Warwick Business School Accounting group
Turning our attention towards the hospitality sector in the UK and Ireland, Finance Monthly interviews the Managing Director of WM Consultancy Ltd, Weldon Mather – an independent hotel asset manager and tourism consultant who has over thirty years’ experience within the hotel industry. Weldon is currently working with owners, banks, receivers/administrators, liquidators and private clients in tourism & accommodation businesses in the UK and Ireland and is an expert hotel witness in legal arbitration proceedings.
What are the biggest challenges in the global hospitality services sector currently?
While worldwide visitor arrivals continue to grow, uncertainty prevails around terrorism, currency fluctuations and virus outbreaks. Hotels benefit or suffer almost immediately, when there is a change in the macro environment and they must adapt quickly to the new market challenges that emerge. The outlook for hotels is positive in emerging markets however some stagnation is evident in large cities such as Paris and New York.
What level of investment activity have you seen with clients over the past 12 months? What do you attribute this to?
Institutional funds now see hotels as a mainstream asset class in the search for yield. While hotels are complex assets with many moving parts, they do provide significant cash flows with careful asset management and oversight. US and Asian funds in particular, have been quick to snap up NPL portfolios (non-performing loans) in Northern Europe where property rights are strong and execution of investment strategy and exit is relatively straightforward. With interest rates at rock bottom (or even negative in some countries), hotels now offer a viable alternative to “dry” asset classes such as offices.
Where do you see the opportunities for transaction growth in the global hospitality sector coming from next?
Southern Europe still has a number of NPL’s that have yet to transact, while in Northern Europe (UK and Ireland in particular) the early entrants into the NPL market have mostly achieved their IRR targets, and are ready to exit. A new wave of investors is now starting to target these recycled assets as the likes of Blackstone, Lone Star and others seek to exit. MEA offers good opportunities for transaction growth, with APAC regions rallying strongly.
Typically, what stops a hospitality deal from going through?
Lack of due diligence, unauthorised building structures in properties that require retrospective planning permission, and currency fluctuations. The Brexit vote caused many deals to either pause or be abandoned, due to uncertainty in the market. Other factors can include grant of planning permission to new entrants, terrorist attacks and unreasonable vendor demands.
What complex issues usually arise during a transaction and how are they overcome?
Sometimes new information comes to light during due diligence, such as outstanding claims (employment, accidents), and onerous TUPE liabilities (transfer of employees to new business owner). Other matters such as tax liabilities, online reviews and even reputation damaging events all result in a price chip/reduction being sought by the buyer. Sometimes the purchaser fails to secure mezzanine funding and has to bridge the shortfall rapidly.
As a thought leader in this segment, what should new investors be mindful of when considering investment into the hospitality sector?
The most important part of any sale process is for the buyer to robustly test the EBITDA (or net operating income figures), taking account of Capex and FF&E requirements (usually 3% or 4 % for the later). Other issues to consider include regulatory changes within that jurisdiction, property and corporation tax changes, pipeline of new inventory due to open in the competitive set, and quality of the incumbent management team. Investors should also scope out potential for upside on the investment and whether RevPAR (revenue per available room) can be improved given the local market and demand drivers.
In the progression of your thought leadership, how are you developing new strategies and ways to help your clients?
As a hotel asset manager, a certain skillset is required to understand and maximise profitability in what is a very complex asset class. Unlike offices or retail, hospitality businesses have fluctuating cash flows, coupled with a high breakeven point, as a result of a high fixed cost base. As a member of the ISHC (International Society of Hospitality Consultants) and also HAMA (Hotel Asset Management Association), I associate with best in class peers, with worldwide experience. These organisations allow me to stay current with trends, developments, research and cutting edge asset management skills to ensure that clients (usually owners) are maximising their return on investment while enhancing value for eventual exit.
Is there anything else you would like to add?
Hotel Asset Management is a relatively recent profession that requires highly-skilled, adaptable and focussed individuals to liaise between owners and operators. This requires considerable negotiation, influencing and analytical skills, while keeping all sides on board and maximising performance and value. Asset management in hotels is becoming much more mainstream now that a new class of institutional investors and sovereign funds demand exacting standards and consistent returns. I thoroughly enjoy this type of work, having grown up in the hotel business, combining a lifetime of operational experience with modern investment strategies, at the most sophisticated level of property investment.