AJ Capital partners, the group behind Graduate Hotels, has acquired two Macdonald hotels in the UK. The move helps the lifestyle brand secure a second UK site for its international expansion.
In Scotland, AJ has bought the Rusacks hotel in St Andrews, where it plans a major refurbishment and expansion that will add 44 more rooms and a rooftop bar. In Oxford, it has taken over the Randolph hotel, which it will refit as a Graduate.
The deal comes after Macdonald said earlier in 2019 that it was planning a portfolio deal to sell 27 of its properties to private equity investor Centerbridge Partners. The UK hotel group was reported to be facing a refinancing deadline on GBP195m of loans from Lloyds Bank.
Group deputy chairman Gordon Fraser hailed the disposals as a “superb deal for the business, which allows us to reduce our borrowings significantly while we progress a number of very positive options for the refinancing.”
AJ was founded by CEO Ben Weprin in 2008, and in 2014 the group launched its Graduate brand. The company has involved itself in a range of projects, typically reusing historic buildings, and working alongside investment partners. It collaborated with Soho House on that group’s Chicago members club, which opened in 2014.
The Graduate brand seeks to locate in towns and cities with a strong university, linking hotels with the institutions and designing properties to reflect the locality. AJ also has a programme to develop hotels alongside universities, aiming to gain access to leasehold development sites.
Currently, there are 25 Graduate hotels open across the US, with a further 10 in the pipeline. In the UK, Graduate acquired the DoubleTree in Cambridge, which it will be converting and opening ahead of the Randolph in Oxford. Alongside its Graduate portfolio, AJ also owns six individually branded properties, plus hotels in Chicago and Nashville operating under Hyatt’s Thompson brand.
AJ’s move comes as another lifestyle hotel operator, Soneva, swapped private equity investors as it looks to scale up. The niche company, which has three ultra luxury hotels in the Maldives and Thailand, plus a yacht, has KSL Capital Partners as a new backer. KSL bought out early stage investor Sailing Capital, which exited after five years. Soneva has plans for two further Maldives properties, based around its “no shoes” format.
Indian British hotelier Sonu Shivdasani and his Swedish wife Eva launched Soneva in 1995.The pair’s properties have won awards, and guests have their own butlers. Tina Yu of KSL said of the investment: “We recognise the power of the Soneva brand platform in the expanding market for luxury experiential travel.”
Phillip Allen, chief development officer, international markets for AJ Capital Partners told Hotel Analyst: “The Graduate brand is deeply rooted in storytelling and each hotel celebrates the dynamic university community it is positioned within. Graduate Oxford and Graduate Cambridge will be no different – each hotel will speak specifically to the centuries of university history and tradition that make its destination so unique.”
The brand works hard to create strong links with each hotel’s locality. “From the moment we identify an opportunity, our team begins a thorough research process of the corresponding community, including connecting with locals, interviewing alums and exploring the city itself to uncover the town legends, age old stories and beloved local haunts. It is through this comprehensive process that we are able to create a hotel that is deeply personal to the people, places and things that call that destination home.” Allen said the brand is looking to grow into “many more” other university towns and cities in the UK in future.
HA Perspective [by Chris Bown]: As branding experts in consumer products know, a strongly developed brand identity that has provenance and connection is something consumers will buy into, stay loyal to, and pay a premium for.
Now that approach is being used to create hotel brands that make a deeper connection with guests. But it requires taking risks, and spending a whole lot more time and trouble on, to get to success. For both Graduate and Soneva, finding the right sites and creating the right product can be challenging.
The big groups know these lifestyle brands can be very lucrative, too. And they also know that, even with the best care, they can go off the boil. So it made sense for Marriott to recently buy its W hotel in New York, giving it the space to test out a refreshed W brand, without a worried landlord stressing about occupancy or room rates.
And proving that it’s still possible to come up with creative, lifestyle brands, there’s Barry Sternlicht and Starwood Capital. The group launched its Treehouse brand in London, and says it is now eyeing other potential sites around the UK. Who will buy in?
For Macdonald, the disposals will help reduce debt. But selling the family silver? AJ is rumoured to have looked at the whole 27 properties in the portfolio up for sale, before picking the two properties that suited its approach.
Additional comment [by Andrew Sangster]: There is a number of things going on at Macdonald Hotels which, taken separately, probably don’t amount to a lot. But combined, it begins to create the whiff of a company in trouble.
In June, the company submitted its accounts for the year to March 29, 2018. These showed a loss of GBP2.2m. This was just after its finance director Jason McBurnie left the board at the end of May. McBurnie joined Almarose, the management wing of Aprirose, in November.
The biggest red flag is the move to extend the accounting reference period from the end of March each year to the end of September (28th). There may well be a legitimate reason for this change but the timing looks, at best, unfortunate. The registration of fixed charges by the Bank of Scotland earlier this year similarly doesn’t help how the company is being perceived.
The failure of the Centerbridge deal is hardly going to be made up for by the Rusacks and Randolph sales (the latter was a leasehold) and Macdonald’s debt stack remains daunting.
Gossip on the cocktail circuit suggests that a number of would-be buyers have kicked the tires of Macdonald and deemed it unroadworthy, or at least not worth the price being asked. A key reason being the current trading outlook.
Knight Frank last month held a seminar on UK hotel trading performance. It made for an uncomfortable session if, like Macdonald, most of your hotels are outside of the UK’s top 15 markets.
Whereas for September year-to-date operating profit (GOPPAR) in London was up1.3%, in the regions it was down 2.9%. Worst still was how it broke between the top 15 cities, down 0.6%, and secondary, down 7.6%.
Macdonald’s latest disposal removes one of its properties that was in the top 15 locations (Oxford). And Graduate is going to focus both properties more closely on a niche, boutique or lifestyle, which has proved to be amongst the most resilient in the current profit downturn. The focus for Macdonald remains sorting out its debt pile.