Green shoots on the Emerald Isle: Hotel Property Investment Conference Ireland (IHF) 2014

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More than 200 delegates from the Irish and overseas hotel industries gathered for the second Irish Hotels Federation Property Conference in Dublin. The conference was of particular benefit to hotel owners, general managers, financial officials, industry advisors, bankers, lawyers, real estate agents, government/state agency officials and institutional/private investors.

The conference looked at the progress being made in restoring financial sustainability to the hotel sector and provided a forum for discussion on investment opportunity as the banking industry enters the next phase in addressing the high level of overhanging debt. Refinancing options and mezzanine finance all formed part of the discussion on how to structure the capital stack.

The hotel industry has taken a battering since the recession in 2008 - RevPAR fell by over 50 per cent and hotel values plummeted in some cases by up to 90 per cent. Unemployment hit 15 per cent and bond yields peaked at ±14 per cent (now 2.7 per cent). Confidence is gradually returning to both the trading and investment market, cash flows have stabilised, and Dublin is leading the recovery - it already has a 20 per cent undersupply in hotel rooms.
Property agencies chose this forum to break their latest news and Savills announced the first domestic portfolio sale in 10 years. Some key news at this event included:

• Total outstanding loans to the hotel sector have reduced from €6.7 billion to €5.3 billion
• More than 200 hotels (23 per cent and c.18,000 rooms) still require refinancing
• Hotel market has evolved into: Tier 1: Dublin city; Tier 2: Major cities; Tier 3: Regional
• Hotels in receivership (administration): 140; hotels sold 57; for sale 24; receiverships still to come to market: 54
• Valuations range from €200k to €10k per key
• Yields in Dublin are now below seven per cent; EBITDA multiples x10-15 dependent on location
• NAMA has sold 19 hotels to date with a value of €237 million
• 102 NAMA hotels remain to be sold (12 per cent of total hotels)
• Investor demand for hotel assets remain strong and cash offers dominate
• Maximum sustainable debt per room is €61k compared with €92k currently
• A wide range of institutional capital providers for Irish hotels include managed funds, pensions, sovereign, hedge, private equity and mezzanine
• Indicative total value of Irish hotels €4.5 billion

Economist Professor Alan Ahearne was commissioned by the Federation to prepare a follow up paper The Next Steps to his report Time to Invest - Proposals to Restore Financial Sustainability to the Irish Hotel Industry (2012) and reported that recovery is still very fragile but there is huge potential for future growth. Progress has been made in restructuring debt. Ireland needs a financially stable hotel sector with sustainable balance sheets and while debt is down to €5.3 billion, max sustainable debt per room is be €61k vs €92k so 25 per cent restructuring is still needed using the following:
    1.    Employment Investment Incentive Scheme (EIIS) - now extended to hotels
    2.    Hotel restructuring fund - only those operationally profitable
    3.    QIFs for hotels (or REITS)
    4.    Opportunity for Ireland Strategic Investment Fund to help industry achieve sustainability 

Ahearne summed up by noting that hotels have a critical role in contributing to economic recovery but balance sheet repair is required, debt overhang persists and new equity investment required if the sector is to survive and prosper.
 
Tom Barrett of Savills provided an overview the past, current and future value of hotel properties in Ireland. Peak sales during the Celtic Tiger era included the Shelbourne Hotel at c.€750,000 per key (close to London and Paris prices) and the Berkeley Court and Jurys Hotel site that transacted €260 million or  €60 million per acre. Those heady days have passed with hotel sales plummeting from 16 in 2007 (€550 million) per year to two in 2009 and 33 in 2013 (€160 million).

The recovery story has seen RevPAR improvement while visitor arrivals are up from six million 2010 to seven million in 2013. Profit recovery and VAT at nine per cent have  led to  sustainable profits so hotels can be refurbished (CAPEX). Other enablers of growth include the travel tax cuts 2013 and 2014 (now €0) increased airlift (Ryanair and long-haul), commercial rates revaluation (Dublin), The Gathering 2013 (+300k visitors), the Wild Atlantic Way and the Queen's visit. 

Buyers are now in the market for the trade - not just a property play. Blackstone, Patron, John Malone, Trump and the property industry Green and Hibernia REITS are very active. Dalata raised €265 million via IPO and iNua and Ostan Partners have significant war chests while the banks are lending again albeit at reduced LTVs.

Hotel transactions of note loan sales (IBRC), investment sales (freehold sale - River Lee Hotel x12 times rent roll) and the Westin Hotel 163 beds on the market for €60 million (x13 times rent roll). Some trophy assets and opportunistic buyers are also in play with significant value available for those not too concerned by return on investment. Savills officially launched  "Project Venue Portfolio" comprising the Malton (€15 million), Kilkenny Ormonde (€11.5 million) and Metropole (112 rooms €4 million) : total 400 rooms - the first portfolio sale in 10 years, so things are definitely looking up.
 
New supply is limited and constrained by planning permission and sales that transact before 31 Dec 2014 will attract 0% CGT if they hold for next seven years, which is attractive to more long term investors. 

Aiden Murphy of Crowe Horwath outlined how the sector has evolved into three tiers:
Tier 1: Dublin city centre (84) Hotels; 9,570 rooms average size 114 keys; 16 per cent of market; RevPar up +€18 from €65 in 2011 to €83 in 2014; Price per room €100-€300k
Tier 2: Rest of Dublin suburbs, Other large urban areas (109 hotels, 12,720 rooms); 22 per cent of market;  RevPAR 2011 €50 and 2014 €61; Price per room €350- €80k; Huge opportunity to resize this debt and openness from bankers to do this but better to hold for 10-15 year rather than selling now;
Tier 3: Regional and other (663 hotels 35,569 rooms) 62 per cent of market; RevPAR 2011 €40 to €49 2014 up +€8 in period but gap with Tier 1 is €35 in 3 years (Now €49) Price per room: €7k-50k

Murphy's key messages for loan refinancing was that hotel valuation reports must be informed with trading levels, capex, vouchers and staff entitlements, value attached to PGs. Bank policies have changed and debtors should resubmit proposals even if previously rejected as banks may wish to leave market.
 
Owen Travers from AIB stressed the importance of ensuring your mezzanine or equity finance is ready when restructuring as "bank to bank" purchases require immediate refinancing which can be complex.  

Patrick Ryan of NAMA noted that loan sales are growing rapidly and that some of the remaining 101 hotels in IRL portfolio could be sold off in tranches. The burgeoning trade in Dublin has not percolated into the provinces and while there will be an accelerating of agency deleveraging, NAMA is aware of market saturation and loan sales could speed this up this process.

Brian Ross of Davy Corporate Finance shared insights on the recent successful Dalata Hotel Group plc €265 million Initial Public Offering (IPO) and information on institutional pools of capital providing opportunities for investment. He noted that "strong drivers underpin the investment proposition for hotels in Ireland" and that Ireland is well ahead on European deal flow and that investors believe the country is at an inflexion point as the sector is emerging from difficult few years.

Forecast two per cent growth in consumer spending in 2014 coupled with strong infrastructure has already attracted strong international investment from a wide range of participants. Ross summarised that new pools of international capital attracted to Ireland.

Con Quigley of BDO explored how to go about obtaining equity, mezzanine finance and addressed the timing and other challenges in funding hotels. He does not believe the market is overheating and that values are at a low point on the curve, yields at low point, there are high barriers to entry and funds are relatively cheap.
 
Minister Leo Varadkar TD, minister for transport, tourism and sport closed the conference, noting that key industry milestones included the VAT reduction to nine per cent, The Gathering 2013 and EIIS Investment extension to include hotels and also allowing hotels to use REITs as investment vehicles. 

Overall the outlook for the sector is looking good but it's worth remembering the unfortunate 200+ hotels that have yet to feel the pain of restructuring. Some good opportunities beckon for owner/operators to buy quality assets so the message is to get out there and secure your equity finance while ensuring the investment stacks up and your exit plan is clearly defined.

Speaker presentations from the conference can be found here.

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