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[#PAFh19] " Each time you separate OpCo & PropCo, you create value "

Giorgio Manenti, partner at Eastdil Secured, talks about the value of an asset: what, how, why... Find all the latest news on hotel investments in Europe in his speech at the Paris Asset Forum >hospitality 2019.

The plan today is just to talk about themes. From 2009, what do we represent in the Real Estate industry? We have an average of about 6.5% between 2009 and 2014 of all asset classes. We were actually just 5% between 2000 and 2009. We’ve reached an average of 7.5% of all asset classes. If you look at the YTD results, for the first time, we’re creeping up on 8%: almost 1 out of 10 is a hotel deal. But, what is really exciting is to see that volumes are down, while we are up. There is one entity to thank for this: Amazon. So basically, retail, which is 50-60 billion dollars in Europe, has actually halved. We were one of the big beneficiaries of it. So, thanks to Amazon, a lot of retail business was moved to hotels. 

For the last ten years, we’ve been doing great. We have compound growth, annually, of close to 20% for the last ten years. France has been a big winner for the last few months.  There has been one loser: England. We have Brexit to thank for this big mess, because we’ve seen a huge wash of volumes in England, and this money has gone a bit in France, a bit in my home country (though which is had to do deals there), and a lot of it in others (Netherlands, Spain…). So, there is a real shift in where investors are going, with a lot more investments in the Mediterranean countries, which is interesting for us.


We’ve been averaging about 5 billion of transactions a year on hotels. I want to show you the diversity of what investors are doing: there are fonds de commerce, company sales, AGV, credit place, … and investors are really happy to go all over our beautiful continent. But, what is driving this incredible deal compression? Clare and I are in Paris this week and, hopefully, are going to trade a very large asset in Porte Maillot. We will trade it around 2%, and the question is, why are people buying such low rates?

In 2006-2007, when I started selling hotels, the 5 year swap-operate (which Is the most recognized tool in the hospitality finance industry) was close to 5%. So, I was borrowing at 5%. Today, I’m borrowing basically at nothing; we have a euro-swap, which is zero-based. We’ve structured our first negative-loan last week in Scandinavia, where we borrowed 500 from a client, and we only had to give him 499 back. So, this is how crazy the world is in the commercial credit space. We have clients who are raising bonds at sub 1%, bringing their average cost of capital to basically the same as the sovereign state funds, which is around 1.5%


Again, what are the themes? I think there are a few themes that have really changed the way global capital looks at us. I think the future is incredibly bright for us. First, there is a concept called core-plus. What is core plus? Core plus is something that feels safe and good, but where there is value-added opportunity. Core is like the Concorde Opera: known, stable. But the plus comes from a change in the management contract or a restructure of a lease. So, capital is going to the relative safety of core product, but with personality, where they can do something with it. This is where everybody is looking for opportunity.

Second, operating platforms are in crazy demand. In France, you’ve been one of the ambassadors of the concept of the OPCO. But, we’ve seen OPCO being traded. We’ve seen an OPCO being sold at 20 times free cash flow. These are multiples which are not historically common. But there’s an incredible demand to run, to manage, and to use technology to operate keys. 

Another piece of it is that institutional investors are coming our way. For years, because of the labor component, the sovereign wealth funds, the pension funds, the REITs didn’t want to buy hospitality. Today, we are finally a bit more like the American model. An example of this is the Pullman in Bercy, where the employees now stay with the operator, not the owner. This allows institutional capital to come in, as we’ve seen. A few months ago, we did a deal with AXA to acquire the DoubleTree in Amsterdam for 460 million euros. They wanted a fully variable income, which is something very new for them. So finally, this capital is understanding the risk vs. return of the operating income, not simply the returns typical of core real estate assets. 

With so many strong brands, so many new operators that keep fueling the interest of these investors,  confidence is growing and pushing hotel prices. This is why we’ve seen a growing gap between a hotel that is managed by a brand and a hotel that is not, the latter going for as much as 25% premium. This is really driven by institutional investors. 

Another theme is that size matters. Everything large-scale is in incredibly high demand. Operators are in the business of managing keys, so we’ve seen a huge demand for the “gros porteurs” as you say in French. 

Also our clients have stopped talking about countries. This is something they don’t really relate to. I’ve seen it with the UK; you’d think that with the Brexit, people would ask, “How is the economy doing? What’s happening?” But investors don’t care. What they care about is the mega cities, markets with scope.  So, they don’t think of Barcelona in Spain, or London in the UK; they look at these cities independently, at what makes those cities dynamic, and they rank them very similarly. This is a complete shift from what we saw 5 or 6 years ago. 


The loose credit market has allowed us the creativity to create derivatives. For example, we are starting to sell credit strips. We go out and we sell a percentage of annual EBITDA to a pension fund or an institution for 100-150 years, with a possibility to buy it back. So, we are creating, within a credit, based on EBITDA, strips that we sell to different people to create arbitrage opportunities. This is fairly new, but it is very exciting. We’ve done about 80 hotels in the last 6 months through derivative credit. Within the portfolio space, every time you can separate OPCO and PROPCO, you’re creating value. We’re currently working on a very large portfolio, and we’re separating OPCO and PROPCO interests. 

Finally, global capital has stopped going to “beer countries” and has finally figured out that “wine countries” are much better. So, Netherlands is flat, UK is down, Germany is beyond boring. What do we do? We invest in Spain, France, and we try to invest in Italy. Italy is a problem, because it’s very obscure, very unclear. But the market in France and Spain has been incredibly sought after. Spain was faster to react to the “bad bank” scenario, so they’ve attracted a flurry of private equity investments. France is also a market that is still very hot; I think the pricing is fairly high. But, it’s clear that 2019 will be a big year for France. 


Here are four case studies. The first one is Project Calypso: 6,000 bedrooms that we are selling the credit. What we are doing here is going out and saying to a financial institution “Buy 2% of the EBITDA at 2%” and they say ok. So, we sell that for a 100 years. And then we say “Why don’t you finance the 86% of the EBITDA left between 50-60%,” and that goes between 3 and 4%. And then we do preferred equity for the last piece. So effectively, without doing a formal sale, we have partially sold our asset, and keep just a very small income stream. 


Project Villa Center Park: we closed this deal not very long ago, and an Israeli conglomerate bought this entire portfolio purely because they have never seen 6.5% on a triple net lease. They’ve been searching the whole market, trying to find that yield, and it just wasn’t there. So, they went to the leisure side to secure it. Also, they viewed Villa Center Park as incredibly resilient in a downturn. As the CEO of the company said, “If people are in trouble, they don’t go to Milan for a weekend, but for sure they’re not cancelling their family holiday.” So, Center Parks will keep filling these destinations, and this is why we were able to make such a big trade. 


The Marriott Rive Gauche: this transaction showed that, when you find a good asset basis, our investors don’t care about the yield. They just look at it and they see that the price per key has tripled in the last ten years. Time-value of money is way above the inflation rate, so why wouldn’t we see the price per key increase to 4,000-5,000 EUR a key?


The Westin: what we’ve created there is that we’ve brought in a tenant, the tenant is guaranteeing a 4% return to the landlord, who has stripped out the retail and flipped it for a hundred million. This enabled us to capitalize an island site in the center of Paris. So, an essentially structured yield. 

As a private equity firm, we are, effectively, the biggest hotel owners in the world. We are in Spain, a little bit in France and little bit in Italy. Those are the guys who sell hotels for a living. So, the big buyers of permanent capital like Covivio, they will be selling on the fringes, to improve their portfolio, but they won’t be selling huge amounts of assets, because they’re all about capital preservation. We will see trades, a lot of them, but I think they will be characterized by smaller deals, French deals. Which will allow smaller investors to buy and improve their portfolio. 

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