Hospitality brands are leading the pack in merger and acquisition (M&A) deals this year, but an improving macroeconomic climate could see more real estate investors pile in, according to experts in the sector.
This year, big deals including IHG’s acquisition of Ruby Hotels and Marriott International’s takeover of citizenM have set the pace for brand growth. “The hotel brand companies all have a growth agenda and are looking for ways to achieve that,” says David Kellett, head of hotel capital markets, EMEA, Savills.
“There has been an incredible brand growth story in recent years. If you look back over the past decade, many brand-owning companies have at least doubled the number of brands in their portfolios since 2015 – some have tripled,” he adds. Kellett notes that most are pursuing “capital light” strategies in which they acquire the brand and / or operating company but often leave the real estate in the hands of landlords.
Asset light growth
This was certainly the case with InterContinental Hotels Group’s (IHG) takeover of Ruby Hotels this year, an asset light operating company in impressive growth mode. HG’s £110.5 million deal for the business saw the hospitality giant acquire the European brand and platform, plus the rights to roll Ruby out in the US. The brand, with 20 hotels in Europe at time of acquisition, has achieved a net compound annual growth rate (CAGR) of 26 percent over the last five years. The tie-up allows Ruby to draw on IHG’s powerful enterprise platform of distribution and technology systems, as well as its significant hotel loyalty programme, IHG One Rewards.
Said Elie Maalouf, IHG CEO, at the time of the takeover: “The urban micro space is a franchise-friendly model with attractive owner economics, and we see excellent opportunities to not only expand Ruby’s strong European base but also rapidly take this exciting brand to the Americas and across Asia, as we have successfully done with previous brand acquisitions.”
Marriott International’s $355 million takeover of citizenM is similarly structured. In buying the citizenM chain, with 37 hotels across more than 20 cities in the US, Europe, and Asia Pacific – plus two more pipeline properties – Marriott expects to turbocharge its brand growth and leverage its loyalty platform still further. “Marriott has proven success in growing select-service lifestyle offerings, including our AC, Moxy, and Aloft brands, and we look forward to accelerating citizenM’s global reach with our guests and Marriott Bonvoy members around the world,” said Marriott CEO Anthony Capuano on signing the deal in July.
Explains Leeny Oberg, chief financial officer and executive vice president development, Marriott: “Obviously, growing a brand organically can mean some of the best returns, but it takes longer. We do like to try and grow brand organically, but we are also opportunistic.” She adds: “When we see a brand’s particular strength, we also see an opportunity to really grow it in the marketplace. We are very excited about growing citizenM from here. If you look at our growth – apart from the Starwood acquisition – around 8 percent of all the rooms we have added have emanated from a brand we have purchased.”
The citizenM deal also continues Marriott’s growth spurt in the midscale space, where it is increasingly competing with rivals to be “in all places, offering all kinds of experience, at all price points”, says Oberg.
Real estate players
However, not all of this year’s M&A activity to date has been brand-led. In May, Brookfield Asset Management acquired the European business of Generator Hostels from Queensgate Investments for €776 million. The deal includes the hostel platform and ownership of 15 assets in 10 countries, with a view to driving further expansion. While Generator already boasts landmark hotels in cities including London, Madrid, Paris, Rome and Berlin, Brookfield plans to buy additional properties and secure third-party management agreements for new, related assets within the hostel market. “We believe that through consolidation and acquisition, we can double the size of the platform,” says Brookfield’s head of hospitality investments Shai Zelering, citing its winning philosophy of promoting “the affordability of travel”. He says that this fits with the group’s wider living strategy that includes student housing.
In June, meanwhile, Tristan Capital Partners also took a punt on budget travel with the €400 million acquisition of the easyHotel business, which comprises some 4,700 keys spread across 48 hotels and 11 countries. The firm said that it intends to significantly grow the easyHotel platform.
Purchased via its opportunistic fund European Property Investors Special Opportunities 6 (EPISO 6), the deal expands the fund’s holdings in the affordable travel segment. In 2022, EPISO 6 acquired Point A Hotels, a budget boutique brand comprising 1,520 rooms in 10 hotels, with 80 percent of its value in London.
Says Kristian Smyth, managing director, investments, Tristan Capital Partners: “Tristan’s Funds have emerged as a leader in the European budget hotel sector, with this transaction bringing the total committed hotel investments to more than €1 billion to date.”
Signs of distress
While this year’s M&A market has not been overly distinguished by distressed transactions, there are signs that some refinancing pressures may yet come into play. Research from PwC suggests that prolonged economic volatility could bring more underperforming hospitality assets to the M&A market, while, on the more positive side, "clarity on interest rate policy and trade developments" could "shape valuation confidence, transaction pacing and ultimately consumer sentiment toward travel".
Under reported stress, Cedar Capital Partners completed the €400 million recapitalisation of a portfolio of five lifestyle hotels with Ares Management Real Estate Secondaries funds earlier this year. The assets include the Hoxton Rome, Hoxton Lloyd Amsterdam and Mama Shelter Prague, comprising 566 keys, plus pipeline hotels in Edinburgh and Florence. Aareal Bank subsequently loaned Cedar Capital Partners approximately €200 million as part of the deal.
Eoin Bastible, managing director, CBRE Investment Banking, which advised on the recapitalisation, says: “We expect investment managers and asset owners to seek innovative continuation vehicle solutions to recapitalise their portfolios,” describing recapitalisation as a “growing trend that is set to continue”.