Stress in Germany

Distress in Germany’s hotel market is starting to appear, as the country’s preference for leases puts pressure on rental payments.  

The chances of a prompt reopening of hotels across the country now appear to be receding, as the head of Germany’s public health agency warned that a third wave of coronavirus infections has already begun.  

Currently, widespread hotel reopening will only be considered on 22 March. In Berlin, recent reports suggest one in three hotels are closed, while those that are open are operating at low occupancies.  

And the country is also grappling with political fallout, as state elections in midMarch saw Angela Merkel’s Christian Democrat party lose ground, in part due to concerns over their handling of the coronavirus pandemic.  

All of which will put further stress on relationships between hotel owners and operators. Some have already been obliged to act, in order to cut their losses. Decisions taken as far back as last summer are only now working through.  

Among those is a deal involving a portfolio of German hotels owned by seasoned hotel investor Invesco. It has been obliged to reset the direction of the 13hotel portfolio, which it acquired in 2017 in a EUR530m deal, after the demise of the operator.  

The portfolio includes the Crowne Plaza Hamburg City Alster, Holiday Inn Munich City Centre, Crowne Plaza Heidelberg and Holiday Inn Express hotels in Berlin, Dortmund, Düsseldorf, Frankfurt, Koln and Munich.  

Invesco’s hand was forced by the insolvency of the Event Hotels operational subsidiary, Tidal Operations Germany, which folded in September 2020, unable to continue to pay rents.  

The insolvency was handled by Michael Bremen of restructuring specialists Pluta: “Achieving an asset deal under lockdown restrictions was an enormous undertaking for all involved – it would not have been possible without partial use of the short-time working allowance scheme and the loss financing approach of the hotels’ owners.”  

David Kellett, senior director at Invesco, said the situation presented an opportunity to rethink the strategy for the portfolio, as it hired CBRE to find a suitable new operator. “The crisis has taught us a lot,” and a new partner could sit alongside Invesco in a new, more aligned relationship.  

Kellett had submissions from several interested parties, including some UK-based operating groups, but went with Westmont – not least as they had previously had a hand in the properties. New leases have a low fixed element, “and are more operationally geared into the recovery”, with Westmont committing a minority equity stake “that adds to an alignment of interests”.  

Kellett believes other thirdparty management companies in Germany – where they typically sign leases – will be under financial pressure in the coming months: “There is more to come.”  

One option is for operators to find a new, well-funded partner, as Dutch/German operator Odyssey did recently, agreeing to a takeover by private equity investor ActivumSG. “I think you will see more deals like that, bringing in fresh capital – and I expect to see consolidation.”  

Invesco’s attitude towards hotels remains substantially unchanged by the pandemic, with an investment focus on city markets, a broad business/leisure mix, and locations where supply is constrained. “I like all of those criteria post-covid – but we’re very selective.”  

Another beneficiary of distress in the German market has been Premier Inn owner, Whitbread. Last autumn, Whitbread picked up 15 leased hotels in Germany, to add to its growing Premier Inn portfolio in the country, following an approach from local hotel company Centro. CEO Alison Brittain said the company offered them any or potentially all of their 53 German hotels. “We went through a process of picking the ones that we liked and started with a bigger list and then knocked off the ones that didnt meet our returns threshold, werent quite on point for the refurbishment plan, didnt fit in the right Tier 1 location that we wanted. So we ended up with our group of 15.” 

And in February of this year, German hotel manager HR Group picked up 32 hotels, largely in Germany, from the Vienna House brand. Thai investor U City, which had backed the expansion of Vienna House, opted to dispose of the brand’s leased properties, in order to reduce its liabilities. HR has said it will rebrand all of the hotels, favouring its existing relationships with Accor, Wyndham, Hyatt and Deutsche Hospitality.  

HA Perspective [by Chris Bown]: Who’s paying the rent? With no guest revenue, it’s a tough time, if you’re staring at lease commitments. And those German funds that like to buy hotel assets, love leases – leading to a situation where hotel operating companies end up signing them. 

Inevitably, as we’ve discovered through numerous conversations, most landlord-tenant discussions through this pandemic have enabled some form of compromise agreement to be thrashed out, with perhaps some forgiveness, a delay in payment, extension of the lease and so on.  

In a few instances, such deals aren’t possible, practical or attractive; and so a more fundamental restructuring is necessary. Event collapsed their subsidiary holding the Invesco leases, in a move not dissimilar to one executed in the UK by operator Bespoke, with hotels it was leasing from Fragrance.  

And so what will these deals do, to shift the balance of brand power in Germany? In the case of the Invesco portfolio, IHG retains its presence; in the case of HR’s takeover of the Vienna House properties, the big brands will be bidding now. And Whitbread looks poised to grab further German sites, cementing its growth plans.  

The coming months will provide us with several more chunky rebranding opportunities, I expect.  

Additional comment [by Andrew Sangster]: Germany is currently enduring a torrid time with the pandemic. While the UK and the US (along with smaller states like Israel and the UAE) are set to emerge from pandemic restrictions in a few months, it looks probable that Germany, along with much of the rest of the EU, will still be suffering restrictions until the summer. 

This has dented the macroeconomic outlook for Germany and threatens to create even more pain in the country’s hospitality sector. Terrible news for incumbents but great prospects for well-capitalised buyers. 

There are a couple of flies in the ointment of this particular narrative, however. Firstly, the pandemic is likely to subside, even with Germany’s slower roll out of vaccines, thanks to natural seasonal conditions, as last year. Secondly, German politicians might well intervene more assertively given that elections take place in late September. 

I suspect there will be a few deals to be struck but not at notably distressed prices. What does seem to be shifting is the obsession with fixed leasesThis gives operators the opportunity to move in and strike much more reasonable long-term agreements. 

If the global brands are to participate in the opportunities, they will need to either develop stronger relationships with third-party operators who will franchise their brands or reassess their opposition to any form of lease. 

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