•London hoteliers had the best summer this year, according to figures recorded by TRI p15 •The British hotel industry has been transformed over the last 20 years, says Otus & Co p12-14 •What impact will turmoil in the credit markets have on the hotel sector, asks Simon Allison p18 The intelligence source for the hotel investment community Volume 3 Issue 5 www.hotelanalyst.co.uk Hotel Analyst newsletter is sponsored by international executive search consultants Madison Mayfair. For more information visit www.madisonmayfair.com A tale of two cycles We are at a capital markets peak but not a trading recovery peak in Western Europe, according to Mark Wynne Smith, European CEO of Jones Lang LaSalle Hotels. The odds are stacked in favour of a wobble rather than a crash, he argued even though the effects of the liquidity reduction are likely to be felt in the capital markets for at least six months. If this analysis is right, it is a strong counterpoint to the last cycle. The purchase of Le Meridien, the high water mark of that period of purchasing activity, occurred just a month before the September 11 attacks and the subsequent sharp downturn in trade. Despite the high profile of private equity, Wynne Smith’s presentation at the Euromoney Seminars’ 7th Annual European Hotel Finance & Investment Summit in September, showed that in 2001, private equity had a bigger share of all deals with more than half compared to 40% last year and less than 20% in the year-to-date. The sanguine analysis of the credit crunch was shared by Tim Helliwell, head of hotel finance at Barclays. “The key message is: ‘Relax, we’re all OK.” Bank of America’s Marco Rosenbaum said that if “you’ve kept your powder dry” then there were opportunities. “Hotels are being recognised as an asset class. This means that if you have people exiting the market then you will have buyers,” he said. More concerned was Peter Anscomb from Royal Bank of Scotland. “Leverage is through the roof and supply could have implications in a couple of years because of lending on development,” he said. The hotel sector as a whole will continue to be attractive, reckoned Peter Procopis, finance director at Dawnay Shore. “Where portfolios are of poor quality and overleveraged they have failed in the past and will fail again,” he said. Procopis urged everybody to hold their nerve about the credit crunch. “We are weeks into this, rather than months. It is not a question of putting pens down and not doing anything.” Dillip Rajakarier from Minor International gave an Asian perspective. He related that a $600m deal Minor was involved with had collapsed as a result of the credit crunch. But there had been no problems for Minor in raising construction finance. HA Perspective: How far and how badly the current contagion in the credit markets will spread into the wider economy is still muddied. Much will depend on the intervention of central banks to prevent an economic downturn. But it is clear that borrowing costs are currently rising as banks charge more for lending money between themselves and are now passing this cost on to customers. The rising cost of borrowing plus more stringent loan conditions is making things tight for some deals. Others, however, are being tucked away. Meridia Capital Hospitality has made its first purchase as a fund, spending US$86m on the Ritz-Carlton and the Crowne Plaza in Santiago. And Ireland’s Prem Group has spent €65m buying nine hotels in Belgium and France.This follows the €48m acquisition of four hotels in Belgium a year ago. It might just be that the deal market has cooled in sufficient time to allow for a soft landing as the strong trading growth of the last few years tails-off.
Transcript
•London hoteliers had the best summer thisyear, according to figuresrecorded by TRI p15
•The British hotel industryhas been transformedover the last 20 years,says Otus & Co p12-14
•What impact will turmoil in the credit markets haveon the hotel sector, asksSimon Allison p18
The intelligence source for the hotel investment community
Hotel Analyst newsletter is sponsored byinternational executive search consultantsMadison Mayfair. For more information visitwww.madisonmayfair.com
A tale of two cyclesWe are at a capital marketspeak but not a tradingrecovery peak in WesternEurope, according to MarkWynne Smith, European CEOof Jones Lang LaSalle Hotels.
The odds are stacked in favour of a wobblerather than a crash, he argued even thoughthe effects of the liquidity reduction are likelyto be felt in the capital markets for at least six months.
If this analysis is right, it is a strongcounterpoint to the last cycle. The purchase of Le Meridien, the high water mark of thatperiod of purchasing activity, occurred just amonth before the September 11 attacks andthe subsequent sharp downturn in trade.
Despite the high profile of private equity,Wynne Smith’s presentation at the EuromoneySeminars’ 7th Annual European Hotel Finance& Investment Summit in September, showedthat in 2001, private equity had a bigger shareof all deals with more than half compared to 40% last year and less than 20% in theyear-to-date.
The sanguine analysis of the credit crunchwas shared by Tim Helliwell, head of hotelfinance at Barclays. “The key message is:‘Relax, we’re all OK.”
Bank of America’s Marco Rosenbaum saidthat if “you’ve kept your powder dry” thenthere were opportunities. “Hotels are beingrecognised as an asset class. This means that if you have people exiting the market then you will have buyers,” he said.
More concerned was Peter Anscomb fromRoyal Bank of Scotland. “Leverage is throughthe roof and supply could have implications in
a couple of years because of lending ondevelopment,” he said.
The hotel sector as a whole will continue tobe attractive, reckoned Peter Procopis, financedirector at Dawnay Shore. “Where portfoliosare of poor quality and overleveraged they havefailed in the past and will fail again,” he said.
Procopis urged everybody to hold their nerveabout the credit crunch. “We are weeks intothis, rather than months. It is not a question of putting pens down and not doing anything.”
Dillip Rajakarier from Minor Internationalgave an Asian perspective. He related that a $600m deal Minor was involved with hadcollapsed as a result of the credit crunch.But there had been no problems for Minor in raising construction finance.
HA Perspective: How far and how badly thecurrent contagion in the credit markets willspread into the wider economy is still muddied.Much will depend on the intervention of centralbanks to prevent an economic downturn.
But it is clear that borrowing costs arecurrently rising as banks charge more forlending money between themselves and are now passing this cost on to customers.
The rising cost of borrowing plus morestringent loan conditions is making thingstight for some deals.
Others, however, are being tucked away.Meridia Capital Hospitality has made its firstpurchase as a fund, spending US$86m on theRitz-Carlton and the Crowne Plaza in Santiago.
And Ireland’s Prem Group has spent €65mbuying nine hotels in Belgium and France. Thisfollows the €48m acquisition of four hotels inBelgium a year ago.
It might just be that the deal market hascooled in sufficient time to allow for a softlanding as the strong trading growth of thelast few years tails-off.
Hotel Analyst is published by ZeroTwoZero Communications LtdStudio 22 Royal Victoria Patriotic BuildingFitzhugh Grove London SW18 3SXt 020 8870 6388 f 020 8870 6398e [email protected] w www.zerotwozero.co.uk
Difficult debt markets means Blackstone is set for atortuous ride prior to the endof year closing of the $26bnacquisition of Hilton.The deal has been struck at $47.50 per sharebut Hilton’s share price is sticking below this,reflecting concerns in some quarters that it is no certainty that the deal will complete.
Growing nervousness about debt default in some private equity deals has made it allbut impossible to farm out the lending inrecent deals across all industry sectors and it has caused some high profile transactions to be pulled.
Given that Blackstone has undertakingsfrom a consortium of investment banks tostump up 80% of the deal value or $21bn,whichever is smaller, it seems highly unlikelythat Blackstone will not consummate.
The debt commitment letter has beensigned by Bank of America, Bear Stearns,Deutsche Bank, Goldman Sachs and MorganStanley. Normally, these lenders would in turnsyndicate out the loan but if current marketconditions continue, then they will be leftplaying banker for real.
The current market reality is not one wheredebt providers have simply shut-up shop. Ratherborrowers are being asked sterner questionsand usually charged a little more than theywould have been just a few months ago.
In some cases, this has been enough for the borrowing private equity fund to walkaway. A few basis points increase on debt cost can easily make a deal unprofitable. Thisdoes not, at the moment, look to be the casewith Hilton and Blackstone. In any case, thedeal agreement has no financing condition to allow Blackstone to walk away, it is notimpossible, albeit unlikely, that that is exactlywhat does happen.
The SEC filing about the deal made on July 27th outlined the terms of the financingarrangement. It reiterated that Blackstonewould receive a $560m break fee if the dealfolds, with Hilton entitled to $660m ifBlackstone walks away in certain circumstances.
Also noteworthy was the $137m pay day
Commentary by AndrewSangster
that Hilton CEO Steve Bollenbach will receivewhen the deal completes.
This sum comprises $74.5m for options,$13.3m for his performance shares, $2.2m for restricted stock, $2m bonus, $34.7m forvested awards and $10.5m for severance pay.
Bollenbach is severing his relationship withHilton at the year-end but the company hasagreed to supply him with an office, anassistant and access to the corporate jet.
The payment to Bollenbach dwarfs the fees being paid to Hilton’s financial adviser,UBS. Provided the deal completes, UBS are set to receive $33.6m with just $2m beingpaid out otherwise.
The filing also detailed the chronology of the Blackstone bid. The first approach was made by an unnamed rival to Blackstone,believed to be Starwood Capital, in June lastyear, offering a deal in the low $30s per share.
A formal meeting with Blackstone’sJonathan Gray took place in August and anoffer in the high $30s was suggested butHilton wanted something in the $40s.
Due diligence was undertaken in Septemberbut Blackstone decided not to proceed byearly October. Communication continuedintermittently until in May, Gray said that adeal in the $40s might be possible and talksbegan again in earnest.
Blackstone said it would offer $47.50 per share on June 24, with an extra 50 centsbeing offered (worth $200m) if the debtmarkets improved. Draft documentation wasdistributed to Blackstone on June 27. Hilton’sboard approved the deal on July 3.
The appeal of Hilton was made clear byEBITDA projections prepared by UBS. Theseshow that the company profits will be $1.6bnin 2007 and $1.8bn in 2008. But by 2012 thiswill have leapt to $2.9bn. This level of cashflow is clearly capable of supporting substantialdebt, assuming trading pans out as expected.
During the second quarter, Hilton’s netprofit was up 15% to $165m. Fees were up16% to $201m and comparable system-widerevpar was up 8.9%. Owned hotels in NorthAmerica showed a 9.8% increase in revpar.
Blackstone’s debt dance
The appeal of Hiltonwas made clear byEBITDA projectionsprepared by UBS… by 2012 profits willhave leapt to $2.9bn.
Starwood Hotels has stuck with the consumergoods sector for its new CEO. The 46-year oldFrits van Paasschen had previously been runningthe largest division of Molson Coors Brewing.
Prior to joining Coors in 2005, vanPaasschen had spent seven years atsportswear brand Nike, including a stintrunning the EMEA operation.
It is this experience with consumer lifestylecompanies that has most excited Starwood asit strives to distinguish itself through its brands.Starwood sees itself as more of a lifestylecompany than a hotel company.
It has taken five months to hire vanPaasschen but he takes up his post onSeptember 24. At that point interim CEOBruce Duncan will resume his role as non-executive chairman.
Unlike with Steve Heyer, who was ousted in April after losing the confidence of theboard due in part to what was deemedinappropriate relationships, van Paasschenwill be relocating to White Plains. Heyer hadmaintained a satellite office in Atlanta.
According to press reports, the losingfinalists in the search included former Gap
clothing chain CEO Paul Pressler and the ex-head of Pepsi Bottling Group John Cahill.
The hiring of a new CEO has convincedmost observers that the threat of a privateequity buyout has now receded, though in reality, the funding difficulties due to thecredit market turmoil make a move in theshort-term highly unlikely.
The appointment was also well receiveddue to the EMEA experience of van Paasschenwhile at Nike. His posts earlier than this alsogave some confidence, including two years atDisney. His early business career also includedeight years as a management consultant atMcKinsey & Co and Boston Consulting.• Millennium & Copthorne has shed its CEO,Peter Papadimitropoulus (Mr Papas), after justfive months. No reason was officially givenother than to state that the decision was by mutual consent.
Chairman Kwek Leng Beng was reportedas stating that “we have a different style ofmanagement and leadership” but no furtherdetails were disclosed.
M&C has now gone through three CEOs in the last three years, perhaps reflecting just
how tough it is working for a man, Kwek,who is the effective owner of the company.
What it also implies is that there is unlikelyto be any radical change in direction at M&C,with it remaining firmly wedded to the owner-operator model.
The company is essential a hotel propertyplay with a small operating business attached.The success of CDL Hospitality Trusts, theSingapore REIT that owns three of M&C’shotels in that city state, might encouragefurther exploration of the REIT model butnothing was revealed as second quarterresults were announced recently.
M&C reported group revpar up 9.3% andpre-tax profit up 44.4% to £35.1m. London,New York and Singapore were the strongestmarkets. The first four weeks of the thirdquarter showed revpar up 7.6%.• InterContinental has appointed PeterGowers, currently chief marketing officer, asthe replacement for Patrick Imbardelli as chiefexecutive of the Asia Pacific region.
At the same time, it was announced thatKirk Kinsell, currently chief development officerfor the Americas, will be president of EMEA.
Starwood sticks withconsumer orientation
The turmoil in the credit markets has deraileda number of hotel deals in the past month butfears of a “buyers’ strike” have so far proveunfounded.
Large portfolio transactions which requirelarge amounts of debt to be syndicated havebeen the main casualties so far.
In fact, the only type of buyers that havemarkedly reduced interest is private equity.And PE was becoming increasingly cautious in any case.
According to Jones Lang LaSalle Hotels,the first-half of this year saw €9.3bn of dealsin Europe with private equity taking a 23%share. Last year, PE’s share was 43%.
JLL found in its Hotel Investment Highlightsthat high net worth individuals and institutionalinvestors are replacing PE buyers. HNWIsaccounted for a bigger share of deals in thefirst-half than PE, while institutions raisedtheir share from 5% to 17%.
PE has been exiting at a faster rate. PE soldeight times more hotels in the first half thisyear than last year, and accounted for a thirdof all hotels being sold. Corporates remainedthe big sellers, representing half of all sales.
While big PE deals have all but been frozenout, smaller transactions are still goingthrough. Given that most deals in the hotelsector, even portfolio ones, fit the small tomedium size categorisation, the situation is at present a long way from a crisis.
There has been a risk adjustment –arguably this was much needed – that hasseen the price of debt go up by as much as100 basis points for these smaller PE deals.And more equity is being required. But PEdeals are still possible at the smaller end of the market.
With more expensive debt and higherproportions of equity required, a lowering of prices can be expected. But so far, therepricing is looking muted.
The best hotel assets are going to continueto obtain keen prices. The buyers that remainin the market are more strategic and morefocused on obtaining the right assets thanpicking-up a mixed portfolio of properties.
The robustness of prices will rapidly changeif the contagion in the credit markets spreadsand slows down the overall economy, hittinghotel trading performance. At this point,
nobody is certain about how deep the currentmalaise is or how long it will last.
For the big deals, postponements of thedebt syndication seem the order of the day inmost cases. A racy bid for a major hotel playerlooks unlikely given that banks are strugglingto offload the debt they are alreadycommitted to.
The amount of buyout debt that is seekinga home is put at between $130bn and $225bn,across all industries in the US. And it isestimated that it will be well into the fourthquarter of this year before there is any hope of clearing the backlog.
The most high profile of the current majorhotel transactions is Hilton and this looks setto be tucked-away pretty much as planned.
The banks involved – Bear Stearns, Bank of America, Deutsche, Goldman Sachs,Morgan Stanley, Lehman Brothers and MerrillLynch – are picking-up 80% of the debt –some $21bn – and seem content for the timebeing to sit on Hilton’s paper.
The split of the holding is even with theexception of Bear Stearns which has a slightlybigger share.
Despite its share price jumping 7% on a singleday in July, Whitbread is confident that it cansee off any predators, implying that it is nowtoo expensive for a private equity bid.
Chief executive Alan Parker has mounted a robust defence of the company in the face of persistent bid speculation and has declaredthat the company can no longer be acquired“on the cheap”.
The main attraction for private equity is theproperty behind the near 500-strong PremierInn chain. But after more than two years ofspeculation, no bid has been forthcoming andin that time Whitbread’s share price hasquadrupled.
Starwood Capital is the usual favourite put forward but, as a significant shareholder,takeover rules mean that the owner of Louvrewould have had to declare its hand.
A bid by Starwood makes more sense thanmost because not only is it seeking the assetbacking but it would have the opportunity tolink Premier Inn to its French budget hotels.
But the reality of limited service properties,where domestic guests usually account for90% or more of business, means that thereare comparatively few synergies to be had.
And Parker’s point about the recentstrength of Whitbread’s share price – alongwith market weaknesses – is probably enough
to ward off anyone looking to make a quickturn by splitting out the property.
The real appeal of Whitbread is that it is,just about, a pure-play budget operator.According to figures from the Budget Hotels2007 UK guide, produced by TRI Hospitalityand BDRC, Whitbread dominates the UKbudget segment with a 38.2% market sharethanks to 32,762 rooms at 488 hotels.
The nearest competitor – at April 2007 –was Travelodge with 19,335 rooms at 304hotels giving it a 22.6% market share. Expresswas the only other brand to have a doubledigit market share at 12.9% with 11,078rooms at 108 hotels.
For the first time, the budget hotel sector in the UK broke through the £1bn revenuebarrier, achieving £1.062bn in 2006, up 13%on the £940m achieved in 2005.
But the budget sector is beginning to behavelike the more established full-service segment,according to the report. Occupancies atbudget hotels were just 2.9 percentage pointsabove the average for full-service hotels.
This should play into the hands of themarket leaders.Whitbread’s dominant positionin the segment should enable to have realpricing power as the market matures. Theadvantages of private equity, such as ability to have a higher leverage or the opportunity
to restructure outside of public scrutiny, arenot particularly helpful in taking Whitbreadfurther forward.
Separately, in late August, Whitbreadpostponed plans to securitise part of its propertyportfolio in a move that would have raised upto £600m.
But despite this news, investors welcomedthe trading update and marked the shares up.
Sentiment was certainly helped by robusttrading, with Premier Inn once again the starperformer with a rise of 11.0% in sales on a like-for-like basis for the 24 weeks to August 16th.
Restaurants was up 2.0% and Costa was up 7.2%. But it was Premier Inn, whereoccupancy was 82.1%, up 1.3 points, thatenabled continuing Whitbread to record a 6.6% increase in like-for-likes.
CEO Alan Parker alluded to wider overseasambitions for Premier Inn, pointing to the hiringof Reas Kondraschow as group developmentdirector and Aly Shariff, the managing directorfor the JV in India.
Despite the problems in the debt markets,Whitbread is still intent on gearing up and ratherthan the bond issue, it is to buy back shares. Itsmaximum allowance under current shareholderauthority is to buy up to 10% which is about£300m worth at recent share prices.
Whitbread shrugs off takeover talk
Dolce International, which claims to be theworld’s leading conference centre chain with26 properties in North America and Europe,has recapitalised to enable a faster expansion.Broadreach Capital Partners, the US privateequity firm that digested executives fromMaritz, Wolff & Co in 2006, has bought outDolce’s existing backers AEW and Soros RealEstate Investors.
No figures were disclosed save that thestake sold was 85% with the other 15%
remaining in the hands of management.With Broadreach, however, Dolce believes
it has a backer to help quicken its lacklustrerate of expansion over the last few years.
Philip Maritz, managing director ofBroadreach and co-founder of Maritz, Wolff,said that hitherto the conference centremarket has been overlooked by investors.
This is probably not a perspective sharedby Permira who earlier this year paid a punchy£32.5m, a sub 2% yield, to buy the St David’s
Hotel & Spa in Cardiff to add to its PrincipalHotel chain.
And in May it announced the acquisition of the Hayley Conference Centre chain for£358m. These nine sites are being added toPrincipal’s existing eight-strong hotel portfolioto create a 17-strong chain focused on themeetings market.
The newly refinanced Dolce could now be a serious contender for the former Initial Stylechain, currently badged as De Vere Venues.
Dolce International refinanced
While the crunch in the debt markets hasweakened the appetite for hotel propertyamong private equity buyers, there is noimmediate sign that stock market investorsare willing to reappraise things.
Sol Melia highlighted the issue in July with the publication of a valuation report thatshowed the discount to net asset value of itsshares was almost 40%.
The report, conducted by CB Richard Ellisand American Appraisal, was an assertiveexercise, demonstrating that much of thevalue of the company remains obscured.
The owned hotel portfolio was valued at€4.452bn with a further €908m put on theleased, managed and franchised hotels.
Perhaps more controversially, the valuationreport also ascribed €1.26bn to Sol’s brands.
The figures came ahead of Sol’s half-yearnumbers, which are expected to reflect thesame buoyancy as shown by NH Hoteles,its main Spanish rival.
NH showed a doubling of net income to €40.5m and EBITDA up 70% to €142.3m,thanks to the inclusion of Italian chain Jolly,the purchase of which was concluded earlierthis year, into the results.
The turbulent times for the hotel industry were illustrated well over the summer at Accor,which has been subject to speculation that it is both a target and acquirer.
The would-be buyer was the inevitableprivate equity firm, this time KKR, while thepotential target was touted as Whitbread,a suggestion flatly denied by Accor.
Accor had been the world’s largest hotel company by enterprise value untilBlackstone’s bid for Hilton which dramaticallylifted the latter’s valuation given the 40%premium offered.
It remains a substantial holder of hotelproperty – about half of its portfolio is eitherowned or on a fixed lease – although it hassold down €2.4bn since 2005 and has afurther €2.8bn likely to go over the nextcouple of years. Unlike the other members of the big five (Marriott, Hilton, Starwood and InterContinental) its main exposure is toEuropean markets rather than North America.The fact that Europe significantly lags NorthAmerica in terms of the business cycle meansthere is more left of the current upswing.
The 10.28% holding by Colony Capital,along with its two seats on the board, makesan approach by a rival private equity firmunlikely. Colony’s stake increased thanks to its exercising of a convertible bond earlier this month.
Meanwhile, Whitbread, having thrown-offpersistent speculation about a bid by StarwoodCapital, still remains the subject of takeovergossip. Part of the reason is the attractive
nature of its asset-backing – it owns almostall of the properties in Premier Inn. But also,Whitbread is now focused on Premier Inn,a business that has consistently delivereddouble digit returns over the last few years.
It is a strange irony that management’ssuccess in shedding weaker businesses andbringing more focus has done little to slackentakeover talk.
Accor’s half-year sales figures showed a solid 8.8% growth, confirming Marriott’snumbers that showed while North Americanrevpar was slowing, Europe’s is continuing to gather pace.
Most noticeable for Accor were the 7.7%hike at economy hotels in Europe and a 6.2%drop at economy hotels in the US.
The US figures looked particularly stark due to the weak dollar. On a like-for-like basis,economy hotels in the US were up 1.9%.
The strong figures helped fuel takeoverspeculation around Accor but there was nothingof substance that came to light. The 10.3%stake held by Colony Capital means that it isin the driving seat if any move is to be made.
Accor net profit more than doubled in the first half as receipts from the sale of hotelproperty and its travel agency boosted thefigures.
But more importantly operating profit was up 34% to €379m giving the companythe confidence to announce a €500m sharebuy-back.
The company appeared to be in bullishmood as it updated investors on its strategic
plan. There were five key parts to this:expansion of the hotels business; the launchof three hotel brands; further divestments ofnon-strategic businesses; more propertydisposals; and optimising the balance sheet.
During the first half, 13,825 rooms wereopened, which is on course for the 200,000 to be opened in the period 2006 to 2010. Thepipeline stood at 83,000 at the end of August.
The brand launches include the repositioningof Sofitel to take place in October; the revivalof the Pullman name to create a new upscalebrand; and the launch of the All Seasonseconomy brand for non-standardised hotels.
The All Seasons name is to appear on 14existing hotels by June 2008 and so far 31franchise deals have been struck. The potentialis for 10,000 rooms by 2010, includingrebranding existing Accor hotels and newfranchise contracts.
Among the business disposals wasAugust’s €135m sale of an Italian contractcaterer, expected to complete by October.
Since 2005 to the end of June this year,Accor has realised more than €3.2bn via thesale of 459 hotels. Another €1.9bn is to beraised by the sale of 350 hotels by the end ofnext year and another 550 hotels will also seetheir current ownership structure revisited bythe end of 2009.
The company refinanced its debt with a new €2bn line of credit in July. It is to buyback €500m following buybacks of €500m in 2006 and €700m in the first eight monthsof this year.
Accor rumours typify market
The mixed second quarter results fromMarriott International, usually viewed as thebellwether of the US hotel industry, ought togive further pause to the rampant privateequity buying spree.
Difficult financing conditions are nowjoined by clear signs that the runaway salesgrowth of the last three years is slowing.
Marriott’s numbers were by no means poor:the standout was probably fees in the quarterto June 15. Base management and franchisefees were up 10% to $249m and incentivemanagement fees were up 51% to $116m.
But the market had been expecting abetter revpar performance and the company’sshare price slid 3%.
During the conference call to discuss theresults, CFO Arne Sorenson said that the biggestfactor affecting future revpar performance wasthe economy – and he saw no reason why
steady demand growth should not continue.The key word here is steady: after putting
in double digit or close to double digit revparincreases since the cycle bottomed, Sorensonsaid that tougher comparisons meant futureincreases would be more subdued.
Even so, the latter part of this year shouldsee a slight pick-up in revpar numbers as thegrowth rates slowed midway through 2006,making the comparisons less challenging.
The supply environment looks healthy,at least for full-service hotels as these takelonger to build than limited service properties.“We think we have a good number of yearswhere the supply threat is not relevant,”said Sorenson.
Fees from outside North America currentlyaccount for about 20% of the total. But this is expected to increase to at least 25%, andpossibly more, in the “near-term”.
The quarter saw 6,976 rooms opened and3,158 leaving the system. At June 15, Marriotthad 521,240 rooms. The year is expected tosee 30,000 rooms added and 11,000 leave.For the full-year 2007, revpar is expected toincrease by between 6% and 7% with houseprofit margins rising by 150 to 200 basis points.
Sorenson refused to speculate on anyissues relating to a possible buyout other thanto mention that Marriott had been anticipatinga move on a major hotel company by privateequity for the past five or six quarters.
While not mentioning Hilton specifically,Sorenson said that a swoop on rivals byprivate equity would leave Marriott betterplaced in terms of attractiveness of productand providing guests with good service. “Wefeel good about the lead that we have todayand about that lead continuing to expand inthe face of [such] transactions,” he added.
TUI, the German travel giant that is one of thebiggest hotel owners and operators in Europe,looks set to have its hotel property ownershipshuffled following the completion of themerger with rival tour operator First Choice.
Much or all of the stock of 279 resorthotels is tipped to end up in the clutches ofRIU, the privately held Spanish chain.
TUI’s hotels are not being injected into theFirst Choice merger and will join the company’sshipping operations in the rump left behindafter completion of the deal which isscheduled for September 3.
The properties are mostly held in jointventure structures in which TUI has a direct or indirect majority interest. The biggest single chain is RIU with 109 hotels and75,000 rooms.
This is almost as big as all the other TUIchains put together. These include Iberotel,Grupotel, Robinson and Grecotel.
While TUI holds a stake in RIU, via a jointventure struck in 1993, RIU’s chairwoman,Carmen Riu Guell, the third generation of thefounding family, holds a 5.1% stake in TUI AG,the overall parent group.
Another shareholder likely to be at thetable during any hotel sell-off is Abel Matutes,a former foreign minister of Spain and chairmanof Fiesta Hotels, a nearly 40-strong chain.Matutes holds 2.4% of TUI AG.
According to TUI’s annual report its 279hotels had a total of 165,000 rooms. Thismakes it the sixth biggest hotelier in Europe,according to rankings published by MKGConsulting (excluding Best Western, which
is a consortium rather than a formal chain,TUI is the fifth biggest).
Of the hotels, 44% were directly owned by the respective hotel company, 11% wereleased and 45% were operated in theframework of management or franchiseagreements. The focus for the enlargedcombine of TUI Travel and Airtours is awayfrom owning hotels with the rooms insteadcontracted both from TUI AG and otherproviders. The enlarged group will, however,continue to own aircraft and is a launchcustomer for Boeing’s new 787 Dreamliner.
The main accommodation business withinthe enlarged group – aside from booking itspackage customers bedspace – will be onlinedestination services which will comprisebrands such as laterooms.com and hotelopia.
TUI set for hotel property shuffle
The Hotel Corporation, the 49.9% owner ofDawnay Shore Hotels, is on course to becomethe biggest publicly traded owner of UK hotelsfollowing its lease deal with Spanish chainBarcelo.
The 20 Paramount hotels are valued at£556.25m in the transaction which seesBarcelo take on 45-year leases.
Privately-owned Barcelo currently operatesmore than 130 hotels in 14 countries and was– according to investment bank Shore Capital,one of the backers of the Hotel Corporation –keen to enter the UK.
Shore Capital created Dawnay ShoreHotels three years ago with investmentadviser Dawnay, Day via the purchase of
13 Paramount hotels from private equity firm Alchemy Partners. The portfolio wassubsequently expanded.
DSH has been formally mulling an exit ofits investment for almost a year, announcinglast November that it was conducting astrategic review.
Its solution will see it secure a fixed rent for the first three years with an EBITDA linkthereafter. Barcelo has also accepted fullrepairing and insurance conditions.
DSH has retained the reversionary propertyinterests in the hotels as it wants to takeadvantage of the 316 rooms and 1,581 sq m ofconference space that have planning permission.Further permissions are being sought.
Following completion of the deal, DSH willseek to increase leverage and hand cash backto shareholders, up to £2 per share.
“Shareholders will be able to crystallise thebenefits of their investment whilst continuingto benefit from significant real estatepotential,” said Howard Shore, Shore Capital’schairman and a DSH director.
A rebranding exercise is likely. Moreacquisitions by DSH are to be targeted withthe strategic alliance with Barcelo playing a key role, according to the company.
“We have laid the foundations for DSH togrow into a major owner of hotel property,”said Peter Klimt, Dawnay, Day’s chiefexecutive and a DSH director.
Barcelo leases DSH portfolio
Eurazeo, the owner of French budget chainB&B Hotels, has sold 159 hotel properties to its own property division for €471m.
The investment company’s move is anattempt to crystallize value in the chain via an op-co and prop-co split.
The 89% owned ANF bought the prop-coalmost two years to the week since thecompletion of the €380m acquisition of the then111 hotels by Eurazeo. Last year, B&B boughtthe 57-strong Villages chain, consolidating itsposition as the third biggest budget operator
in France after Accor and Louvre Hotels.Excluding the impact of the Villages
acquisition, B&B showed 15.5% sales growthin the first quarter of this year. The latest dealis being financed with about 50% debt,according to reports.
B&B splits-off property
Delek Real Estate, the Israeli propertycompany that is listed on London’s AlternativeInvestment Market, is considering the optionsfor its £1.5bn worth of hotel property.
A spin-off of its hotel interests or the
creation of a hotel REIT are all possibilities for its holdings which include stakes in 47 UK Marriotts and 16 UK Hiltons.
The company, together with Igal Ahouvi,bought a Swiss retail portfolio at the end of
July for CHF1.5bn (US$1.3bn).The total property portfolio of Delek is
worth about £3.5bn and includes the UK’sNational Car Parks, the Adidas HQ in Germanyand 73 petrol stations in Finland.
Host Hotels has, along with its former siblingMarriott International, suffered the least fromtakeover speculation.
And, like Marriott it recently reportedmixed second quarter figures which were at the bottom end of guidance.
The Host numbers, which showed revparup 6.7% – the guidance range had been6.5% to 8.5% – come as no surprise giventhat around half of its 121 hotels are run by Marriott.
As an owner of 24 Starwood operated hotels,the lower revpar numbers also signal thatStarwood’s own figures may not be too bullish.
The second quarter revpar figures fromSmith Travel Research showed an increase of 5.7%. Both Marriott and Host were wellahead of this but it is usual for the biggerchains to outperform the market as a whole.
Full-year revpar guidance from Host wastrimmed by a percentage point at the top of the range so that it is now 6.5% to 7.5%rather than the previous 6.5% to 8.5%.
This declining rate of growth in tradingmakes, when coupled with an increasinglydifficult financing market, a much moredifficult environment for private equity.
A recent report by credit rating agency
Standard & Poor’s said the secondary loanmarket in the US had suffered the biggestdrop in pricing since the days following theterrorist attacks on September 11.
This is causing some indigestion for privateequity firms as they try to put away loans forrecent deals on both sides of the Atlantic. Forexample, the £9bn of financing to fund theacquisition of pharmacy chain Alliance Bootsby KKR had its pricing postponed during July.
In the US alone, some $200bn of loanswere up for financing. Only the bravest privateequity firms will be promoting fresh dealsgiven current market conditions.
Host reports mixed Q2
The raising of $475m by Indian Hotels, theowner of the Taj brand and budget Gingerconcept, is set to deliver further rapid growthin the hotel stock of what will soon be theworld’s most populous nation.
While China has garnered the most interestamong hoteliers seeking to push into emergingmarkets, the potential in India is nearly as great.
Indian Hotels is to use the cash it is raising
to fund growth: currently, seven Ginger hotelsare under construction and three upscaleproperties. Acquisitions were also on theagenda, said the company.
While there is rapid growth in room supplyin the country, the current shortage of hotelrooms is set to continue at least into 2009,according to estimates.
IHCL has plans to open 30 Ginger hotels
over the next two to three years and is pushingoverseas with its Taj brand. Its most recentacquisition was the Campton Place in SanFrancisco which was bought in April for $58m.
The other main domestic player in India is East India Hotels, the owner of the Oberoibrand. It also has a co-branding deal withHilton for its Trident hotels. It has a total of 20 properties with around 3,000 rooms.
Indian growth
An outfit created by Norwegian Property,the original suitor of Norgani, has moved intopole position to buy the chain with a NOK91per share bid.
This trumps the NOK88.50 bid byAberdeen Property Investors and is markedlyahead of the NOK82.50 that Norwegianoriginally bid.
But the real intrigue lies with how theNorwegian vehicle, Oslo Properties, has madethe move make sense. Scandic, whichcontributes about 60% of Norgani’s rentalincome, has agreed to increase its rents.
The shareholders of Oslo Properties includeScandic’s backer, the private equity house EQT,as well as Norwegian Property, the companyheaded by former SAS executive Petter Jansen.
Aberdeen had itself linked to a rival hotelowner for its bid. It had agreed to sell sixhotels to Home Properties, the Oslo-listedchain controlled by Petter Stordalen. Homehas hotels operated by Scandic and ChoiceHotels Scandinavia, the latter a company also chaired by Stordalen.
Aberdeen plans to launch a new fund,Norgani Hotels Europe, which, once it has
bedded in the acquisition, it will take acrossEurope for acquisitions.
Espen Klevmark, CEO of Aberdeen PropertyInvestors in Norway, said that buying Norganimade sense due to the strong economicgrowth forecasts for Scandinavia. Norgani’sturnover linked leases gives Aberdeenexposure to this economic growth.
“When we saw the competing bid weknew there was an investment opportunity.As we looked at Norgani we found more and more comfort,” said Klevmark.
The acquisition would give Aberdeendiversification and allow its institutionalinvestors access to a separate hotel fund.
The fund will only consider leasedproperties which have the same type of risklevels as offices. Expansion elsewhere inEurope will be in 2008 at the earliest.
The board of Norgani has recommendedthe Aberdeen bid. Unless Norwegian Propertyraises its current NOK 82.50 bid to the NOK88.50 level of Aberdeen’s, then Aberdeen will have succeeded, most likely by the end of this week.
Jan Petter Storetvedt, chairman of Norgani’s
board, told Hotel Analyst [prior to the laterraised offer from Oslo] that the Aberdeen offerhad the merit of offering a clear plan for thefuture of Norgani, including for its staff andorganisational structure.
Aberdeen said that the current Norganiteam would be the core of Aberdeen’s newdedicated hotel team.
The bidding war may yet have further torun. Credit Suisse has bought 5% of Norgani’sshares and the share price of Norgani hasrisen above the latest offer price.
Aberdeen said it would consider raising itsoffer, particularly given the deal with Scandicwhich had “changed the deal economics”.
The Norwegian presentation on its biddescribed Scandic as the “unrivalled Nordicmarket leader” with an 18.5% share, with thenext nearest being Rica with 9.4%, RadissonSAS with 8.9% and Quality with 8.4%.Scandic is 58% of Norgani’s room count with Choice being the next biggest at 21%.
Driving the interest in Norgani is the stronggrowth in the Nordic market: in the year toJuly 2007, revpar in Norway is up 13% and up 10% in both Sweden and Finland.
Room additions were almost as important as revpar growth in building gross revenues in InterContinental’s franchise business in the first half of this year.
The figures show just how importantgrowing its pipeline is for the future of IHG as a company.
August’s first-half results presentationshowed that 48% of gross revenue infranchising came from room additions withthe rest made-up of revpar. A year earlier,room additions were just 23% of the increasein gross revenue.
With revpars globally beginning to growmore slowly, on average, it is only by addingmore rooms that will ensure IHG maintains its rate of growth.
The good news in the presentation wasthat the company reckons it will exceed thetop-end of its 50,000 to 60,000 net newrooms target for the end of 2008.
The goal was set 18 months ago and in that time the company has added a net26,000 rooms. But the momentum isincreasing and there is confidence that the upper threshold will be breached.
CEO Andy Cosslett said it was important“that the business remains focused” on thetarget. It is currently opening a hotel a dayand signing two a day.
One slight hiccup has been a slightlengthening in the time it takes betweensigning and opening. Typically this is nine
quarters – just over two years – but growth in China, where hotels are 400 rooms andtowers, means completion times are beingstretched a little. Outside of China, theaverage room size is 150 or so.
The overall number of open rooms underthis brand in the Americas shrank 3% in thefirst half to stand at 181,292.
But this quality management exercise ishelping to bring future owners into the fold,claimed Cosslett. The brand is now beingmanaged in a “more assertive” fashion whichgives confidence to potential franchisees.
Later this year, there will be a majorannouncement concerning the renewal of the brand, added Cosslett. “Addressing theHoliday Inn tail gives us a platform to take the brand forward,” he said.
Exits from the system would remain high –6,281 Holiday Inn rooms left in the Americasin the first half – until at least 2009. Overall,13,282 rooms exited and 20,713 were added.This meant the net room growth across all the brands in IHG’s system in the first half was7,430 or 1.3%. The development pipeline atthe half-year was 187,487 rooms across1,414 hotels.
The company chose to highlight thegrowing momentum within the upscaleInterContinental brand with 16 signings in the first half bringing the pipeline to 50.
Despite the success of building themanagement contract business, just 20%
of revenues come from this source. And even then, the nature of IHG’s managementcontracts is significantly different to its mainrivals. They are much less operationally gearedwith the bulk of the fees being flat base ratherthan incentives.
Ownership is still significant with a total of £858m of assets at net book valueincluding four flagship InterContinentals (New York, London, Paris and Hong Kong)valued at £669m.
So far this year £75m worth of hotels and interests in hotels have been sold and a further £64m worth is currently on themarket. The asset sales more than covered the £40m in capital expenditure that included£15m on refurbishing InterContinentals inLondon and Hong Kong and £25m investmentspending on the forthcoming InterContinentalin San Francisco (IHG has a 19.9% stake),inducements on 11 Holiday Inn conversionsand one InterContinental renewal, and the landpurchase for the first phase of an Indigo in SanDiego. “We will use our capital to support thedevelopment of our brands,” said Cosslett.
Thanks to recent disposals, total operatingprofit fell from £127m to £116m, withfranchising contributing £122m, managed£42m and owned and leased £17m.Continuing operating profit was up 5% or17% at constant currency to account for theslide in the dollar. Global constant currencyrevpar was up 7.0%.
Room growth matters at IHG
Menzies Hotels has bought eight ThistleHotels for £54m from Curzon Hotel Properties.The hotels, placed on the market in April,were part of the 28 bought by Curzon foraround £400m.
This purchase by Menzies, which is ownedby the Tchenguiz Family Trust, the investmentvehicle of Robert Tchenguiz, demonstratesthat private deals are still being crunched
where debt raising is more manageable.Menzies was bought by Tchenguiz in
October last year and, with its latest buy,it has 23 hotels, all in the UK. It plans to spend £12m uprating the hotels.
“Our existing hotels continue to enjoybuoyant trading and we are confident thatthese new hotels will provide the companywith a significant return on investment,”
said Menzies’ chief executive Tim Penter.Meanwhile, Thistle said sales were up
26.5% to £196.1m for the year to June 30.Occupancy in London was up from 77.2% to79.6% and rate was £95.60 against £81.90last year. Figures for the provinces were moresubdued, with occupancy up from 69.8% to 71.1% and rate was £60.30 against£58.10 previously.
Menzies shows PE still has teeth
Morgan Stanley Real Estate has agreed termsto buy a 35% stake in Motel One Management,the German budget hotel brand.
The original investors in the chain, which is currently 17-strong with 2,300 rooms, willretain a 65% holding.
Dieter Muller, co-founder and CEO of Motel One, said: “We’re certain that
in addition to their financial investment Morgan Stanley’s specific real estate marketknowledge and network will be of great helpto Motel One in our continued strategicdevelopment.”
John Carrafiell, global co-head of MorganStanley Real Estate Investing, said: “Webelieve that Motel One is very well positioned
to capitalise on the attractive opportunities for the sector in both Germany and other CEE city centres.”
Motel One said that it has signed contractsto grow to 28 hotels with more than 5,000rooms. A large number of the properties willbe owned by the company via its Motel OneReal Estate subsidiary.
The August announcements that theCaledonian in Edinburgh and, separately,the Eton Collection, have both been solddemonstrates that the credit crunch has so far only afflicted larger portfolio deals.
But the tricky debt markets are beingblamed for the pulling of the sale of 15 hotelsowned by Royal Bank of Scotland in whatwould have been a much chunkier £1.1bn deal.
JJW Hotels & Resorts, the subsidiary of MBIInternational, made a £70m swoop on the fivehotels in Eton. Milestone Capital Partners,previously called European Acquisition Capital,drove the deal by selling its 80% stake.
The founder and chief executive of Eton,Peter Tyrie, is to head up the now 15-strongJJW Luxury Collection. The existing JJWproperties include the Scotsman in Edinburgh,42 The Calls in Leeds, Berners in London, theGrand Hotel in Vienna, and Hotel Balzac andHotel de Vigny in Paris. JJW paid £63m in early2006 for the three-strong Scotsman group.At the time, JJW said these properties were to be the basis for a new pan-Europe groupbut they have continued to trade separately.
The challenge for Tyrie, a former executive
with Mandarin Oriental, is to bring a coherentthread through his enlarged portfolio. Tyriesaid that the two groups were a perfect fit,a point also made by Sheikh Mohamed BinIssa Al Jaber, founder, chairman and CEO of JJW and MBI International.
Two projects are already underway,another property in Vienna and another golfcourse in Portugal.
Meanwhile, the Caledonian has been soldby Hilton via agent CBRE Hotels for £51.7m to a group of Israeli investors who have alsoagreed to inject a £13.5m to upgrade theproperty. Debt finance came from Bank of Scotland Corporate.
Israeli investors were also among thebackers to buy the 15 hotels from RBS.The dealhad been put together by Jeremy Robson theformer head of RBS’ principal finance operation.
It is understood that the deal collapsed dueto the increased cost of debt that has resultedfrom the current credit market turmoil. It is not clear whether Robson, who was using his vehicle Robson Asset Management, or RBSitself, which was also underwriting the debt,stepped back.
It is the second time in as many monthsthat the hotels have failed to sell. They werepart of the Vector Hospitality portfolio.Vector’s float was aborted in June.
The sale of another part of what wouldhave been Vector, the Marylebone WarwickBalfour portfolio of Malmaison and Hotel du Vin properties, remains on course, insistedMWB, with Prem Group, Ireland’s largest hotel developer, tipped as the prospectivebuyer having offered £685m, against thehoped-for £700m. Market rumours hadsuggested a number of high profile bidders,including Quinlan Private and RobertTchenguiz’s R20, pulled out of the biddingand forcing the price down.
Another deal that was crunched in Augustwas the €41.5m acquisition of Kasterlee,which trades as Choice Hotels Ireland.TVCHoldings led a consortium of investors to buy the 11 Comfort Inns and Quality Hotels,all based in the Republic of Ireland.
TVC will hold 29% with other equitybackers including new CEO Pat McCann, theformer boss of Jurys Doyle, and Davy PrivateClients. Debt is from Ulster Bank.
Smaller deals avoid credit crunch
Starwood Hotels’ policy of “asset right” ratherthan “asset light” had made it a favourite fora private equity take-out.
But now, with the debt markets in turmoil,a private equity bid looks much less likely.So has this proved Starwood right in its approach?
The jury remains out. The evidence againstthe company is that by retaining a propertyfocus, it is less effective at building a fee-based business. The real estate is a low-returndistraction.
Starwood’s retort is that by owning hotels it can facilitate innovation; it has brandstandard bearers; it can capture mixed use
and timeshare opportunities; and it providescredibility with owners.
Only the point about mixed use andtimeshare can entirely fee-based companiesnot answer back. And even here, Starwoodrisks confusing whether it is doing a project to generate fees for its brands or for theproperty returns.
So far, Starwood can also make a strongcase for leading industry innovation, at leastin the upscale arena.
Part of this is because it is comparativelyless established than many of its biggestrivals, notably core brand Marriott and Hilton.
Even in the US, it believes that all of its
brands have significant opportunities to grow.Its most widely distributed brand, Sheraton,present in 121 tracts (or micro-markets), canadd a further 169 locations. Le Meridien andWestin with four and 42 existing tracts, cangrow another 167 and 129 respectively.
At its August second quarter resultspresentation, it was confident that it willcomplete on its strongest ever pipeline of 440 hotels adding 105,000 rooms by 2010.Growth, therefore, does not seem a problem.
Because Starwood’s existing room supply issmaller than its main rivals, if it matches themin absolute terms through openings, its ownrate of growth will be significantly higher.
Starwood sticks to asset right
Park Plaza, fresh from its £85m of fundraisingthrough its listing on AIM in July, reported a16% increase in total revenues to €46.7m.
During the next four years, the group isplanning to double the number of rooms in itsportfolio. No dividends will be paid for at leastthe next 18 months to help finance thisexpansion.
The group is geared to the UK and the
Netherlands where it owns, or has an ownershipinterest of at least 50%, in eight hotels, fourin each country. Its seven German and oneHungarian hotel are on operating leases.
The current portfolio represents 4,128 roomswith 1,843 rooms that are committed projects.By 2010 it is planned to have 8,181 rooms ofwhich just 1,824 will be owned or co-owned.
Revpar growth in the first six months of
2007 was 9% to €94.70. The UK wasparticularly strong with a 22% increase.
In its listing prospectus, Park Plaza mademuch of its integrated model in that it bothowns and manages hotels. Through its art’otelconcept, it also owns a brand.
In total the group owns €302m worth of hotel property. It has two developmentprojects which will add another €57m.
Deloitte’s HotelBenchmarkteam examine the prospectsfor hotels in India.Spreading over 3 million square kilometres,India rises from the snowy peaks of Kashmir in the north and falls to the tropical shores ofKerala’s southern tip. India’s size and diversityis matched by few countries. Dotted acrossthis vast country are huge cities and manythriving regional centres. Over 40 cities havepopulations of more than 1 million. Butdespite India’s huge scale, one thing links this spectacular country: growth.
The figures are staggering. India containsover 1.13 billion people, and is predicted tobecome the world’s most populous country by2050, overtaking China.Three cities – Mumbai,Delhi and Kolkata – contain over 10 millioninhabitants, and those figures rise daily.
Like the population, India’s economy is growing at speed. Real gross domesticproduct (GDP) grew by 8.5% in 2005, afurther 8.8% in 2006, and according to theEconomist Intelligence Unit this trend willcontinue in 2007-08.
For the first time India looks like becominga major force and the hotel industry is notbeing left behind. So what is fuelling thisdramatic growth, and how sustainable is it?
The new tiger economyAcross India average room rates are risingfast. In the twelve months to August 2007average room rates rose 32.5% to US$191,driving revenue per available room (revpar) up 32.0% to US$134. The Indian hotel markethowever, does suffer from limited supply.There are an estimated 105,000 hotel roomsin India – a number comparable to that ofManhattan. This lack of supply, especially inthe lower end of the market, combined withincreased demand, is allowing hoteliers topush up average room rates.
India’s hotel industry is not the only sectorthat is prospering. The IT, pharmaceutical andtelecommunications sectors have all seen
rapid expansion in recent years as Westerncompanies outsource operations to India.
So what effect is this economic upsurgehaving on the hotel industry? The EconomistIntelligence Unit believes that approximately80% of foreigners coming to India are thereto do business. International tourismexpenditure in India in 2006 was someUS$8.7 billion, and is expected to rise to overUS$10 billion in 2008, with the greatest shareof this being generated from the hotel sector.
It is no wonder therefore, that India’sgovernment is reducing the barriers to foreigninvestment. Expenditure tax is no longerapplied to hotels and service charges havebeen slashed. New five-year tourist visas have also been introduced for the citizens of selected countries, including the UK, Japan,Germany, France, Switzerland and Brazil, toencourage repeat visits from wealthy tourists.
Island nationGiven the scale of India, air travel plays animportant role. Domestic air travel throughoutthe country is becoming a cheaper, morefeasible option with private carriers allexpanding their fleets and cutting fares. Thenational carriers Indian Airlines and Air Indiaare doing likewise.
The majority of international visitorsarriving in India fly into one of the four gatewaycities. So how are the hotels in these citiesbeing affected?
The capital: DelhiThe gateway to the north, Delhi is the startingpoint for the majority of India’s tourists.However with thriving telecommunications, IT,banking and manufacturing industries, and anEnglish-speaking workforce, Delhi is also ahaven for business travel.
Delhi’s relevance to the world of businessis enhanced by the presence of many majormultinational companies. With the exceptionof the Taj Group, all hotel industry majorplayers have based themselves here.
A dramatic 36.4% rise in the twelvemonths to August 2007 forced Delhi’s average
room rates up to an incredible US$255; thehighest of all Indian cities. The main reason for this is under-supply, especially in the lowerend of market. As with all cities in India, themarket in Delhi is dominated by 5-star and 5-star deluxe properties. Efforts are beingmade to solve this problem before Delhi hosts the 2010 Commonwealth Games.
Between now and the Games, newdevelopments in the National Capital Region(NCR – including Delhi and its suburbanconurbations of Gurgaon and Noida) are setto include a 320-room Novotel, a 200-roomTaj Hotel, three Starwood (the 300-roomWestin New Delhi, the 97-room WestinSohna-Gurgaon and the 220-room SheratonNew Delhi) and a 319-room Leela-Kempinskijoint-venture. The public sector is also playinga role with the state governments of Delhi,Haryana and Uttar Pradesh having identified75 potential NCR sites for hotel development.
Together with Mumbai, Delhi accounts forthe bulk of inward arrivals. The modernisationplan for Indira Gandhi International Airport by its new private owners is already underway.This is expected to be completed by 2010 andwill double its capacity.
The financial centre: MumbaiThe capital of the western Maharashtra state,Mumbai is now the financial capital of Indiaand home to the National Stock Exchange.It also has thriving industries revolving aroundIT, engineering and healthcare sectors. MostIndian conglomerates have their corporateoffices here, including Tatas, Birlas andReliance. This status makes Mumbai a havenfor national and international business travel.
Mumbai experienced revpar growth of48.8% in the twelve months to August 2007.This, again, is due to a sharp increase inaverage room rates, which rose 45.6% toUS$237. Once again, a market dominated byluxury properties, as well as a shortfall insupply, is forcing this trend. Increased capacityat Mumbai’s Chatrapati Shivaji InternationalAirport has exacerbated the problem andallowed hoteliers to force average room
Indian hotels show strength in numbers
Hotel performance for gateway cities in India – twelve months to August 2007Occupancy (%) Average Room Rate (US$) RevPAR (US$)
9/2006 to 9/2005 to 9/2006 to 9/2005 to 9/2006 to 9/2005 to8/2007 8/2006 Change % 8/2007 8/2006 Change % 8/2007 8/2006 Change %
rates even higher. With further expansionproposed, and a new airport planned in theeastern suburbs of Mumbai, the city looks set for an even greater increase in arrivals.Planned developments over the next twoyears by Marriott, Four Seasons and Accor’s300-room Sofitel Mumbai will help.
The growth city: KolkataThe capital of West Bengal, Kolkata is the hubof trade into eastern India. As a traditionallysocialist city, Kolkata had been unattractive to investors. The state government had longfavoured trades’ unions and workers’ rights,and consequently the post-independence dayshad seen Kolkata lose out as internationalcompanies located elsewhere. However sincethe change of leadership in 2000, IT andmanufacturing sectors are now revitalising the city. With its prime location for trade withChina and the ASEAN countries, and directflights to Brunei, Bangkok and Singapore,Kolkata looks set to grow.
Although revpar in Kolkata remains the lowest of the gateway cities, the rate of growth is among the country’s highest.An average room rate rise of 44.6% in theyear to August 2007 is close to that ofMumbai. Average rates for this period stand at US$138, while Revpar grew 45.2% toUS$99. But as the city’s status as a centre ofindustry grows in the coming years, will supplybecome increasingly outstripped by demand?Marriott plan to open a new 250-roomCourtyard property in the city by 2009, whileHilton, with its Indian development partnerDLF Ltd, also has a new opening planned in the city. It remains to be seen if the supplyof beds in the city will match demand.
The ‘resort’: ChennaiDespite the 12km-long Marina Beach thatdefines Chennai’s eastern limits, the capital of Tamil Nadu state and the gateway to southIndia is no beach resort, but a major industrialcentre. The traditional hub of India’sautomobile industry is also now becoming a major IT centre.
With revpar growth of 37.3% for thetwelve months to August 2007, Chennaifollows the pattern of India’s other gatewayscities. Average room rates, rising 36.7% toUS$152, accounted for this growth. Direct air links with many ASEAN countries and theMiddle East show strong potential for furthergrowth. Leela-Kempinski plan to open the300-room Leela Palace Kempinski Chennai by 2008, while the 253-room Hilton Chennaiis set to open in December 2007.
A false dawn...? ‘Make hay while the sun shines’, appears to be the current motto of India’s hoteliers.But can average room rates be forced higherin future years and if so, how high? AlreadyMumbai and Delhi have average room ratescomparable to the most expensive cities in Asia. Delhi’s average room rate for theSeptember 2006 to August 2007 period(US$255) outstrips all its regional rivals,including Shanghai (US$140), Singapore(US$145), Hong Kong (US$187) and Tokyo(US$225). But how high can they go?
A hotel construction boom in years tocome will resolve the supply problem. India’sbudget sector in particular looks set to takeoff, with Accor and Hilton planning to launchtheir Ibis, Formule 1 and Hilton Garden Innbrands across the country. Whitbread Plc,
operator of the UK’s Premier Travel Inn budgetchain have committed to opening severalhundred hotels across India and China in thenext 5 years, while the easyGroup also haveplans for the country.
Local operators are also expanding theirportfolios. Sarovar has launched its Hometelbudget brand in India, and South-India basedChoice Hotels looking to open 8-10 budgethotels a year in the next three years. Anddevelopment is planned not only in thegateway cities, but new, rapidly growing cities such as Bangalore, Hyderabad, Pune,Chandigarh, Indore and Jaipur. Once thishappens it is likely that the new competitiveclimate will force average room rates, even inthe top end of the market, to plateau or fall.
…Or a bright future? India needs further infrastructure investmentfor economic growth to remain strong. With a booming IT sector, India is ideally placed tothrive in the 21st century. However, justificationof such high average room rates can be foundonly in world-class facilities and back-upservices for the business traveller. If the logisticsof travel itself are troublesome, businesspeople may be dissuaded from travelling to India. As India’s cities attract increasingnumbers of visitors, the surrounding servicesneed to be improved.
However with the increasing supply of airtravel it is becoming easy to travel around thisvast, spectacular land. Whether you enter bythe north, south, east or west – through Delhi,Chennai, Kolkata or Mumbai – India is nowbecoming more accessible. As urbanisationincreases, the need for hotel rooms will keeppace. International chains have realised thisgreat opportunity, and even though averageroom rates cannot continue to climb assteeply in future years as at present, furthergrowth is expected.
• The HotelBenchmark Survey by Deloitte contains the largestindependent source of hotelperformance data and tracks theperformance of over 7,200 hotels and 1.3 million rooms every month.www.hotelbenchmark.com
Average rooms rates across India’s gateway cities September 2006-August 2007
Source: HotelBenchmark™ Survey by Deloitte
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OverviewThe period saw the addition of around 70,000 hotel rooms, which wasan unremarkable average annual growth of less than 1%. However, thevery remarkable transformation was the 4% average annual growth inchain-affiliated rooms, which added 147,000 rooms to portfolios. Thisboosted hotel room concentration in the country from 29% to 54%and established hotel chains as the dominant force in the business.
The shift in the structure of the British hotel business was not all about the growth of hotel chains, it was helped along by the decline inthe number of unaffiliated hotel rooms, which itself was accelerated bythe trading downturn during the recession of the early 1990’s and thecollapse of international travel due to Gulf War I. At that time in Britainthere was a marked increase in bankruptcy and liquidation amongunaffiliated hotels that required the lending banks to take those hotelsonto their balance sheets or to find alternative uses for the properties.Before that time banks were quite relaxed about lending toindependent hoteliers to build new unaffiliated hotels, but from thispoint onwards banks reduced this lending sharply and progressively.This was a crucial development in restricting the unaffiliated segmentto old, small hotels in poorer locations and therefore cheaper hotels.
As the expansion of the hotel business during the second half of the 19th century was borne out of the economic transformation thatresulted from the Industrial Revolution, so the faster changes over thepast two decades were driven by the economic transformation thatwas driven by the Service Revolution. When Margaret Thatcher came to power at the end of the 1970’s the British economy was in a messhaving endured a decade of slow economic growth and recession,industrial relations trauma, very high inflation, very high levels ofunemployment, significant parts of the manufacturing economycontrolled by the government and burgeoning growth in citizenservices. Previous governments had also been in denial about the
Those of us who have been active in the hotel investment community over the past 20 years have probably not realised that wehave participated in a greater transformationin the British hotel business than in anyprevious period in history. Even the secondhalf of the 19th century, which benefitedfrom the payoffs of the Industrial Revolutionand produced a spate of urban, resort andrailway hotels added only half the number ofrooms per decade than were built in the last20 years.What’s more, the past two decadessaw the addition of 10 times more chainaffiliated rooms than during the whole of the second half of the 19th century.We willexamine here why the recent surge occurredand we will explore some of the specificchanges in market level, hotel configurationand location that emerged. In the next twoeditions of Hotel Analyst we will track thefate of specific hotel brands over the periodand we will consider the implications for thefuture of the recent changes in the structureand conduct of the hotel business.
Paul Slattery from Otus & Co examines the UK
The Transformation of the British HotelBusiness: 1987 to 2006
The Structure of the British Hotel Business: 1987 to 20061987 1996 2006 Change CAGR
UK hotel room stock Rooms Rooms Rooms 1987-2006 1987-2006 %
natural growth of service businesses. The new government institutedwide-ranging changes to boost the economy including greaterflexibility in the labour market, growth in home ownership, the extensionof personal credit and the privatisation of businesses controlled by thegovernment. All of these changes and more involved the expansionand development of service businesses and resulted in a shift in thestructural balance of the British economy so that a greater proportionof GDP was generated by service businesses. By the late 1980’s thesedevelopments established the British economy with a more developedstructure and better performance than its partners on the continent.
The British hotel businesses not only benefited from these changes,but also as a service business, it was part of the solution. The growth in service businesses produced a stepped increase in domestic businessdemand into hotels from fast growing businesses such as retailing,financial services, communications, logistics, travel and hospitality.It was not just a boost in bedroom demand, but also demand formeetings and conferences from the new and expanding servicebusinesses that did not have their own office infrastructure toaccommodate meetings. Domestic short break demand also grewsharply as a result of the economic changes as did the volume ofinbound business and leisure visitors.
The surge in hotel demand during the 1980’s also brought changes in the sources of capital for the hotel business. The 1980’s and 1990’ssaw the stock market become the prime supplier of equity to the hotelbusiness. In 1987 there were 51 publicly quoted companies with104,800 hotel rooms in Britain amounting to 85% of all chain roomsand most of the rooms were owned or leased by the companies. By1996, UK Hotels Plc had increased to 62 companies and their room stockhad increased to 124,550 accounting for 73% of all chain rooms andthe proportion of owned and leased hotels began to decline as, gradually,more hotels became managed and franchised by the brands. Over thenext 10 years there was a marked downward shift in the sentiment ofstock market investors about the hotel business. They considered thequoted hotel companies to be top heavy with hotel real estate andtherefore to have a high risk profile, to produce too low a rate ofgrowth in earnings and to deliver too low a rate of return on investedcapital. Consequently, by 2006 there had been a procession of quotedhotel companies that were taken private. UK Hotels Plc had declined to only 22 companies and their room stock fell to 105,000, accountingfor only 39% of all chain rooms. The valuation the stock market placedon public companies was invariably lower than the valuation achievedby private equity funds, real estate companies and high net worthindividuals who valued hotel real estate at higher levels than the stockmarket and coped with higher gearing that produced higher returns
on invested equity. For most of the companies that retained their stockmarket listing it was a time of transformation in the affiliation betweenhotels and the brands. The number of franchised and managed hotelsincreased sharply as major quoted hotel companies pursued programmesof sale and management back and sale and franchise back to lightentheir balance sheets and improve the rate of return on invested capital.To all intents, over the past 10 years, the stock market has all butwithdrawn as a source of equity for hotel companies.
Market levelIn 1987 there were twice as many mid-market chain rooms aseconomy rooms, by 2006 there were broadly equal numbers of up-market, mid-market and economy rooms. Economy brands achievedelectric growth adding 69,000 rooms, an annual average growth of7.4%. This growth was achieved by two styles of hotel. First, there was the expansion of new, hard brands such as Premier Travel Inn,Travelodge and Express by Holiday Inn. Secondly, there was theredevelopment of softer branded pubs-with-bedroom such asInnkeeper’s Lodge and Old English Inns. Up-market hotels grew in linewith the market as a whole adding 48,000 rooms, while mid-marketand deluxe hotels grew at sub-market levels. The collapse of thebudget segment resulted from the disposal by chains of clapped-outhotels to independent owners or for alternative uses. Three activitiesproduced changes in the supply profile of chain hotels – new buildhotels, the acquisition of better quality and better sited unaffiliatedhotels and the disposal to independents of hotels that were too small,of too poor quality, or in too unprofitable locations for the chains. Themore that this pattern of migration between chains and independentowners occurred, the greater became the quality gap between chainand unaffiliated hotels.
The Market Level Profile of Chain Hotels in Britain: 1987 to 2006Market Level 1987 Rooms 2006 Rooms Change CAGR %
Hotel configurationThere was significant development in hotel configuration over theperiod. Full feature hotels with restaurants, bars, conference andmeeting rooms and leisure facilities added most bedrooms, 60,000,doubling their presence. This growth was driven by demand forconferences and meetings in hotels and by short break customerstempted by discounted hotel packages enhanced by the use of an on-site health club. Full feature is the largest configuration category by far, now accounting for 43% of chain rooms, but their rate ofgrowth is slowing. Since 2000, less than 10,000 rooms in full featurehotels have been added to portfolios in Britain.
The most radical development in hotel configuration occurred in limitedfeature hotels, that is those with more than 75% of turnover generatedby renting bedrooms and room only hotels where all turnover is fromrenting bedrooms. The room stock in these chain hotels increased by71,000 mostly through new build economy and budget brands. Basicfeature hotels typically deliver between 55% and 60% of turnoverfrom renting bedrooms and they added little more than 500 rooms peryear over the period. There are now 73,000 basic feature rooms in thechains, but from a position in 1987 when they accounted for half of allchain rooms they have now declined to a little more than a quarter in2006. The typical profile of basic feature hotels is around 100 rooms,provincial and reliant on local demand for restaurant, bar and socialfunctions. The problem is that over the past two decades the growth in high street restaurant and pub brands have deprived basic featurehotels of much of their non-resident demand, reduced their profitabilityand reduced their attractiveness to the chains.
Hotel locationThe most striking feature of the locational development of chain hotelsin Britain over the past 20 years was the material increase in the numberof locations of chain hotels. In 1987 chain hotels were represented in650 conurbations, but by 2006, 335 conurbations were added to reacha total of 985 locations.The only major hotel city, with more than 30,000chain rooms in Britain is London. In 1987 it accounted for 35% of all chainrooms in the country and since then a further 31,000 chain rooms havebeen added, but now it only accounts for 27% of all chain room stock.
Britain has three primary hotel cities: Manchester, Birmingham andEdinburgh, which grew their chain room stock faster than the countryas a whole and most of the rooms added over the period were in up-market and mid-market hotels. Secondary cities added 20,000chain rooms over the two decades and tertiary locations added morethan 21,000, but the biggest uplift was in quaternary locations. Eachquaternary location has less than 500 chain rooms and is, in the main,a village or rural location. The new conurbations for chain hotels werepredominantly quaternary and it was mainly economy and budgethotels that were sited there.
As the table above illustrates the larger economy brands haveportfolios that are skewed locationally towards the smaller locationswhere they have a significantly greater proportion of their British roomstock. A characteristic feature of the smaller locations is that theygenerate lower volumes of demand and slower growth in demand.
ConclusionsThe 20-year period was not simply characterised by a growth in the number and in the size of hotel portfolios. There were significantchanges in the substance of chain hotels and in the rationality of their portfolios.
The growth in volume has been accompanied by growth in the diversityof demand and this has been reflected in the supply profiles of hotelchains. As the diversity of hotel demand increased so did the marketlevel spread of chain hotels. As the diversity of hotel demand increasedso did the hotel configuration spread of chain hotels and as thediversity of hotel demand increased so did the locational spread of chain hotels.
By the end of this period Britain had the most structurally developedeconomy in Europe. In parallel, it had the most concentrated hotelbusiness in Europe and also the most diverse and sophisticated hotelcapital markets in Europe. In our analysis the developments are farfrom complete. The volume and diversity of demand continue to growand the gap between hotel chains and unaffiliated hotels continues towiden. We now estimate that around 50,000 unaffiliated hotel roomsin Britain are unacceptably poor in terms of life safety provision, thequality of facilities, services and products sold as well as the quality of their management and performance. Such hotels are anembarrassment to the hotel business to the economy and to ourculture. They should be removed from the market to make way fornewer, safer, better and more economic chain hotels.
London’s chain hotelsgenerated the best roomsales in July according to thelatest HotStats survey ofleading European cities byTRI Hospitality Consulting.
Revenue per available room rose by 1.7% to€184.50 in London, the result of the highestrate and occupancy levels in Europe. Averageroom rate edged up 2.9% to €206.36, andoccupancy was 89.4%, one point down onthe same month in 2006.
“Demand in London continues to beextremely high, despite no evidence of summerand the unfavourable dollar to pound exchange
rate. But for the first time in 14 months, London’shoteliers did not push rate so aggressively,”said Jonathan Langston, managing director,TRI Hospitality Consulting.
The highest increase in revpar was found in Russia where Moscow’s remarkable run ofgrowth continued unabated with a 27% risetaking revpar to €118.39.
Room rate was up by 19.9% to €173.9,but an increase of 3.8 percentage points stillput Moscow’s occupancy at only 68.1%.
Lack of volume put Moscow’s room salesin third place after London and Paris, whichtook second place with revpar increasing by11.7% to €164.64.
“Moscow’s hoteliers continue to drive rateharder than any other city in our survey, butunless you also fill your hotels, the net result is not as beneficial as when a more balanced
approach is taken. Paris and London have thesales edge due to superior volume, particularlyin London where average occupancy isnearing 90%,” said Langston.
Unfavourable comparison with 2006 whenGermany hosted the World Cup showed inchain hotel performance in Berlin, Munich andHamburg. The most significant falls were seenin Berlin where room rate was down 30.2% to €117 and revpar fell by 30.4% to €83.67.
“Germany presents clear evidence of thetransformational effects of major sportingevents. Yet it would be a mistake to judgeBerlin’s performance one year on too harshly.Compared to July 2005, revpar in Berlinincreased by more than 100% during theWorld Cup. With a fall of just 30.4% this year,arguably Berlin’s hoteliers have continued toup their game,” said Langston.
Rooms Department Headlines Business Mix – RoomsAverage Room
Month Region Occupancy room rate revpar Commercial Conference Tours/groups Leisure Other
Current year July 2007 London 88.50% £112.57 £99.59 45.00% 6.00% 16.80% 20.20% 12.10%July 2007 Provincial 76.70% £71.44 £54.78 47.40% 15.40% 10.20% 22.00% 5.00%July 2007 All 80.80% £87.22 £70.48 46.40% 11.80% 12.80% 21.30% 7.80%
Month Region Points % % Points Points Points Points Points
Year on year change July 2007 London -1.1 2.10% 0.90% -2.7 -1.1 -2.5 7.4 -1.1July 2007 Provincial 0.7 3.20% 4.20% -0.4 1.3 -1.3 2.4 -1.9July 2007 All 0.2 2.70% 2.90% -1.3 0.4 -1.8 4.3 -1.6
Average Room Month Region Occupancy room rate revpar Commercial Conference Tours/groups Leisure Other
Last year July 2006 London 89.60% £110.21 £98.70 47.60% 7.00% 19.30% 12.80% 13.20%July 2006 Provincial 76.00% £69.24 £52.60 47.80% 14.10% 11.50% 19.60% 7.00%July 2006 All 80.60% £84.92 £68.48 47.80% 11.30% 14.50% 17.00% 9.40%
Rooms Department Headlines Business Mix – RoomsAverage Room
Month Region Occupancy room rate revpar Commercial Conference Tours/groups Leisure Other
Current year YTD London 81.70% £110.05 £89.89 47.90% 7.30% 16.20% 17.30% 11.30%YTD Provincial 70.00% £71.03 £49.73 49.50% 16.30% 8.80% 20.80% 4.60%YTD All 74.10% £86.02 £63.73 48.90% 12.80% 11.70% 19.40% 7.20%
Month Region Points % % Points Points Points Points Points
Year on year change YTD London -0.6 10.80% 10.00% -0.8 0.3 -1 3.4 -1.9YTD Provincial 0.3 3.30% 3.80% -0.8 1.5 -0.1 1.4 -2.1YTD All 0 6.90% 7.00% -0.8 1.1 -0.4 2.2 -2.1
Average Room Month Region Occupancy room rate revpar Commercial Conference Tours/groups Leisure Other
Last year YTD London 82.30% £99.32 £81.72 48.60% 7.00% 17.20% 13.90% 13.30%YTD Provincial 69.70% £68.74 £47.92 50.30% 14.80% 8.80% 19.30% 6.80%YTD All 74.00% £80.46 £59.57 49.60% 11.80% 12.10% 17.20% 9.30%
The month of July 2007
The 7 months to July 2007
The extraordinary run ofrevpar growth enjoyed byLondon’s chain hotels slowedin July, according to the latestHotStats survey from TRIHospitality Consulting.
Revpar increased by just 0.9% to £99.59compared to the same month in 2006. Thiswas the result of average room rate up 2.1%to £112.57 which was counteracted by a dipin occupancy of 1.1 points to 88.5%.
The modest growth contrasts markedlywith London’s recent runaway performancewith revpar increases largely staying in doubledigit figures from May 2006 onwards.
“Such phenomenal growth could not lastforever, although London is still putting in asparkling performance. At 88.5%, there’s notmuch further average occupancy can go so inorder to maintain volume London’s hotelierschose not to push rate so aggressively in July,”said Jonathan Langston, managing director,TRI Hospitality Consulting.
The bi-annual Farnborough Airshow, whichattracted 270,000 visitors in 2006, not fallingthis year is the most likely explanation of the
slight dip in occupancy.“We expect London’s hoteliers to continue
pushing rate upwards because demand is stillvery strong. But double digit hikes may nolonger be achievable,” said Langston.
In the provinces, performance continued tobe steady with a 0.7% increase in occupancyto 76.7% and room rate up by 3.2% to£71.44. This led to revenue per available roomof £54.78, up 4.2%.
Year to date, provincial revpar is nearlypassing the £50 mark with an improvement of 3.8% taking it to £49.73, while London is about to break the £90 barrier with revparat £89.89, a 10 per cent rise on 2006.
No change in visitor numbers,but spend dipsOfficial Government statistics showed nochange in the number of visitors to the UKduring the three months to the end of Junecompared to the same period in 2006. Thetotal number of visitors from all sourcemarkets was 8.4 million.
The number of visitors from North Americafell by six per cent to 1.2 million, while totalvisits from the EU remained the same at 6.1m.Visitors from countries outside the EU andNorth America increased by four per cent to1.1 million.
The weak dollar-pound exchange rate and consequent loss of North Americanvisitors made its impact on overall spendingby overseas visitors which dropped by threeper cent to a total of £3.87bn.
UKinbound, the trade organisation for theinbound tourism industry, said its June surveyrecorded the lowest rise in visitor numbers fora year, with a 0.9% increase, as well as asignificant drop of 1.5% in forward bookings.
Airports operator BAA said it handled atotal of 15.1m passengers in July, an increaseof 0.2 per cent, the biggest number it has everhandled in a single month.
European scheduled traffic was up 2.8%but charter dropped 7.3% and UK domestictraffic fell three per cent.
North American traffic was down 0.4%,but other long haul routes saw gains of threeper cent.
Of the UK airports operated by BAA,Aberdeen experienced the biggest increase in traffic of 10.6 per cent, while traffic inGlasgow fell the most with a drop of 6.4%.At Heathrow, traffic was down by 1.7%.
So, here we are again,in another credit crunch.The Sunday Times on 9thSeptember 2007 is talkingabout “the worst crisis in themoney markets for 20 years”.Banks around the world arerethinking their propertyexposure and lending spreadsare widening.The stockmarkets are plummeting –and hotel shares areespecially badly hit.Intercontinental, for example, has slumpedfrom a high of about £16.00 to a price of£9.60. Its P/E is under 12x. Compared to the35x EBITDA multiple paid for Four Seasons inthe heads days of….well…. a few monthsago, the collapse has come alarmingly fast.
Is it going to be grim? Well, probably, for afew months at least. Bankers, or should we saybaa…baa…nkers tend to flock together andoften run straight into the nearest snowdrift.
Why is it that they have all been lending at ludicrously high loan to values, especially in the US, both to residential and commercialborrowers? And also why now is the infection of the financial system spreading globally?
Let’s just step back and try to work outwhat’s really going on. Right now, the issue isthat many off-balance sheet companies set upby banks to lend to the subprime market werefunding themselves with commercial paper(basically, short-term borrowings).
These now need to be refinanced, but in the current market, there’s a danger thatnobody will want to take the exposure. So,banks behind these vehicles are hoardingcash, to make sure they have enough liquidityto meet these obligations falling due.
But if they are hoarding cash, then theyaren’t lending to each other, or indeed, toanybody else.
In simple terms, then, this is a purely
financial crisis which – if enough short-termliquidity is pumped into the markets – will sortitself out in months if not weeks.
However, and there is a big however, a lotdepends on whether it infects the underlyingmarkets. Some of these crises, like the lastRussian one, are relatively short-lived anddon’t have too much spillover.
Others, like the last Asian crisis, can causeunderlying downturns. Basically, if it’s just a matter of banks having made some baddecisions, it’s going to be OK, but if the realproblem is in the underlying economy, it won’t.
In this case, it’s hard to tell. It’s true that a big part of this issue is due to bankscollateralizing lots of obligations and everybodyplaying “pass the parcel” shoveling themaround the system, hopefully at a profit.
But it’s also true that the US is massivelyover-borrowed, with households having anegative savings ratio and banks offeringmortgages to people who shouldn’t be letnear a credit card let alone a multi-thousanddollar loan.
If the crisis caused a massive crash in UShousing values, sparking a collapse in USconsumer confidence, I think it’s fair to saythat we’ll all be in trouble.Whatever happens, I expect a bumpy fewmonths, not only in the stockmarkets, but alsoin underlying trading, as people pull in theirhorns and cut their discretionary spending.
Unfortunately, none of that quite explainswhat has happened to European hotel stocks,however, which have plummeted, especiallyUK majors like Whitbread, Intercon and M&C.
To explain that, we have to factor in aVector. The collapse of the UK’s first hotel REITflotation has not left equity investors in a goodmood. Regardless of the specific factorsinvolved (potential conflict of interest etc),there is a general feeling that it marked apeak of hubris in the sector and that hotelstocks are best avoided for a while.
Indeed, it’s worth remembering that thestock markets have generally not been bigfans of hotel companies. In every ten yearcycle, there are only a few stellar years.
In the last cycle the Granada bid for Fortein 1995 had awakened fund managers to thehidden value in hotel shares and they all piledin, seeing many stock rise by significantpercentages and a spate of flotations in 1996,some of which were questionable publicmarket stories (and most of which are nowback in private hands).
The run-up in hotel shares from 2004 to2007 was based primarily on the ability ofhotel companies to realise value from theirassets, resulting from a clear arbitragebetween property yields and the multiplesthat public markets would put on the assets.
That story is now over and done with.A slight subsidence in share prices mighttherefore have been expected anyway and the high multiples of more recent monthswere almost entirely based on potential bidpremia, as the markets expected other hotelgroups to follow Hilton into the whale’smouth of the private equity houses.
The collapse of the lending markets has of course also scuppered this hope for now,leaving few reasons to be a holder of hotelequity – or so it would seem judging by theshare prices.
And yet, the medium-term outlook for thebig boys is excellent. With no real estate, theyare less exposed to the downturn than everbefore. Their growth pipelines are in strongfettle and the key emerging markets of Chinaand India (and also of Brazil and Russia) areopening up for them.
They are probably better run too, havingbrought in some infusions of outside talent in many cases. For anyone with a slight riskappetite, this definitely looks like a buyingopportunity, soon if not right now.
The Blackstone deal also shows one of the key areas for future excitement. All thoseprivate equity houses with assets undermanagement by third parties will get fed up,at some point, with paying fees to entities thatare smaller and less powerful than they are.
So, they’re going to buy them out. Just likeBlackstone did. Thus, the bid premia will beback, the banks will be back and eventuallythe economy will be back. So, don’t despair.At least not till next week.• Simon Allison is managing director of finance at Six Senses Resorts & Spasand director of HOFTEL, the HotelOwners and Franchisees Transatlanticand European League(www.hoftel.com).
Le Crunch – not Golden, not DeliciousSimon Allisontakes a lookat the turmoilin the creditmarkets
Why is it that bankshave all been lendingat ludicrously highloan to values,especially in the US,both to residentialand commercialborrowers?
Volume 3 Issue 5 19
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www.hotelanalyst.co.ukFeatured businessesAberdeen Property Investors 7Accor 5,6,11AEW 4Alchemy Partners 6American Appraisal 4Bank of America 1,2,3Bank of Scotland 9Barclays 1Barcelo 6BDRC 4Bear Stearns 2,3Blackstone 2,5,18Broadreach Capital Partners 4CB Richard Ellis 4,9CDL Hospitality Trusts 3Choice Hotels 11Colony Capital 5Cushman & Wakefield 20Curzon Hotel Properties 8Davy Private Clients 9Dawnay Shore 1Delek Real Estate 6Deloitte 11Deutsche Bank 2,3DLF 11Dolce International 4East India Hotels 7Eurazeo 6Fiesta Hotels 6First Choice 6Four Seasons 18Goldman Sachs 2,3Hilton 2,3,5,6,7,9,11Host Hotels 7Hotel Corporation 6Indian Hotels 7Intercontinental 3,5,8,18,20JJW Hotels & Resorts 9Jones Lang LaSalle 1,3,20Jurys Doyle 9Kasterlee 9Kempinski 10,11KKR 5,7Leela 10,11Lehman Brothers 3Louvre Hotels 6Mandarin Oriental 20Maritz, Wolff 4Marriott International 5,6,7,9,11,20MBI International 9Menzies Hotels 8Meridia Capital Hospitality 1Merrill Lynch 3Milestone Capital Partners 9Millennium & Copthorne 3,18Minor International 1MKG Consulting 6Morgan Stanley 2,3,8Motel One 8MWB 9Norgani 7Norwegian Property 7NH Hotels 4Otus & Co 12,14Park Plaza 9Permira 4PREM Group 1,9Quinlan Private 9RIU 6Robson Asset Management 9Royal Bank of Scotland 1,9Sarovar 11Six Senses 18Shore Capital 6Smith Travel Research 7Sol Melia 4Sonnenblick Goldman 20Soros Real Estate Investors 4Standard & Poor's 7Starwood Capital 2,4Starwood Hotels 3,5,9,10Strategic Hotels & Resorts 20Taj Group 10Tchenguiz 8,9Thistle Hotels 8TRI Hospitality 4,15,16TUI 6TVC Holdings 9UBS 2Ulster Bank 9Vector 9,18,20Whitbread 4,5,11,18Wyndham 20
Will the crisis in the credit markets cause dealflow to dry up completely? Not according tothe brokers who are making money out oftransactions, at least.
Jones Lang LaSalle Hotels predict that thesecond half of this year will see $54bn worthof deals, after clocking up a record $56bn inthe first half.
The broker said that although the first half had seen particularly strong activity in the US with REITs being privatised and privateequity buying management as well as brands,the main focus may well be Europe for thesecond half.
The JLL Hotel Investor Sentiment Survey
found that buyers are currently outnumberingsellers by four to one. Almost a quarter ofrespondents are now expecting to build hotelassets rather than just buy them.
A similarly bullish outlook is no doubtprevalent in the offices of Cushman &Wakefield which at the end of July completedits purchase of Sonnenblick Goldman, a realestate investment bank that has enjoyed asignificant presence in hospitality deals.
The six principals with Sonnenblick will continue to maintain a “significant”ownership position in the new entity, whichwill now be dubbed Cushman & WakefieldSonnenblick Goldman.
The current benign supply environment maynot have that much longer to run, if the bigcorporates are to hit their growth targets.
In an August announcement, Wyndhamsaid that 46% of its 100,000 pipeline wasnew build, with 25% of that international.
The company, which is predominately abudget player, had 541,700 rooms at 6,460hotels at the end of its second quarter. This
makes it the largest US hotelier by roomnumbers and the world’s largest hotelfranchiser.
Revpar for the quarter was up 5.1% on a comparable basis and hotel revenues wereup 6% to $186m. The other (larger) two partsof Wyndham’s business, timeshare exchange(RCI) and timeshare ownership sales, alsoreported strong results.
Wyndham’s new-build supply
The benefits of brand extension are beingexploited by Mandarin Oriental, which isbidding to make itself a dominant player inthe luxury hotel segment as it breaks throughthe 10,000 room barrier.
It currently has nine Residences atMandarin Oriental in development, openingbetween 2008 and 2010.
Only one of these, in London, is an ownedproperty. But the company benefits both fromone-off branding fees and the ongoing supplyof services to the Residences.
There are 16 hotels in development and,with the exception of Paris, all are managementcontracts. The group now has 9,800 rooms in operation or planned.
Mandarin extends brand
Sir David Michels may have had his REITambitions in the UK thwarted with the collapseof the Vector Hospitality float but he is showinghis faith in REIT vehicles by stepping up to abigger role within US REIT Strategic Hotels & Resorts.
Although he was already a non-executivedirector, he will now slot into the consultingposition of senior European strategist.
Laurence Geller, CEO of Strategic, said thecompany’s North American management cannow focus on its domestic region “with theconfidence that, under Sir David’s aegis, weare improving and strategically considering
the expansion of our European business”.The company’s current European portfolio
comprises four hotels – Marriotts in London,Hamburg and Paris plus an InterContinental in Prague. These four properties accounted for12% of EBITDA last year. The company has atotal of 20 upscale hotels with 10,005 rooms.
When Strategic floated on the New Yorkexchange back in 2004, it faced questionsabout conflicts of interest which havesimilarities to those that dogged Vector’s float.
In particular, Strategic listed 14 hotels whileholding onto seven hotels privately. Unlikewith Vector, however, the float was a success.
