The half year results for French real estate investment trust Covivio, unveiled at the end of July, underlined that the firm remains committed to its pan-European hotel business, which achieved a revenue growth of over 20 percent in the last six months. Due to better-than-expected hotel performance, the firm raised its 2023 adjusted earnings guidance to €420 million from €410 million. Yet as inflation and high interest rates continue to squeeze real estate investors, amid a tough financing environment, the firm is also using hospitality’s upward curve to realise disposals.
Said Christophe Kullmann, the firm’s CEO: “In a real estate environment marked by rising interest rates and a slowdown in the investment market, Covivio is rapidly adapting. The €350 million of new disposal agreements as well as the scrip dividend further reinforce the balance sheet’s solidity. Meanwhile, strong like-for-like revenue growth of 7.6% has allowed us to raise our recurring net income guidance for 2023.”
Covivio holds a €2.62 billion interest in 314 pan-European hotels, representing some 16 percent of its overall business. European offices comprise 54 percent of its business, while German residential has become a significant 30 percent, following meaningful acquisitions in recent years. The hotels to which it is exposed, all of which are 100 percent occupied, have a total asset value of €6.6 billion. Its largest hotels business is in France, Germany and the UK, where the group is exposed to hotels worth a gross asset value of €2.5 billion, €1.5 billion, and almost €1 billion respectively. Growing activities in Spain and Portugal, Italy, Belgium, the Netherlands, Hungary, Czech Republic and Poland ensure that the business well diversified across the continent.
Disposal agreements
The firm has now signed some €550 million disposal agreements across its entire portfolio over the last seven months, after unveiling plans in December 2022 to exit some €1.5 billion of assets by the end of 2024. The firm said it was on track to dispose of the remaining €950 million in the next 18 months, with some €350 million of assets under advanced negotiations. Following a slate of sales this spring, Marielle Seegmuller, Covivio operations director, said that sales proved “that recently built, high-performance assets which are in good locations and well-let are seen as attractive opportunities by institutional investors”.
In the firm’s hotels business, H1 2023 saw €58 million in sales, including properties such as the Duca d’Aosta in Milan with 79 keys, purchased by Coima. A range of hotel assets are being earmarked for the capital recycling programme, including properties directly owned by Covivio Hotels, as well as joint divestments alongside AccorInvest, primarily to franchisees. The group is also divesting end-of-cycle properties once asset management programmes have been realised, both in France and other territories.
The second part of the plan involves reducing planned investments, to limit overall capex for the business, while honing its strategy of focusing more clearly on major city centres.
Hotel performance
That said, out of all of the asset classes in its portfolio, hospitality has displayed the greatest resiliency, seeing value declines of just 0.8 percent, and offering a yield of around 5.5 percent in the past six months. Its European office holdings and German residential saw appraisals fall by 5.7 percent and 7.3 percent respectively. Covivio’s hotels portfolio has a healthy average remaining lease term of 12.6 years, far stronger than its offices or residential assets, and its RevPAR climbed 13 percent in the first half of 2023, compared to 2019 figures. Furthermore, significant indexation on fixed hotel leases bodes well for the future. Meanwhile, variable rents have been growing, and the firm has identified further easy asset management wins, it reported. It calculates it will need to spend a fairly modest €21 million on sustainability capex for its hotels in the coming years, targeting equipment upgrades such as geothermal systems, free cooling and heat recovery kits, as well as improved insulation, LED lighting and motion sensors. Some 89 percent of its hotels are currently certified green.
Covivio has also identified reasons to be cheerful about hotels in the coming 12 months. Major events in Paris, including the Rugby World Cup in September 2023 and the Olympic Games, slated for July and August, 2024, are predicted to bring in record tourism figures. In parallel, changing French legislation around AirBnB lettiings have squeezed that market in the French capital by some 18 percent, compared with 2019. The slowdown in construction in Europe also continues to work in Covivio’s favour, with the firm benefitting from a reduced hotel pipeline which the firm estimates to be in the region of 11 percent, with respect to the end of 2022.
A key target for the overall business has been a reduction of its loan-to-value (LTV) to under 40 percent. In the recent results, Covivio said that this had been brought down to 40.7 percent. The firm has achieved a €175 million net debt decrease over the six-month period.
Post-pandemic growth
Like many of its pan-European real estate peers, Covivio saw an opportunity to expand its hospitality strategy in 2020 as Covid-19 sparked distress in the sector. At the height of the pandemic, in autumn 2020, the group pushed through with a sizeable deal for the Dedica Anthology portfolio of eight luxury European hotels, for a price ticket of €573 million, including €86 million of capex. The year after, the firm confirmed it would continue with plans to develop €900 million of properties in France, Germany and Italy. However, a note of prudence emerged even at this time, with a decision to make no acquisitions for the whole of 2021 amid a clearer-than-ever focus on balance sheet health.
Despite all this, there is no doubt that Covivio remains committed to the hospitality sector. The business was a conspicuous early mover in hotel investment, in its former guise as Foncière des Régions, a French REIT structured to take advantage of France’s new SIIC regime in 2003.
Foncière des Régions entered the French hotel market in 2005 through a sale-and-leaseback deal with Accor for 128 hotels, and rapidly expanded in the sector through its listed subsidiary, Foncière des Murs, which became Accor’s preferred leasing partner. Key deals with French chain B&B hotels boosted its business. In 2012, the firm acquired 165 two-star hotels in France from B&B Hotels for €508 million, adding another 22 B&B properties in 2015 for €128 million.
In December 2014, Foncière des Régions created FDM Management through Foncière des Murs, to expand its hotel development business still further. This partnership with insurer Assurances du Crédit Mutuel Vie and bank BNP Paribas added considerable firepower to the hospitality platform, enabling it to expand in the German budget hotel sector and strengthen its French holdings in successive years.
Following the firm’s rebranding in 2018, Foncière des Régions became Covivio, while Foncière des Murs took the name of Covivio Hotels.
In successive years, while partnering with Accor as it restructured its HotelInvest business, Covivio has expanded its credentials as a key leasing partner for many household names. These include Germany’s Meininger, Barcelo and NH Hotels, Melia, Club Med, Grupo Hotusa, Radisson, Marriott International and IHG. Initiatives such as its responsible purchasing charter and a shift to a 100 percent green bond portfolio, have been flanked by plans to achieve a 40 percent reduction in greenhouse gas emissions by 2030. Covivio is also targeting a net zero carbon contribution from 2030 onwards for scopes 1 and 2, all of which increase its institutional appeal.