At the beginning of the year, Electra Real Estate launched an REIT fund for investment in hotels, since when it has purchased three hotels in key regions, for approximately 200 million Dollars. The CEO, Gil Rushnik: "Corona has created opportunities – which will continue to appear in the coming year too". The assessments are that the hostelry market will return to profitability in 2023 – 2024.
Electra Real Estate, which is part of the Elco Group, which is controlled by the Salkind brother, announced recently that it has acquired a third hotel in the United States, within the framework of a new REIT partnership fund. Electra Real Estate has acquired the Conrad Hotel in Miami for approximately 126 million Dollars, through the subsidiary company Electra America and a local partner in the USA (25%).
The hotel contains 201 rooms and the shareholders' equity that was invested in the transaction was approximately 51 million Dollars. This acquisition joins two previous acquisitions that have been executed by the specialist REIT fund – the Alexandria Hotel in Virginia (which is close to Washington DC) and the Roger Hotel in New York. Overall, the fund has acquired 573 hotel rooms for approximately 200 million Dollars, of which approximately 90 million Dollars was financed by shareholders' equity.
According to Gil Rushnik, Electra Real Estate's CEO, many investors are interested in the hostelry field. "We are in negotiations with institutional investors and with qualified investors (wealthy, experienced investors) in Israel and globally. The product interests them because it is a non-marketable investment and they are interested in a component that is investor in a sector that has been hit by Corona – so that its correction will be very strong. The opportunity of purchasing assets at a lower price that the evaluations that were performed in 2019 is in and of itself supposed to generate a very handsome profit on an exit. With smart management, it is possible to profit from multiples, which not every other segment of the real estate sector is capable of after Corona. Therefore, institutional bodies are interested in the hostelry sector. It is very difficult to identify a segment of the real estate sector that has suffered a blow and has created an opportunity.
The global tourism segment has suffered a serious blow from Corona, and the investors see this as an excellent opportunity. For example, in June, the Blackstone and Starwood investment funds acquired the Extended Stay America hotels chain, which is the largest chain in the USA for ongoing stays, for approximately 6 million Dollars.
Electra Real Estate too has identified the difficulties in the segment at time of the spread of the Coronavirus in the United States in March 2020. "When we understood that there is an opportunity in the hostelry segment, we began to think how to make preparations for this event", Rushnik says, "It took us a whole year to build the infrastructure, before even approaching any institutional body on the subject. We understood that this is a field that requires much management, and that it is not possible to approach such an investment if you do not have a strong and qualitative operator who will sit with us in the management company".
Rushnik mentioned that after the company has examined numerous companies in the operating field, it chose AKA, which is a hotels operating company from Philadelphia, which is owned by the Korman family, which has been involved in the realty field for five generations. "We wanted the management company to be with us within the management company and for it to have a holding in real estate in order to avoid a conflict of interests. In the hostelry field, if the company is both the operator and also the owner, then the profits increase. Here, we approached the operator and said to it, you will operate the hotel at cost price and the better you operate the hotel, then the more your profits will come from the success of the entire properties portfolio.
The beginning of the recovery from the crisis Electra Real Estate's Shares in the past year
Forecast revenues for the hotels market in the USA In billions of dollars In Shekels
Between a hotel and Airbnb
The specialist REIT fund has set itself a target of recruiting an amount of 500 million Dollars from investors as shareholders' equity for investment in hotels, where the general partner (GP is committed to invest 8%, in other words, 40 million Dollars, of which AKA has invested approximately 10 million Dollars.
The management companies have not been hurt by the crisis, because for them, in contrast to the owners of the hotels, it does not matter whether the hotel is open or closed, they receive the management fees in any event. Thus it would appear that AKA too sees the acquisition of the hotels as an opportunity. Within the framework of the agreement between the companies, ALA cannot reach management frees outside of the partnership. In other words, apart from the hotels that the company manages at present, AKA will be the exclusive operator of the hotels that the partnership will acquire alone.
According to Rushnik, the fund is looking for opportunities that have added value, and it is focusing on the field in which AKA specializes – the extended stay field. "The intention is to a sort of hybrid between a hotel and Airbnb, a room, which gives you the feeling that the hotel is a little bigger, spacious and comfortable. The assessments are that Corona will change the usage and the habits of the consumer when he comes to stay in a hotel, primarily on the business side. If I would once fly for three days, today I will fly for at least a week and a half, with the intention of reducing the number of times I have to get on a plane.
"For the user, the price of the room is lower than the price of a single night. For the operator and the hotel owner, this is a tremendous saving in operating costs. A person who stays in a hotel for several days does not even replace things like soap or shampoo each day. This can result in a saving of 20% in operating costs" says Rushnik.
Electra Real Estate is not the only company to have identified the opportunity in the hotels market and inter alia, it is also competing against Israeli players like Yakir Gabbay, who acquired the Watson Hotel in New York in February 2021 for 175 million Dollars, however the main problem lies in the identification of the opportunities. According to Rushnik, hotel owners often prefer to sell hotels to parties that operate in the field and therefore some of the opportunities never reach the market at large and so AKA's experience has an important part to play in the finding of opportunities.
"There will be more opportunities"
Rushnik explains how exactly the Corona situation has affected the hostelry sector in the USA: "Hotels are a business that require a lot of management and which require a lot of cash flows, because it consumes investment in refurbishments, there is a large level of erosion of the asset, which requires the hotel owner and the management company to put aside 4% to 8% of the revenues for a capital reserve, which is designated for the approval of the hotel, in routine times or during a refurbishment.
"Two phenomena occurred in the Corona period, which are not convenient for the hotel owners: There is no revenue, because the hotel is closed and therefore there are no contributions to the capital reserves. On the other hand, a lot of hotel owners used the reserves in order to pay debt. Even if the banks had been more tolerant during the Corona crisis, at a certain stage they wanted to receive at least the interest payments on their money".
"At present, a year and a half after the Corona crisis broke out, the large operators of hotels are interests in maintaining a high standard and are requiring the hotel owners to refurbish the properties. The hotel owners will have two options – to inject money from their own pockets or to sell. Out assessment is that they will create further opportunities, whether from the direction that many hotel owners will go towards refinancing in 2022. The banks will be willing to provide financing at a rate of 60% of the value of the property, however, the value today is lower than in the past so some of them will have to top up the equity and some of them may prefer to sell".
The assessments are that the hostelry segment in the USA will return to the profitability levels that it had in 2019, however this will only occur in three to four years' time. "According to the models, it will only be in 2023 that the hotels market will return to the levels it had in 2019. There are states in the USA that will help this to happen earlier, for example, in New York it is no longer permitted to operate Airbnb apartments", says Rushnik.
According to him, the pace of the recovery in the sector has not had a marked impact on the fund, whose objective is to invest in hotels in central cities in which a comprehensive refurbishment is planned. "The hotels in New York and in Washington will only open in 2022, after an in-depth refurbishment, within the framework of which some of the rooms will be converted for extended stays. The hotel in New York, for example, was purchased for 20 million Dollars and its refurbishment has cost a further 20 million Dollars. During the upcoming interim term, with uncertainty in the market, the model is to identify and to refurbish hotels in central cities".