How to Evaluate a Deal in Today’s Market, with Valor Hospitality’s Euan McGlashan



Volatile market conditions present risks and opportunities for both hotel owners and operators. In this podcast, Euan McGlashan, co-Founder & CEO of Valor Hospitality Partners, joins host Robin Trimingham to discuss how variables like rising interest rates are impacting market transactions, how to properly manage downside risk, how to evaluate potential acquisitions and future strategies for growth.











Highlights from Today’s Episode

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Episode Transcript

Euan McGlashan: There are so many layers to this conversation because as development has slowed, a lot of it’s been for city center projects because we’re still dealing with some of that, that fallout from COVID, where you got that sluggish corporate travel demand is still not back. So it’s a tough time to be building new and developing. 

Robin Trimingham: Welcome to the Innovative Hotelier podcast by HOTELS magazine, with weekly thought provoking discussions with the world’s leading hotel and hospitality innovators. Welcome to the innovative hotelier brought to you by HOTELS magazine. I’m your host, Robin Trimingham. As we begin to work our way through the second quarter of 2023, global analysts continue to weigh in on the likelihood of recession. Despite the rumors, one full service hotel management company has been expanding its portfolio in the Middle East by partnering with the prestigious Investment Corporation of Dubai to add two properties to its portfolio. My guest today, Euan McGlashan, co-founder and CEO of Valor Hospitality Partners, a global third party management company that serves as a one stop shop for owners, investors and developers with more than 90 hospitality projects in its portfolio. And he’s here today to share his perspective on the opportunities for expansion in a time of economic uncertainty. Join me now for my conversation with Euan. F.O.H is a global food service and hospitality company that manufactures smart commercial grade solutions. Headquartered in Miami, the company designs and manufactures all their restaurant and hotel products. They have showrooms and distribution centers located throughout the globe, and their products are always in stock and ready to ship from any of their distribution centers worldwide. Welcome, Euan. It’s great to meet you. 

Euan McGlashan: Thank you. It’s lovely to be here. Thanks for having me. 

Robin Trimingham: Well, I’m very interested in your perspective today. As you know, I’ve been doing this podcast for about a year now, and I’ve had the opportunity to talk with lots of hoteliers at all different levels. But I’ll just tell you openly, you’re my first owner on the show, so I think this is going to be a great conversation for our listeners. So let’s just dive straight in here. In the hotel industry, we’ve got the debt and the equity market. And traditionally the advantage of debt financing is that operators can raise capital without having to dilute ownership. So with interest rates being the way that they are little crazy volatile. In your opinion, is this a volatile way to proceed? Like when does it make sense at the moment? 

Euan McGlashan: Well, there’s lots of ways to answer that based on what we are seeing. There’s still equity and debt in the markets for the right project and sponsor. But as you know, right now, interest rates have increased to 8 or 9%, which pushes the equity return requirements to need to be higher to correlate the risk. So we’ve definitely seen a slowdown that is much harder to get and there are very few groups in the equity world that are willing to take the risk, especially on new development. Right now, there’s not a lot of appetite for risk where you’re going in all equity for a new development and then seeking the debt when the market stabilize and recover. So we’re definitely seeing pressure. And then don’t forget that the interest rates affect everybody. So as a developer, you’ve got to deal with massive budget fluctuation on project cost. And we were fortunate. We had a few projects that were on the go during COVID that we opened, but I can safely say that anything that we’ve opened in the last year or two that we’ve ended up overbudget. When you think about the lifespan of a project from start to finish on a new hotel development, you know, you’re talking 3 or 4 years and how how you underwrite a project 3 or 4 years ago relative to today. And I’m sure you’ve seen this in Herodus, the cost of of goods and just development costs in general have spiraled upwards. So they’ve gone the wrong way. So the interest pressures really affect everybody. Now, there are some lending programs in some states that may help, especially as we’re spending a lot more time in that ESG space, environmental, social governance, etcetera. So there’s one program called the Pace Lending Program, which is a property assessed clean energy. So you are seeing creative ways to try and get some of those interest rates down. But I guess the short answer would be that everybody is feeling the pressure now and new development is certainly slowing down. 

Robin Trimingham: You know, you’re making an excellent point that I’d never really thought about. You know, when you’re costing one of these enormous projects, of course, you’ve got, you know, all the supplies, the concrete, the wood, the whatever. What do you do when you have a huge jump in the cost of construction supplies and labor and things like that in the middle of a project? 

Euan McGlashan: There’s two ways to answer that. So in the good old days before all these pressures and if you were if you were maybe over developing or overbuilding, that beautiful term value engineering so you would value engineer some of that cost out. I think what we’re seeing today is that there’s actually a scale back sometimes even during the construction development phase when it’s not a it’s not really a value engineering, it’s basically a redesign and you’re having to act and react and act in real time and you’re having to scale the project back, which again, that has a massive knock on effect because whatever you were underwriting relative to the five, seven, ten year performance of the property, you’re in that juggling act because if you’re redesigning and you’re taking some of the elements out that were helping drive a lot of those revenues you were underwriting too, it gets pretty tricky. So it’s a it’s a scary time for a lot of folks that are dealing with that. 

Robin Trimingham: I can totally see what you’re talking about because if you have a hotel in development and you’re costing everything going forward on how many rooms you’ve got and, you know, projected sales and all of a sudden you have a whole building, less rooms, you must have quite a pickle. 

Euan McGlashan: You do. It can be quite a daunting and terrifying experience, but hopefully you’re doing it in a intentional and thoughtful way that you’re not you’re not stealing too much from the revenue drivers. Then it’s so nuanced. I could put you to sleep and bore you on this topic. But, you know, there’s so many layers to this conversation because as development has slowed, a lot of it’s been for city center projects because we’re still dealing with some of that, that fallout from COVID, where you’ve got that sluggish corporate travel demand is still not back. So it’s a tough time to be building new and developing. 

Robin Trimingham: Believe it or not, my very first proper job was selling houses under construction. So I know something on a small scale about this kind of business. You could not possibly put me to sleep. I love talking about this stuff, but let’s change it up a little bit here. Let’s talk about equity financing where, okay, you’re raising capital by issuing shares, which in some way is appealing because there’s no principal or interest that has to be paid back. But let’s face it, you’re diluting ownership. When is that a good idea? At the moment. 

Euan McGlashan: Look, the whole capital stack is completely changed. Some of the developers that are talking to us, you know, with with interest rates up at the 8 or 9%, they’re almost trying to stack it and they’re taking maybe 40, 50% conventional debt. There may be taken some meds that in the middle. And then in terms of their equity generally being asked to put in a lot more and commit a lot more. So but again, that’s that really changes the returns dynamic. So again, it’s a really tough one and it really depends on the appetite of the developer. 

Robin Trimingham: So this is really turned the whole process on its ear. Do you feel that there are some new business models coming out of this that are like really good or is it just survival mode? 

Euan McGlashan: I don’t know that I would necessarily call it survival mode. I think the core hospitality investment world is are slowly backing away from unless it’s an incredibly lucrative opportunity where the returns are so high anyway and there’s a massive demand for that market. Generally, we’re seeing everybody start looking at hotels that are trading hotels and more likely need a need, a renovation or a rebranding or a repositioning. 

Robin Trimingham: Well, that completely makes sense. So supposing you’re a boutique operator and you’re looking to expand your portfolio and just the way you said you’re looking at possibly acquiring some kind of existing property when you’re evaluating the financial and operational performance of a project at a time like this, what are the key things you should be considering?

Euan McGlashan: We follow the markets daily and you’ll certainly you’ve been writing about this. You’ve seen this. There was a massive spike in transient demand coming out of COVID. You know, we not that we ever expected to see discounts to try and attract guests, but we’ve seen transient demand like we’ve never known. It’s probably been at an all time high. And therefore the beneficiary of that is much higher orders. I think from what we’re seeing that by the end of Q2 or Q3 this year, we may see that transient demand start to drop. We’re already seeing in some of our forecasts that that’s starting to slow down a little bit and therefore if that slows some of those top. Hours that we’ve been experiencing will slowly start to diminish and come back more to Norm, whatever. I mean, it’s tough these days to even talk about what is normal. But I think with the underwriting, we’ve got to be careful. I think we’ve still got some choppy water over the next year or two. 

Robin Trimingham: Yeah, I completely agree with you. And in such a volatile time, part of evaluating a prospective project when you’re talking about acquiring an existing property is doing your due diligence and analyzing the competition. If the competition is having a really rocky year, how do you evaluate it? What’s your take on this? 

Euan McGlashan: We’re a global company, so my view of that is a world view and it’s different in different markets. We tend to look right now is where do we see some of the. When we talk about these these choppy waters, where do we see them coming? And it will be really interesting to see what transpires for the hotel owners and weaker markets, not A-plus-plus core markets as that debt that they currently have starts to mature and they need to refinance. So I think that’s where we might see see some opportunity. I could see that coming probably again by Q 3 or 4 this year. 

Robin Trimingham: Yeah, I think you’re right. Every analyst that I’ve spoken with is predicting that the same thing is going to happen or starting to happen. So I do think that there’s going to be some surprising things available as we go forward. So if you’re adding to your portfolio and you’re going to expand into a new territory, you presumably want to put enough oversight in place at this property you’re acquiring to get it off to a good start. But at the same time, you don’t want to micromanage to the point that you’re stagnating growth. How do you find that middle ground as an owner? 

Euan McGlashan: Operator, Let me try and answer this in a different way, because I actually did an interview not too long ago because interviewer was really interested in some of my thoughts about entering a new market globally and what are some of the key things to be thinking about? So this answer is probably more for hotel operators like us that they’re thinking about a new market. The problem you’ve got now is you can’t just pick up an opportunity in another city which is geographically well away from from head office or in another country and think, just put in a great GM and everything will be fine because that’s not what the owner of that property needs. I mean, they need proper oversight. So what we’ve done, which is a little contrarian to a lot of our competitors, is my partner and I decided very early on in the evolution of valor and wanting to be global that we would go into the markets, we would study the markets, we’d get to know the markets, the good owners versus the bad owners, the good projects versus the bad projects. And while we were there, we would start to build a small team on the ground that when we then got our first opportunity, there was a team that was ready to provide that oversight. And that’s where you’ve got to have the inner fortitude to be able to say, Right, we’re going to we’re going to spend some real money to enter this market. And then once you do get the opportunity and it comes up, you’re you’re well positioned to actually deliver for the owner. 

Robin Trimingham: I think that’s an excellent way to proceed. And I think that really speaks to you guys being a global company, because if you are, that’s exactly how you would approach it. So I’m asking everybody that I talk to this question lately. How did COVID change the nature of these owner operator relationships? Is it just what you’ve said a minute ago, or is there more to it than that. 

Euan McGlashan: Is maybe going to sound a little self-serving, but but our valor, our reputation means everything to me. And, you know, I don’t know how much you’ve followed us or read about us, but but integrity and transparency is massive and honesty and trust. We agreed a couple of things very early on in COVID. One is because of the culture and I know I’m getting slightly off topic, but I’ll come back because of the culture. We weren’t going to let any of our team go. We were going to do everything we could to hold on to them because we knew that it would end. And culture only means something when things go really wrong. And we saw so many competitors just slicing their team. So we kept everybody in place. And what we did though, was we doubled down with the owners. We wrapped their arms around them, gave them a big hug, said it’s all going to be fine and we’re going to be in the trenches with you. And you know, here in the US we had ET, etcetera. And I was so proud of my team because while everybody was avoiding. All our team were on planes. 

Euan McGlashan: Many got COVID, including myself. And we went out and we got into the properties, hunkered down with the owners and did everything we could to get through it as painlessly as possible. It was a nightmare for all of us. I keep telling everybody I’ve never worked so hard in my life for nothing. But it was something because you know, what we got out of it was even deeper and more trusted relationships with the owners, which is everything to us. So when you say how did the owner relationships change if you did what we did? And trust me, there was a lot of people that did, then the relationship just became even more trusting. But I think owners in general paid more attention. If it was an owner with a big portfolio that trusted you anyway and that was commercially performing and doing well, when you’re not performing and you’re plowing in hundreds of thousands or millions of dollars to keep a business alive, you tend to take a slightly different view on the commercial. So they got a bit more involved. But you know, for us, that’s that’s fine. 

Robin Trimingham: I think you’re right. Covid really separated those who care from those who don’t. When you swallow hard and do what you did, it really speaks well. It just builds your reputation in a way that people will remember for quite a long time. So I think it’s a very smart move. Established in 2002, F.O.H is a woman owned global food service and hospitality company that manufactures smart, savvy commercial grade products, including plateware, drinkware, flatware. Hotel amenities and more. Driven by innovation F.O.H Is dedicated to delivering that wow experience that restaurants and hotels crave all while maintaining a competitive price. All products are fully customizable, and many are also created using sustainable eco friendly materials such as straws and plates made from biodegradable paper and wood and PVC free drinkware. F.O.H. Has two established brands. Front of the house focused on tabletop and Buffet Solutions and Room 360, which offers hotel products. Check out their collections today at I understand that Valor also works with hotel developers. How is the feasibility analysis process for a start up project affected by the current economic uncertainty? Do you see the situation changing anytime soon, or are we just going to be going around buying existing properties? 

Euan McGlashan: Well, we work with a very interesting ownership. We work with private equity that we run big portfolios from there at private equity firms from different parts of the world. And we we work with a lot of of independent owners or even just small portfolios. So one of my partners, Brandon Hatfield, he heads up our global underwriting platform. And then we have regional underwriting platforms in the Americas, UK, Europe, Africa, etcetera. But again, I’ll answer this in a slightly different way, because the work that you do in feasibility is it’s very involved and it’s hard work. I think a lot of people think that it’s just pulling up an Excel spreadsheet with a five year pro forma sticking your finger in the wind and seeing what way you think it’s going to go and taking just industry standard margins to get you to an EBITDA number that everybody could live with. That’s not true. So what we’ve done, I think we’re about 135 team members now at corporate globally. And one of the big investments we’ve made has been in our revenue management team. So we’ve got we’ve got a top revenue manager for America’s UK and Africa who all talk regularly. But when we’re asked to look at a market, we do a deep dive into that market and really study financial performance of what we believe to be the comps both historically and in present day trading. 

Euan McGlashan: And when we use that as the basis and then we work from there, But then the rest of the teams and the disciplines, whether it’s HR or whether it’s the ops or the fab guys, they then go and look at the market. And labor costs around the world vary labor costs from market to market, and the states vary. So we do a lot of deep dive work. And then you’ve got the project team. If there’s a pit or a renovation or a repositioning, again, you know, those development costs in different markets are very different. So everything we do in that underwriting feasibility is thoughtful, it’s intentional, We really study the market. And if an owner says, Well, that’s not good enough and I need more, we’ll see if there’s more. But, but we’ve lost a lot of projects because we refuse to underwrite to something that we just didn’t believe was accurate that we couldn’t achieve. And we you know, when we talk about taking on projects, one of the things that you’ll never hear me say is going to be 100 hotels in 20 minutes. 

Euan McGlashan: I don’t like putting out numbers like that because for us, we look for quality over quantity and and its quality of owner and quality of project where we know that we can add a lot of value. So underwriting is tricky because I know a lot of people are in a difficult situation. They need to add hotels to the portfolio because management company’s tough, especially when you get to a certain amount of scale. So again, I keep talking about this inner fortitude. You’ve really got to have the courage to stand up and say, no, it’s not realistic. And often, certainly in in a lot of cases, if you say yes and then you don’t deliver because it isn’t, you knew you couldn’t get there. That’s worse than saying no, that’s worse because you’re you’re getting you’re getting beat up by the owner every month. You’re probably getting beat up by the lender and you’ve got to explain it away. And and in more cases than not, you’ll normally end up losing the contract and your reputation goes with it. So we’re just not willing to take that reputational damage. 

Robin Trimingham: You have to decide who you are and what’s right for you and then stick to that. And it really doesn’t matter what kind of business you’re in. It’s always interesting to me when people feel that, Oh, well, they can stray away from that. It’ll be fine. Having said all of this, you’ve just taken on two new properties in Dubai, so they obviously pass the sniff test, if you will. What makes this region so attractive to you at the moment? 

Euan McGlashan: You know, I’ve been following I spent a lot of my career in South Africa. And actually, we’re we’re very active in Africa and very active in the Middle East. And what is probably at 100,000 foot level and give you a real macro answer, What’s got us interested is the fact that as our portfolio is there’s some independent luxury boutique, but a large percentage of our portfolio is internationally branded under a franchise franchise has not something that’s typically been thought about or promoted. Two two ownership groups in the Middle East or Africa. But now owners are getting a lot more savvy. They’re realizing that that is an option. We had seen this shift. We certainly weren’t one of the ones that were fighting for it, but we saw the shift. We had a few people in in Dubai that had said to us, look, this shift is happening. Would you take a peek? And we went into the market and we actually did what I said to you before. We spent a year or two learning the market, understanding who the players were. Seeing if that information was actually true, which it turned out to be. And we were really fortunate because one of our clients that we did some work for in South Africa, IQD Investment Corporation of Dubai, they are one of the largest sovereign wealth funds in Dubai, wonderful people. 

Euan McGlashan: And they had some properties that they actually wanted to take from brand manage to franchise plus they were seeing multiple opportunities where where they felt they could actually be really additive to our company. So we actually signed a joint venture agreement with them where they’re a minority stakeholder in our business. And so we when we actually did decide right now is the time in Dubai, we had our team largely built, or at least the first 6 or 7 people we’ve just picked up. I think it’s it’s around seven properties actually, in Dubai, a couple in Oman. And that region spreads to Uzbekistan, where we’ve got a project that spreads to Lahore in Pakistan where we’ve got a project coming up. So we’ve gained some traction really quickly, which has been great. And I can assure you that franchise is definitely becoming more and more prevalent. And to be fair, all the big international brands have realized that to get the kind of growth that they’re looking for over the next few years and longer that they’re going to they’re going to rely heavily on franchises, one of those growth vehicles. So we got great relationships with with IHG and Hilton and Marriott and Accor, etcetera. 

Robin Trimingham: So that’s a very interesting way of looking at portfolio diversification. When you’re being particular about what you’re taking on board, how do you approach getting the right mix of assets of properties in your portfolio? 

Euan McGlashan: I don’t think that that’s something that is on me or us as a company. I said we look for quality over quantity, but we don’t have a business plan that says, Right, we’re going to be 50% franchise, of which, you know, we don’t do that. It’s as the opportunities come to us, I mean, we know that we prefer to play in the the full service, upper upscale end of the business, although we have some more select service type properties in our portfolio. But we spent a lot of time as we’ve invested in our teams around the world and our people. We’ve tried to become specialists in so many areas, but from an ops perspective, so many of of the partners, including myself, come from independent luxury or big city luxury hotels. So that tends to be a market that we know really well. So if you say, right, is that one avenue, then possibly we love the independent space. You know, I grew up in independent. A lot of the partners grew up in independent. So we actually have really interesting conversations when we sit down with with potential clients because they kind of tell us their vision for the project. And then we do one of two things. We either help them pick the right brand for them or we say, Look, here’s how we think we could perform as an independent, and it’s really up to them to choose. 

Robin Trimingham: So you’re really very open minded If everything lines up, I guess is the best way to say that. 

Euan McGlashan: Yeah, absolutely. We don’t ever go into a project with an idea of, Yeah, it absolutely has to be this. Unless, of course, look, there’s a lot of projects that we go into that the brand is already there, which is fantastic, or it needs to be repositioned and you need a PIP or the the license agreement has come to an end and the owner wants to think about another brand or a different direction. And so we have a we have a real open, clear worldview of all that. And and we have look, we have certain loyalties to a lot of the brands that have been loyal to us over the years. But again, we’ll go down that route only on the basis that it is the right thing for the owner. At the end of the day, that’s what keeps us alive and what pays our fees. 

Robin Trimingham: That makes sense. Question I ask a lot of the people I chat with. What do you feel is the biggest mistake that other hotel management companies have been making, and why do you say this? 

Euan McGlashan: Oh, well, there’s enough material there for a conference. That’s a bit of an unfair question because. 

Robin Trimingham: Because when you do your TEDx talk, I want a credit. 

Euan McGlashan: Yeah, You’re going. Yeah, well, it’s probably enough for a TEDx talk. Let me tell you about some of the things that I think I’m proud of that I think make us unique in a very humble, non arrogant way. We believe in over communication and transparency. So I was always told, tell the truth, even if it hurts and give me the good news fast and the bad news faster. And I think a lot of management companies probably don’t over communicate are probably not a heck of a transparent and a lot of times may bury their head in the sand and hope the problem goes away. And in our business, which is millions of details, the problem never goes away, I can assure you. I think I maybe tried that route once or twice and it failed. My my head was pulled out of the sand really quickly. I think I’ve written a lot and spoken a lot recently on fees. We often compete against management companies that are reducing their fees to their base, fees to ridiculous amounts, sometimes to zero, and basing their entire fee off of some sort of incentive off of an app. And that’s unfathomable to me. And that really does irk me and make me mad because you’ve got an owner that spent tens of millions or hundreds of millions of dollars on an asset. An asset that never sleeps. So businesses 365 24 over seven and it is probably one of the most complex, hardest businesses in the world today. 

Euan McGlashan: It truly is. Never mind. We are not even going to have enough time for this once we start getting into labor. The biggest labor crisis in hospitality I’ve ever seen in my life, and largely because a lot of the youngsters coming out of uni today are looking at the workplace, are not even thinking about hospitality. But let’s let’s park that for another day. So our our world is hard. And basically that base fee, what that base fee should be going to is your infrastructure that you and I have talked about where you’re investing in the people on the ground so that they can make sure that that asset delivers culturally and commercially and makes the owner wildly successful. So effectively we’re the most important party. So why, why why do people offer that service for next to nothing just to get a management contract? I see that happen and I see so many failures and so many breakdowns with the ownership and I give the ownership groups a hard time when they ask me to do. When owners say to me, look, you know, you need to reduce your fee, you need to drop, you need to discount. I say to them, no, for all those reasons. So there’s that. I think you’ve got to work with high integrity. I mentioned it there. You have to deliver commercially and culturally. You almost have a word I’ve used a lot recently is Obsession, and my team around the world know this. 

Euan McGlashan: I’m obsessed. I’m obsessed about that delivery and I’m obsessed about guest service experience. Because another thing that happened coming out of COVID and especially with with these higher orders, the guest today have higher expectations than ever when, by the way, we’re in a global staffing crisis and we’re scrambling to get people in. Obviously, you’ve got to spend a lot of time training, but you’ve got to be able to deliver. And I always say that originality is overrated. It really is. Just do the simple things brilliantly. So many people are trying to get funny and clever and tricksy and all these new original ideas when they’re not even getting the basics right. But you do the simple things brilliantly. Your business is going to be massively successful. And I see so many people getting away from that. And then I think we always generally to our clients, you know, if they say we’ve we’ve got a question, we say yes is the answer. Now what is the question? And you have to have that kind of attitude, but it’s fair to charge for that. So gave you a lot to think about there. But I really could talk on that topic and what we should be doing for owners and how that relationship should be. But thankfully, and I’m touching wood while I say this, we love our owners. We’ve got a great, great collection of owners of of many who have become personal friends of mine. 

Robin Trimingham: Thank you so much. You and I think this has been a fascinating conversation, and I appreciate you taking time to chat with me today. You’ve been watching the innovative hotelier. Join us again soon for more up to the minute insights and information specifically for the hotel and hospitality industry. You’ve been listening to the Innovative Hotelier podcast by Hotels magazine. Join us again soon for more conversations with hospitality industry thought leaders

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