Stephen McCall likens U.K.-based hybrid extended-stay player edyn to a newly refined woman from Victorian times, who sweeps down a staircase in a new ball gown ready to meet her suitors.
The group, owned by Canada’s Brookfield Asset Management and led by CEO McCall, operates an extensive range of properties across the U.K. and Europe, including its lifestyle brand Locke, and Cove, which offers serviced apartments for the modern traveler. It also has a traditional corporate apartment brand called SACO (Serviced Apartment Co.). Together, alongside an extensive network of partners around the world, edyn has created a global ecosystem consisting of more than 80,000 sites in 260 locations.
And while the hotel world derailed over the past two years, edyn’s portfolio traded “exceptionally well” and this year expects to exceed 2019 performance because its evolving strategy affords it a steady base of longer stays at more sustainable rates, combined with transient rates that compete with those seen pre-pandemic.
With that as a backdrop, edyn’s sights are firmly set on expansion into Europe this year – especially with Locke and most notably in Germany – where it will open 536 keys across Munich and Berlin. “In addition, we are laying the groundwork for further openings in London and our entry to the Swiss market with the opening of a Locke in Zurich in 2023,” McCall added.
To further its momentum, last March edyn secured an additional £105 million (US$137 million) in debt funding from Blackstone Mortgage Trust and KSL Capital Partners’ European Capital Solutions platform (KSL ECS) to expand its Locke and Cove brands across Europe. The new funding will directly support the development of properties in Zurich and Lisbon.
Last month, edyn acquired the Hotel Ascot in Zurich, which will convert to a Locke by 2023 with 80 mixed-style rooms and amenities that will include a restaurant, bar and coffee shop. Meanwhile, the Lisbon development is the conversion of a historic Portuguese convent, located close to Avenida da Liberdade in the city center. Scheduled to open in 2023, the property will be the largest Locke to date, consisting of 369 keys, with amenities that include two destination restaurants, three cocktail bars, café and co-working space, swimming pool, courtyards, gym and meeting rooms.
The new support builds on the £195 million (US$254 million) multi-asset debt facility created last year with Blackstone and KSL to support the acquisition and development of five new projects.
Edyn also has a property in Copenhagen, Denmark, which is expected to open in 2024, and it bought other properties in London – Kensington West and Canary Wharf. Paris is the next target, with the group also looking at Barcelona, Madrid, Milan and, ideally, Amsterdam and Rome. Back in Germany, it also has developments underway in Frankfort, Hamburg and Dusseldorf. “That’s the first stage of growth and then you can start to look at either multiple Lockes in markets where there’s opportunity or potentially going further afield to other continents,” McCall said.
To execute on this plan, it is now up to McCall to keep edyn agile and focused on building positive relationships with its partners to navigate the added challenges of a pandemic, Brexit and talent shortages.
Betting on trends
The former hotel accountant who rose to CFO of IHG’s Middle East and Africa business before realizing he’d be happier on the operations side and finally became COO for IHG in Europe, wasn’t so sure about this opportunity when first offered in 2018. But, he says, the more he learned the more intrigued he became with the possibilities. “Like many COVID-related things, this hybrid extended-stay trend has been accelerated by some fairly profound changes in society,” he said.
Edyn, a pioneer in their space, is betting travelers are going to travel less, but stay longer, and the length of stay plays into its hands because, as McCall put it, “you don’t want to be in a hotel room for three weeks.”
That change in travel behavior is also expected to attract the attention of the investment community, which will start to back this type of an asset class more widely because yields are more favorable, and the assets are lower risk due to being anti-cyclical. “But it’s also a question of time,” McCall added. “The investment community is slow to wake, as are your average consumers because many people don’t like taking risks with new concepts and ideas… We just need to promote ourselves a little bit better.”
All of this has served to enlighten McCall, who thought he had fallen out of love with hospitality. But he had not – it was just the big brands he didn’t like anymore. “The problem with big brands is that they’re created in an office by marketing execs and designers, and not by people who spend a great deal of time in hotels and who want the journey to be a journey of discovery,” he said. “We’ve forgotten that as an industry. Edyn has changed me, quite fundamentally, because I forgot that travel should be about fun and discovery and stories to tell and memories to share. And you don’t get that at a big brand, no disrespect to those guys.”
With business travelers remaining part of all edyn brand’s sweet spots, McCall continued to explain his rejuvenation by stating how he doesn’t understand the positioning of a traditional business hotel. “A business hotel is code for boring, right? And there’s no room for that in life,” he said. “Travel is just fundamental to human connection, to avoiding misunderstandings. Anti-globalization is one of the most worrying trends I’ve ever seen, and travel is potentially a remedy to that. But it must be enjoyable and fun, and sometimes we take it far too seriously.”
A standard Locke offering is usually at least one restaurant, one cocktail bar, a co-working zone, a gym, and a coffee shop or a cafe.
Edyn tends to use different, smaller designers willing to take some risks for every Locke it does. While some of those designers are more cost effective, McCall admitted it makers scale more difficult. “But we decided it was a price worth paying to have a brand that was fresh and surprising,” he added.
Edyn also finds local, artesian-quality third-party operators to run those amenities, who are not crucified with expensive leases to benefit from the ecosystem they create. “You get bars in the common areas, which helps sell the rooms and at a premium, and there’s more money for us in rooms… Like many lifestyle businesses, it’s the hustle, the bars and the common areas that make the hotels most active… In south London, the coworking area is jammed every day – and we don’t charge for Wi-Fi. We encourage them to buy a coffee,” McCall said. “But the guests who stay with us for months or weeks love the fact that they’re walking into this bustling place with cool people. We put on good music and we do a whole bunch of cultural events – not that different to what any respectable boutique or lifestyle brand would do… There’s a real demand for that, albeit most of our guests don’t eat in our restaurants [they have their own in-room kitchens]. It’s the locals that eat there.”
Business mix
All that said, when Brookfield acquired the business from Oaktree Capital Management in 2018, it was a traditional five-year hold with more of a traditional serviced-apartment vibe that needed a better operating platform. Then the pandemic happened, and plans changed. The good news is that Locke, Cove and its legacy SACO brands have done well during COVID as it supported a lot of essential workers and other remote workers.
McCall said the business never dropped below about 40% occupancy and covered all its marginal costs throughout the pandemic. In March, it was running at about 85% occupancy and RevPAR in some of its properties – back to pre-COVID levels. “They’re super resilient and far less cyclical,” he said of the edyn concepts. “Investors are now slowly waking up to the fact that if you are an extended-stay model, where you can secure a base of business, which is very resilient to economic shocks, then you have the best of both worlds.”
With the pandemic slowly quieting down, however, McCall expects the business mix to moderate, which he says isn’t all that bad as the leisure business is more expensive to operate with higher distribution and commission costs. “But the big question is when and how much corporate business comes back,” he said. “My CCO is a little bit pessimistic and said he thinks that about 10% in corporate travel has disappeared forever. If that’s the extent of it, I’ll be quite happy.”
What has changed a lot is the increase in short-stay business, McCall said, and the lifestyle positioning also serves to attract locals looking for a place to work, eat and network, especially within the Locke brand. “We took in quite a lot of short-stay business when corporate business disappeared… It meant we could run at a high occupancy, and we could do it very effectively on pricing,” he said. “Our GOPs, like our operating margins, never really suffered very much. We will run GOPs north of 60% when most hotels will be lucky to see more than 40%. In my mind, the flexibility is most attractive.”
As a result, edyn wants to put a Locke into most of the European gateway cities with Brookfield supplying the equity and the edyn team going to the market to find debt such as that supplied by Blackstone and KSL. Blackstone usually supplies most of the main debt with KSL taking the junior mezzanine piece, according to McCall.
Not all future deals will be funded through Blackstone, however, as edyn will choose the best premiums in specific markets, as well as the best partners with which to work. “It does help to have Blackstone as a partner as people immediately assume the degree of credibility and that you must be reasonably well run,” McCall added.
Development side
While Cove and SACO are asset light, Locke is predominantly asset heavy and most of the value of the business is tied up in the real estate. It acquires assets and converts them by using its own service departments.
Room for room, development costs are more per square foot than a traditional hotel, according to McCall, with a lot of the additional cost coming with the kitchen fit out. But the advantage is on the operating margins because it doesn’t have big F&B costs and has a slim staffing model with most service centralized.
Rates are property dependent, but McCall said its Leman Locke asset in East London has been getting £300-400 a night at its peak.
But the booking model has evolved dramatically as the brand is evolving into more of a hybrid. What used to be a couple of thousand corporate transactions a year has evolved into 250,000, requiring what McCall calls a rewiring of the business to yield more like a hotel. “It will serve us well for a decade to come, but it’s quite painful because it’s a new enterprise architecture and a new hybrid hospitality revenue management discipline,” he said. “Hoteliers are used to looking at occupancy, rate and RevPAR. We do occupancy, rate, GOP and length of stay because length of stay drives GOP, even if your rates are lower. So, we will sometimes turn down higher-rated business because it’s short stay and we’ll take lower-rated business because it’s longer stay and more GOP accretive. But traditional revenue management doesn’t work.”
Another challenge moving forward, McCall said, is inflation causing development cost increases, as well as supply chain delays. “We must be quite conservative when we do our underwriting,” he added.
Then there is awareness, especially when opening in new markets. “We must build that commercial muscle from scratch, and as a centralized business that is a challenge. But most new entrants come across that problem,” McCall stated.
Culturally, McCall is concerned about maintaining distinctiveness in the face of scale. “As we get bigger the tendency is to standardize, systematize, automate and build processes around everything, and it can strip the joy and the heart and the soul out of what it should be like,” he admitted. “We fight very hard to maintain our identity and purpose, and that’s always a balance… But too much order and control and you step away forever. So, that’s a very interesting tightrope to walk.”
In the end, though, McCall remains very enthusiastic about Locke because it has early-mover advantage, particularly when it takes so long to build an asset base. It could reach 40 hotels and more than 4,000 before others get started. “We can get to a reasonable degree of scale, while others are still figuring it out,” he concluded.