A new limited-release Luxembourg-based capital guarantee bond has been launched in a bid to capitalise on opportunities in the post-pandemic tourism and hospitality industries in Europe.
In this question-and-answer session, we speak to Christopher Griffin, CIO at GESCO T1 about the five-year GESCO T1 Ltd bond which has been designed as a fixed-income impact investment to provide vital funds into the beleaguered European hotels and resorts industry, with the chance to access a share in the potentially lucrative post-pandemic cut-price hotels and resort property market.
Q1) What does your proposition do? How does it work? And who is it for?
Chris Griffin: In simplest terms, GESCO T1 Ltd has developed a post-pandemic European beachfront hotel and resort acquisition strategy whose basic premise is to buy properties at a discount, develop a geographically diversified portfolio, and then exit in 2026.
The products are design for qualified investors, high-net-worths, family offices, asset managers and the like who want a fixed income diversification component in their overall investment portfolio. This is a hedge investment intended to be over-collateralized and as safe as possible.
We wanted to create something simple, easy to understand, easy to buy, low risk, transparent, and domiciled in a respectable location.
2) What is the structure of this investment? What are the initial and ongoing charges and what level of risk is involved to capital investment?
CG: Our investment is a credit-linked product structured as five-year secure bear debentures bonds in Luxembourg with a total ceiling of €250m, which equates to 2,000 bonds.
There are initial fees that are waiverable under certain circumstances, but there are no ongoing costs to the investor. The bonds are capital guaranteed via collateral, so these are genuinely low-risk, higher liquidity products. There are early redemption fees in the first 36 months.
The ongoing annual fees that are paid by GESCO T1 Ltd. These are back-end fees for the third-party management, issuance, auditing and regulation that are around 60 basis points.
3) What makes GESCO different to other alternative investment companies?
CG: GESCO is the underlying asset for the investment and not an investment company.
What makes us different? I wouldn't necessarily use the term ‘alternative investment company' but rather ‘hybrid investment'.
We were looking to invest in beachfront hotel acquisitions prior to the pandemic but once it hit, we took a step back, re-evaluated the market, saw opportunities and then reverse planned the strategy using available data and market research; so we started with the exit and worked backwards.
We are providing a fixed income product with the goal being to rehabilitate an industry following one of the greatest financial catastrophes in history. Of course, we want to make money, we want the investors to feel safe, but we are also focused on economic development by creating jobs and protecting and supporting the entire business ecosystem that surrounds hotels and resorts.
In that sense we can be considered a fixed income impact investment.
There are real estate funds and other investments that have some similarities to what we do, however our bond holders are sharing in the profit at exit. This means if we hit our exit target, which is predefined and directly correlated to the coupon, that will be reflected in the portfolio's value which includes all the revenue streams at each property.
So simply put, rather than investing in a building you are investing in the building, the land and all of the business and profits within that building.
4) Who are the key members of your team? What is their expertise and background?
CG: In the case of my background, I am currently CIO and I was in wealth and asset management. Before that I worked in the military and government sector both as a uniformed member of the armed forces and as a contractor supporting those entities.
The director of the company, Øyvind Berger, has a background in real estate development as well as project and programme management, in both commercial and residential properties.
We have other team members in the UK and Canada as well as a litany of consultants across a spectrum of areas of expertise, to include an investment board.
Right now, our focus is to stay small and agile, keep all of our overhead costs low and bring in experts as needed.
5) What level of protection do I have in my investment?
CG: All investments carry risk, but the bottom line is that 100% of GESCO T1 assets are pledged towards collateralisation of the bonds. As long as bond are sold, capital is flowing and acquisitions are being made, there will always be a certain level of safety. It is critical that we are not over-subscribed, and that collateral is not being under-utilized.
We have an ongoing pipeline of potential acquisitions that we are currently reviewing which is about 100 properties per week. Maintaining an active acquisition pipeline is equally as important as selling bonds - there is a balance between the two components.
Another thing that we do that helps protect an investment, but it is not a traditional way of doing things, is working with a company in the US that had built an analysis method for us to use that removes emotion.
Unlike traditional real estate investments there is a tremendous amount of emotion involved in tourism and resorts, especially with regards to properties that are family operated.
Emotion creates risk, quite often influencing investment decisions. This is something that we can work diligently to remove for the entire decision-making process.
If something goes wrong, the situation can get complicated, which is what we see every day from potential acquisitions.
For us, the worst-case scenario would be that we default on the coupon and the investor would receive their initial investment. But because we are buying at a discount, we do anticipate that the markets will improve, and valuations will increase. So, a situation like a default is highly unlikely.
6) What about any early redemption charges?
CG: Our early redemption fee is 20% and a forfeiture of all accrued interest within the first 36 months. We do this because we need time to come into a property, rehabilitate it, make changes, and get past the pandemic.
We are structured to highly encourage and motivate investors to give us at least three years. That said, these are trade-able, listed securities so there is a lot you can with that if you need to.
An investor that purchases these bonds should speak with the financial adviser or broker about options.
7) What jurisdiction is the investment housed and how is it regulated?
CG: These are European, Luxembourg domiciled securities issued, administrated, and managed by three Swiss companies MTCM, ISP Securities, and Praetorian Assets. It is important to understand that GESCO is not involved in any trades or financial transactions as we are not a financial services company.
When a bond is sold there are back-end management and administration fees, and costs are paid by us and not the investor. For an investor, there is a definitive recourse through regulated entities in Switzerland and Luxembourg. And if something was to go wrong then the investor doesn't have to deal with GESCO but with the financial services companies and banks that administer these securities.
8) What happens if the pandemic and travel prohibitions continue for much longer than expected? Do I just get my money back? Or can the investment be extended or be transferred into another investment?
CG: Anything is possible in terms of the pandemic and there is an element of risk to consider in that regard. It used to be that you would talk about defined risk and pandemic wasn't in the top five.
But now [during the pandemic] is the time to invest in these types of investments because of the discounts available and the need within the industry.
There has already been over four trillion dollars lost in the market in 2020 and 2021 is not looking much better despite travel restrictions being lifted in many locations.
The UN World Travel Organization and most industry experts believe that the vaccine adoption, government intervention, the ease of travel, and the pent-up demand means that the industry will recover to 2019 [pre-pandemic] levels by 2023.
Our structure is five years, ending in May 2026, with the objective to merely reach or exceed 2019 levels.
If we can acquire a property at a 50% discount of its 2019 pre-pandemic valuation, then exit in five years at that valuation, we have basically doubled the investment.
On the other hand, if the pandemic was to continue through 2022 or 2023 then this is still within the timeline of our investment structure. It could be helpful as there could be more acquisitions or higher discounts.
Part of the reason that we structured it this way, where we pay the coupon at the end of the term and not each year is that if the pandemic were to continue it gives the investor a chance to have a higher coupon payment at the end. If they want to participate in that then they really should be willing to stick it out for the five years to see the highest returns.
On the other hand, these bonds can be traded or sold. They can't be directly transferred into another investment by us, but with a financial adviser or broker then there could be a trade option.
9) You have a set a % for return each year. How does that work and what is the end of term figure that you would expect to pay?
CG: The annual coupon is set between 4-10% per year, then at exit everything is reverse calculated.
Let's say someone wanted to get out early, then after 36 months there is the ability to redeem or sell back their bond, but they would be potentially forfeiting as much as 10% per year in terms of coupon payments.
That is why we exit and then reverse calculate so that the exit amount is directly tied to the coupon - and absolutely uncorrelated to the markets.
If hypothetically we bought €250m in properties and we exited at €500m then that means that would max out the coupons so [the investor] would receive 50% on top of their original capital.
I went to large funds where I have worked with or with whom I have worked with the past and I said, let me give you a hypothetical situation.
"If I brought you a portfolio of hotels, what would you want them to look like… what are the qualities are you looking for?"
And I got a bunch of different answers from different funds. So, I then asked, "What would make you want to pay €500m for €250m worth of [hotel and resort] properties?"
And that's how we got to this reverse planning from exit.
10) How long does it take to re-develop a property? What does that typically entail? Do you have strict guidelines?
CG: Every property is different and there is no one size fit all approach. All the properties we are viewing now do not require redevelopment. In fact, most of them require some minor refurbishment to wear and tear. What we are focused on are minor changes especially with respect to the business plan, marketing, sales, technology and customer service that can be introduced quickly and at low cost.
So, it is all about rehabilitation of properties and not full-scale redevelopment.
We are not coming in and doing construction necessarily because it eats into the discount.
Our goal across the portfolio is to average a 50% discount. Generally, we see between 30-70% discounts on properties that are submitted to us, which are about 100 per week.
If we can average a 50% discount, some will require more investment, some will require less. But the main thing killing the industry is that everyone has done things the same way for so long, but now because of Covid - and this now an almost 2 year old pandemic - they've not been able to adjust and they are taking on so much debt, or not being able to service preexisting debt, that they need to get out.
That gives us a really great opportunity to get in and buy at discount. If it is not as much as we like, it is probably a property that doesn't need as much work.
If the discount is steep, then there were probably some problems before Covid, and we might not even look at them unless it was in some amazing location that we would never be able to get to otherwise
11) Do Investors get to enjoy and stay in any of these properties after covid?
CG: No-one has ever asked us that. It is not built into the term sheet, but we've told people before if they wanted to invest and then stay in the properties then they are more than welcome to.
Also, because we have an online management pipeline tool, bond holders who are interested can see in real time the properties that we are looking at - pictures and videos of those that we are beginning the due diligence on. We want prospective bondholders to be as actively or passively involved as they want with the understanding this is not private equity or a GP/LP structure and their input is a suggestion and not a mandate. The fixed income structure removes the ability for aggressive overly "passionate" investors from getting too involved, by design.
If a single family or an individual wants to stay in a property that can be probably be arranged.
12) What regions are you specifically looking at making investments? And why these countries/regions? What about the recent issues in place like Greece with fires etc?
CG: A lot of the fires in Greece have been on the mainland and not so much on some of these tourist spots like Santorini for Mykonos.
We are really focused on Italy, Spain, Croatia and Greece. All beach front properties with 200 rooms or less, three, four or five-star properties. For a three star we would convert them to four stars, four stars to five stars and a five star we would work on improving them.
The countries we chose were specific because they were hit the worst by the pandemic, the inventories are very high, there is good infrastructure in place, and they are all in the EU, which offers a little bit of stability but also they come with geographic diversity.
Let's say Greece is doing badly, and we have properties in Spain, then those doing better help prop up the portfolio.
But the discounts might be better in Greece right now based on what we've seen.
There are certain parts of Italy that would be great to have but they are very expensive, and it is the same with the South of France.
For some islands in Greece the entire economy is travel and tourism; the businesses are so depressed economically and unemployment is high. You can impact an entire Greek Island by investing.
Croatia is a little different, a huge coastline and very beautiful. The South is affected more than Northern Croatia. In the north you can drive there in three hours from many parts of Europe and be on the beach quickly but the likes of Dubrovnik and Split that requite air travel have been hit harder. So, in Croatia we are looking more towards Southern Croatia.
When you look at infrastructure, if hotels are empty, the 100 or more staff are out of work, the company that supplies the food are struggling, travel agents are out of work, airports are empty.
To reinject capital in some of these smaller markets and smaller resorts would be truly impactful. We are not trying to compete with the likes of Hilton or IHG because we are talking about beachfront, smaller, family-owned properties operated by people who are often from there.
Some ask who will you bring in as management? If a property was functioning well prior to the pandemic, why would I bring in people when there are those that speak the language and know the area?
Teaching properties how to do things differently, focusing more on direct sales and marketing, rather than using the online tours and travel agencies or package providers, are key skills to impart now.
We aim to educate people how to do it a little differently and increase their revenue. For example, we did a study for a property and made some simple changes and increased their profitability by 1,300% just by minor changes to their business plan and overall strategy.
Designed for both qualified and institutional investors, GESCO T1 Ltd. has issued a Luxembourg-based note, GPP Euro Resort Impact Stability (ISIN CH0549200217), listed on the Vienna Stock Exchange, with an initial volume of €250m and is now available.
Click here to find out more about the GESCO T1 Ltd bond offering.