Soho House IPO Filing Reveals Plan to Leverage Cool Factor for Better Rent

The global chain of members-only clubs Soho House inched closer to a debut on the New York Stock Exchange last week by submitting a prospectus to the U.S. Securities and Exchange Commission. That filing provided a lot of intel into how the brand built on exclusivity courts developers to fuel its growth.

The company — which plans to go on the stock market as Membership Collective Group and symbol “MCG” — plans to have 46 Soho Houses in operation by the end of 2023, with a long-term growth target of adding three to five properties each year.

Marketing Soho House’s cool factor to landlords can help achieve that growth at more favorable lease terms.

“Our real estate partners benefit from the impact of the Soho House brand on the value of their underlying property and surrounding neighborhood,” the MCG filing states. “This enables us to achieve favorable lease agreements, increase tenant improvement allowances from landlords to support our capital light expansion, and in some cases receive a share of the upside in the value of the property.”

Soho Houses in London’s Shoreditch neighborhood, the Meatpacking District in New York City, Barcelona’s Gothic Quarter, and downtown Los Angeles were opened in this manner. The filing goes on to note MCG is “constantly approached by landlords and developers” to consider their projects for new Soho House locations and serve as an anchor tenant.

While the rent revelation probably elicits sour grapes from mom-and-pop retail tenants who are stuck paying full rent, the practice isn’t entirely unique to Soho House.

“Landlords understand the importance of finding the right tenant for their space,” said Aaron Jodka, national director of capital markets research at Colliers. “It drives activity to their property and recognition of their asset. Certain tenants can amplify that.”

Soho House’s expansion plans arrive at the right time for further deals like it has in cities like Barcelona and New York. The pandemic ravaged the commercial real estate market, and landlords will be looking for destination tenants to drive foot traffic and appeal to a larger project.

“Cities across the globe are reawakening after Covid-19,” Jodka added. “Tenants that can bring a unique differentiator to the market are intriguing for landlords.”

A Landlord Lift: This kind of arrangement is a much-needed financial lift to a company in significant debt as a result of the cash required to open a Soho House.

Soho House has never posted a profit, even before the pandemic. The company lost $235 million in 2020, $128 million in 2019, and $90 million in 2018. The company lost $93 million in the first quarter of this year.

The company had an $848 million deficit at the beginning of April, and the prospectus notes much of this stems from expenses involved in opening new clubs and launching complementary businesses.

Where to Grow: While MCG didn’t outline specifically where it plans to build out its network, it did note it is present in 63 global markets through its membership base, which includes the physical Soho House clubs as well as “Cities Without Houses” memberships for those who live in cities without a club.

There are also the Soho Works coworking concept, the Scorpios beach club in Greece,    and the Ned membership club in London. Soho Friends, a type of membership that enables access to some — but not all — aspects of a Soho House like bedroom use and discounts to restaurants, and a subscription platform for the company’s home retail brand are also part of the MCG network.

MCG plans to use its Cities Without Houses membership option as well as a planned digital-only platform, slated to debut later this year, to map out its future physical markets.

“We will continue to open physical Houses — expanding our footprint across Europe, the Americas, Asia and Africa — and launch new types of membership that can be scaled globally,” Soho House founder and CEO Nick Jones wrote in a letter included in the SEC filing. “As well as guiding our decision-making on future House locations, the appetite for Cities Without Houses membership has also given us proof of concept for a digital membership, not tied to a physical space.”

What Keeps Hotel Developers Awake at Night?

The Counselors of Real Estate issued their annual Top Ten Issues Affecting Real Estate report last week, and hoteliers have a few reasons to be concerned.

“Which behavioral changes made by U.S. households during the pandemic will persist into mid-decade, and which will be happily set aside when things feel normal again? No one knows, in all honesty, and that’s the equivalent of indicator lights in the cockpit going out for budgeteers in Congress and for bankers, developers, investors, and other real estate professionals,” the report states. “At this point, it is safe to say that economic models are of limited use in providing numerical guidance. As such, the price of risk should be high. But it is not.”

Translation: It’s hard for lenders to model out performance projections when it comes to putting a value on real estate projects like hotels. That’s a major headwind for hospitality developers and investors.

Economic structural changes took eighth place on this year’s list, with the Counselors of Real Estate warning developers across a variety of real estate classes about how much uncertainty still exists during the ongoing recovery from the pandemic.

U.S. hotels last week reached an 85-week high with a 68 percent average occupancy rate, according to STR. But that is largely fueled by leisure traffic, and the report notes hotel revenues are likely to stay at pre-2015 into 2022.

Demand levels for hotels may be on the rise, but the ability to pinpoint reliable momentum in occupancy gains as well as general performance will make underwriting new deals difficult for lenders. That plays into the industry thinking the U.S. is likely to see a major construction cool-off when it comes to new hotels in the years ahead.

A House Divided: The report also emphasized how political divisions are doing no favors to the real estate market, particularly around labor. Hotels are among a variety of commercial asset classes relying more on immigrant workers, and the inability for Washington to come up with a cohesive, clear strategy around immigration and worker visas only exacerbates swelling labor shortage issues.

“So it is that we consider the present tribalism of American politics as a top issue for real estate now and in the foreseeable future,” the report states. “It hinders our productivity and therefore the nation’s economic strength. And the real estate industry’s well-being is a function of our economic growth.”

Let’s Pay for a Deal

The ink is barely dry on Blackstone and Starwood Capital’s roughly $6 billion takeover of Extended Stay America, but the deal needs funding. JPMorgan Chase, Citi, and Deutsche Bank — which helped financed the acquisition — originated one of the largest commercial mortgage-backed securities loans of the last decade to make the deal possible.

CMBS loans are a group of mortgages pooled as one that property developers use to build new projects. The one tied to the Extended Stay America deal clocks in at $4.6 billion and is the largest piece of CMBS financing from a single-borrower since Blackstone secured $5.6 billion in debt in 2019 for an industrial portfolio acquisition, CoStar reports.

Part of Extended Stay America’s argument to shareholders on why to sell was looming property improvement expenses. Blackstone and Starwood plan to spend nearly $200 million annually over five years for renovation and maintenance across the brand.

All Eyes On Unemployment

The U.S. hotel industry gets its latest employment report card this week with the June jobs report to be released on Friday. Hotels have added back workers from the depths of the pandemic, when the industry unemployment rate hovered just below 50 percent. But that isn’t as fast as some would like.

Many hotel owners blame a swelling labor shortage issue on the fact the federal government is providing an extra $300 in weekly unemployment benefits through early September. While many economists refute this claim and say staffing issues also stem from lack of childcare and continued fear around the pandemic, 22 U.S. states have opted out of the extra benefits.

Hotel owners across Missouri, where Gov. Mike Parson cut off the extra funds on June 12, have noticed a boost in hiring, the Wall Street Journal reports. St. Louis-based Midas Hospitality went from no attendees at job fairs to 40 people at an event two weeks ago.

Twenty-three states will have ended extra unemployment benefits by Friday’s jobs report, and Tennessee and Maryland are expected to cut ties with the added funds by Saturday.