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[#PAFh19] "We chose to be a diversified group because we wanted to be very resilient in terms of cycles."

By Dominique Ozanne, CEO, Covivio Hotels and Gaël Le Lay, Deputy CEO, Covivio Hotels at Paris Asset Forum >hospitality.

Covivio, a generalist group

These two examples of value creation are in line with our strategy and that is what we are trying to implement. What is important is to have time and be selective in our locations.  was a real estate company 10 years ago and has become a general European operator. We promote, we are investors and we also operate. We do this in the office sector with co-working and traditional offices, in the accommodations sector with co-living and housing that we own in Germany and then in the hotel sector. In this branch we are both owner-investor, developer and also operator with about fifty hotels under management and franchise agreements.

We chose to be a diversified group because we wanted to be very resilient in terms of cycles and we now realize that this has many advantages. We are in a world where the differences between asset classes are increasingly diminishing, where there is a very strong mix of uses and where the hospital sector teaches a lot to other sectors (offices and housing) because there is an increasingly strong notion of services.

This is an advantage for a group like Covivio because on products where destinations expect innovative offers, they also expect a real mix of uses. In Europe, as with the Alexander Platz in the heart of Berlin or Reinvent Paris, we have been able to move forward because we are able to position ourselves on different products.
 

Covivio Hotels

Five years ago we decided to position ourselves in premises and business assets This choice has proved to be profitable as we experienced strong growth. We were mostly positioned on the economy and midscale in France. We were working with just a few operators just four to five years ago. Today we doubled the size of our patrimony. We are more on the upscale, we made a lot of investments in prime locations, we are highly diversified from a geographic point of view. We reason by city, our criteria being cities with more than 2 million nights, of which there are sixty or so in Europe. We work with 34 different brands.

We are a pretty atypical owner in this sector of hotel investment that has reached a significant size. It is necessary to keep in mind that it is because we are able to position ourselves on premises and and business assets, prepared to sell the business assets because our business is above all about real estate.

This growth has not been too dilutive. We sold assets at secondary cities (fewer than 300,000 habitants) with less performing margins or 800 million euros of assets on the last 4 to five years. We reinvested more than 3 billion euros with the same yield. Why? Because a lot of funds were positioned to acquire assets with long leases and thus strong competition on the lease causing yield on ;ore economy assets to decrease. In parallel, Covivio Hotels positioned itself on portfolios that are fairly complicated in terms of premises and business assets, which allows us to achieve better yield. When you buy the premises and business assets and sell the business assets it puts you in a much stronger position in negotiation with the operator with respect to when it is the operator who outsources the walls. This changes the balance with the operator.

Today we have a European heritage, we believe we have a very low lease risk factor for this property. When we make calls to tender for one of our properties, we receive enormous volumes of responses. Moreover, it is quite impressive to see the appetite of global operators for Europe. In Europe the flow of international tourists is growing, the foundations of the hotel sector are very good, the offer is stable while demand is growing. There are a lot of operators that would like to position themselves on better locations. This leads to a real desire for well-located assets that are under lease or management contract by operators today.

In the last 5 ... 10 years there has been a real change in the hotel sector, there are more and more third party asset managers and they’ll increasingly have to be reckoned with. They will replace traditional hotel operators that got out of premises and then business assets. These actors have an ability to manage costs in a very pertinent matter and a capacity to align with the needs of the owner which can be very interesting. A fortiori when they accept contracts that are different from the ones that may be accepted by a large traditional hotel operator. We will increasingly have to work and exchange with these third party asset managers who are able to do management contracts but also to lease when they are comfortable with the assets and the operational profitability of an asset.

Case study, the mechanisms of value creation

The first case is an property in Madrid that we bought three years ago (260 keys) in the city centre. At the time of acquisition, we identified low rent, an exit clause and prime location. The combination of these three elements was a source of value creation for us. We therefore launched a call for tender and we had 15 firm offers on this relocation asset with a 30 to 50% increase in rent. The operator also agrees to take over the work.

This is an essential part of our strategy: find well positioned assets. This asset in particular, will be operated under the Radisson Red brand, we expect between 40 and 45% value creation in 3 years with respect to the acquisition price. Liquidity clauses are important. If it works well, so much the better, otherwise, we need these liquidity clauses to try to reposition the asset and we were able to do that in this particular case.

Le Méridien in Nice (318 keys): for this property, the strategy is a multi-year one. We have owned the premises of this asset for a very long time and three years ago we bought the business from Starwood Capital. We have therefore decided to re-member, to carry out a work programme of 13 to 14 million euros. The asset will be repositioned on the theme of Jungle Chic by May 2020. Here again, there is a liquidity clause, we bought it with a management contract with Marriott that has three years remaining. So we invest CAPEX to reposition and the liquidity clause allows us to anticipate all options. As the location is strategic, we may have to compare with operators other than Marriott. We can also anticipate increasing EBIDTA from 30% to 40% and sell the business by issuing a lease.

These two examples of value creation are in line with our strategy and that is what we are trying to implement. What is important is to have time and be selective in our locations.  
On the subject of brand asset management, what impresses us daily is that with this reconfiguration of the sector with new so-called lifestyle or hostel brands, there is an ability to achieve profitability per m² that is more efficient than traditional operators. There are smaller operators that have better cost management than larger operators. This results in incredibly different proposals and margin expectations for hotels. We sometimes have hotels with margins of 15 or 20 points and when we make a call for tender like the one in Madrid, some operators anticipate doubling or even increasing the current margin by two and a half times. This reasoning leads to reconfigured rental proposals that take into account this doubling of profitability. When you work with Meininger which sells by the bed, it gives a much higher turnover per m² than traditional hotels. There is a reconfiguration of the actors which is very interesting for the owners who are able to move from lease to management contract and vice versa. There is really much to do given this multiplication of actors, including third party asset managers.

We have Hotels by Meininger and B&B and we are looking to keep a balance. 25% of our fleet is made up of budget hotels and the rest are mid-scale to high-end. Our reasoning works regardless of the segment.

What we also see about the brands that perform best, and that is in line with what David Fattal said earlier in the day when he talked about "love in management", is that it is the operators who are able to be most involved in the management of assets on a daily basis who are the actors that deliver the best profitability. That's why I was talking about third party asset managers, when you are part of a small group and you have four hotels to manage, you can do the daily analysis, with your income statement manager, and you create optimization. This is quickly expressed in the results and in the hotel's P&L. This "love" in management creates increasingly strong value and we are led to work more and more with this type of person.

What made you cross over into a new market ?

We are dedicated to supporting and financing the organic growth of our partners. We have found ourselves living a rather fantastic story with B&B Hotels by systematically being the first to accompany them in a country and producing positive results with them and for us each time. It taught us to get to know the country, to develop a platform there and to develop ourselves there. We have done this in Germany with more than 70 properties developed together, in Spain with 4 hotels now, and we want to write the same story in Poland. The more global objective is to consolidate the European market, we now have important positions in Germany, France, the UK and Spain. We think there are some very good opportunities in Eastern Europe, which is the country with the highest growth rates. Warsaw and Krakow are therefore very interesting to us. With B&B Hotels we have built a very efficient mutual development machine.

Will we be seeing more Covivio properties on in the resort segment?

Covivio is essentially City Hotels. However, we have between 3 and 400 million euros invested in resorts. We built a Club Mad in Samoëns, we have a few properties with Barceló in the Canary Islands. We have discovered that the resort resort may have resiliency, perhaps even  more so than certain city hotels. We will thus be open to doing a bit more in resorts. What is important for us in understanding the resort risk is the length of the season. At a mountain destination where the season lasts about 6 months we are more cautious than at destinations like Greece or the Canaries where the season lasts longer.

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