We have created very strong partnerships with operators in which, although we work with management contracts, we are very present in the operations. An approach that goes from the choice of the concept, to development and growth. This aspect is closely accompanied by an ESG approach which today merits major investments to reduce energy costs and be at the forefront of governance and social responsibility.

A broad presence to secure value

Jaume Tàpies, Boscalt Hospitality: We have two types of investors. Those who like more risk, to whom we offer opportunistic value add. There is currently an opportunity that seems incredible to us. Since September, we have received many very interesting dossiers at very attractive prices. Valuations have stagnated over the last two years, so we are reaching a point where it will be very interesting to enter these investments. For this type of investment our objective is to reposition the hotels. In many European cities when you upgrade a hotel, the compression of the exit yield is significant and it's well worth it. If you add the opportunity to the repositioning strategy, from our point of view it is a good challenge.

On the other hand, we work with long-term investors, who invest more in real estate than in hotels and who, faced with an inflationary problem, are looking for investment solutions to get through this inflationary period as well as possible. You can get into core assets at very attractive prices, the higher the category, the less customers are impacted by price increases. This strategy is primarily aimed at small institutional investors or large family offices.

What strategy for leisure assets?

Jaume Tàpies, Boscalt Hospitality: We have segmented the European city market in order to master these markets. We have opted for a short-range leisure segment, a long-range segment and then business travellers. The European cities address very different segments. Rome has 80% leisure travellers, whereas in Brussels or Oslo the customer mix is completely the opposite, with a preponderance of business travellers. We have therefore adapted our strategy by focusing on markets that are likely to develop more rapidly and have started to invest in these markets. The other markets remain interesting and we are receiving interesting opportunities. We are waiting to see how the situation evolves before we move into these markets again.

Tugdual Millet Covivio Hotels: On our side there is a clear desire to strengthen our exposure to the leisure segment. This is a subject that we look at essentially through the destinations, most of the major European cities have this leisure clientele. In leisure, there can be city centres in large European cities as well as resorts, and this type of asset currently represents a little less than 15% of the portfolio, and we are aiming for 20 to 25%. However, this classification is increasingly difficult to understand precisely, including on the operator's side with the mix of trips. The fact that a business customer can extend into a leisure version blurs the picture a little. This customer segment has been one of the big winners post Covid and this is likely to continue. This will be one of our main investment targets in the future. At the moment we don't have the asset profile to transform the mix of our existing portfolio, so we will have to reposition ourselves in the market to increase this leisure exposure.

What impact does politics have on business?

Tugdual Millet Covivio Hotels: At Covivio we have been very present in Italy for a long time. Despite successive changes in policy, the attractiveness of the market remains strong. We are looking at the major European capitals, which is our priority. All the European Union markets, to which I would add the United Kingdom, are relatively mature. We don't intend to go beyond this territory, but the idea is to strengthen our presence in Southern Europe, regardless of public policies, which fluctuate and do not have a very measurable impact on the attractiveness of the activity as we see it in our hotels.

Jaume Tàpies, Boscalt Hospitality: For our part, we try to compare 33 European cities every three months. We rate them on macro and micro aspects, but also on their hotel performance, and this gives us visibility on the most attractive ones at any given time. Rarely do political aspects have an impact, a counter-example would be London with the political decision to raise taxes for next year. So it's more the tax pressure that can potentially have an impact.

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