How a Value Recovery JV model can reassure hotel owners

Charles Scudamore, CEO and founder, Hetherley Capital Partners, describes how the group’s Value Recovery JV Model offers reassurance for hotel owners in a post-Covid hotel sector.

We’ve never before seen the kind of operational cost challenges that we are seeing right now and, as a result, owners have become more involved in the operations of hotels, whether they want to or not. Our model allows them the opportunity to focus on wider strategic concerns while we take care of the day-to-day issues of hotel ownership and operations, but with the shared goal of recovering both profits and value.

The goal for most hotel owners is to return to the book value that they had on their asset pre-Covid and there is a journey to get back to that position. It’s not going to happen immediately. And ultimately, is it only going to be delivered through a trading recovery and underlying profitability improvement.

There are a whole range of things one can do in any hotel to drive that profitability recovery, but you also need to know the areas that are going to make the biggest and most immediate change and understand how to follow that up over six, 12, 18 months.

The return to pre-Covid capital values will not be a short one for many hotels. Yes, there is some heat in the transactions market at the moment, but only because of the lack of supply with buyers almost frustrated into paying premium price, not because the underlying asset supports that value.

At the moment, particularly in private equity, there is that desire ‘to do a deal’ which is driving the market in the UK & Europe. That’s all great if you want to sell your hotel right now, but that’s not the case for many owners and the JV structure we’ve adopted at Heathrow is aimed at delivering a solution for those owners.

Our approach is really simple. Under our value recovery JV model, we have a valuation done by an independent valuer to look at what the hotel is worth right now, which is in most instances somewhat beneath where it was pre-pandemic. Even if there is a lease, the owner is still exposed to trading risks and we look to reduce these as much as possible, particularly when it comes to the day-to-day operations of the hotel.

We create a roadmap to recovery, looking at all possible capital value opportunities and then there’s a sharing of the upside difference between what the asset is worth now and what it is worth at a pre-determined future point in time. From the owner’s perspective, they share some of the upside with Hetherley, but only when pre-agreed valuation hurdles are achieved, so where’s the downside?

I think that we all underestimate how dynamic hotel operation is and many people and brands are guilty of over-automation of their hotel operations. We firmly believe that many decisions taken on a daily basis impact the profitability of the hotel and that, to deliver high returns on trading assets such as hotels, you have to take a hands-on approach, you need to focus on the minutiae. It might not mean a huge amount to some, but it means a huge amount to us, because what we’re trying to do is recover that underlying capital value.

Owners will have to become more involved. Even when you have hundreds of hotels in a portfolio, where you might not have the resources to focus on the individual hotels, that’s where having joint venture agreements with partners who can create real value becomes key. Many institutional investors initially came to the sector looking for an attractive hedge for the other asset classes in their portfolios, without having to participate in the minutiae of hotels and we can offer them a return to that reassurance.

Despite the issues that the sector has faced, we’re still backing hotels. If you have a large portfolio across many asset classes, or are using hotels as a hedge, the number of new entrants to the market illustrates that, for the informed owner, it’s an attractive investment.”

Founded in 2012, HCP partners with private and instructional investors, including Land Securities, for whom it oversees a 22-strong portfolio of hotels under Accor brands.

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