no change in the cycle - hotel analyst · from australian property company investa. the wider issue...

•Orient Express feels the heat as suitors circle: managementrebuff takeover advances p8

•Big on branding: newnames from Accor andHyatt, and Whitbreadplans a spring marketingoffensive p6

•Asset right: withproperty assets sold off, Simon Allison looksat how hotel sharesperforming p14

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No change in the cycleThe scariest phrase for anyinvestor should be: “this timeit will be different”. Nobody inthe hotel industry is claimingthat the cycle has gone awaybut most seem to believe thatthis time the downturn willbe much gentler.

While there are sound reasons for suchoptimism, economic slowdowns can have anasty habit of gathering speed as the graphsbegin pointing downwards.

TRI Hospitality Consulting put the bull case for the UK, towards the end of December.It argues that economic growth is stronger,house price growth is still positive andinflation is lower than it was at the lastturning point at the start of the 1990s.

At least two of these three seemsustainable. The economy is clearly slowingbut few believe GDP will enter negativeterritory in the next year. Inflation, too,seems set to be restrained despite significantcommodity, particularly oil, and food price pressure.

Already shot, though, are house prices.These are falling if figures for the past fewmonths are looked at rather than 12 monthmoving averages, and seem certain tocontinue on a downward spiral.

Data for the UK residential housing marketgoes back 100 years, encompassing two worldwars, the Great Depression of the 1930s, theremarkably low interest rates of the 1950sand the stagflation of the 1970s.

Drawing a line through the data pointsshows house prices are around a third higher

than the long run average. Even the mostoptimistic commentator is hard pressed to makea case as to why prices will not eventuallyhead back to the long-term trend.

Supply shortages are a prop but cannotaccount for the huge gap which surely hasbeen expectations driven. These expectationsare now reversed and will reinforce the movesouth on residential house prices.

The good news is that the evidence in the US, which has seen a residential propertymeltdown for 18 months or so, has shownthat even with drops as high as 20% innominal values, consumers are still comingout to spend.

There seems a reasonable chance that theasset price bubble will work its way throughwithout a major recession.

Despite all this, there is no doubt thatrevpar growth is slowing markedly thanksboth to the slowing of the economy and apick-up in supply growth.

In the US, where the data on room supply is more robust, some leading Wall Streetanalysts are already turning bearish. At theend of last November, Goldman Sachs’ SteveKent advised investors to move away fromhotels as “a slowing economy will be met byaccelerating supply growth, resulting in a lossof pricing power”.

Rather than the hotel operators, thehardest hit will be some of the buyers of hotelproperty over the past couple of years.

Asset price drops of 20% are already being mooted (although the big question is from what point is this drop calculated) and financing conditions are much tighter.

TRI makes the point that UK chain hotelsare in great shape to confront an uncertainfuture. This is probably true for operators.But investors who jumped in at the top of the asset price cycle look more poorly placed.

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www.hotelanalyst.co.ukVolume 4 Issue 1

ContentsNews review 3-8Sitting out the crunch – Sol heads Innside – Aman sale – IHG and Expedia settle – Travelodge off to Spain – Apollo goes cruisingSector stats 9TRI says London chains top performers, trade shows lift Munich and ParisAnalysis 10-12Otus & co look at what is next for the British hotel marketPersonal view 14Hotel shares yoyo, despite splitting from property assetsThe Insider 16Marriotts boost Delek – LandSecs split – Spanish consolidation

©ZeroTwoZero Communications 2007IMPORTANT – Unless otherwise attributed,all material in this publication is the copyright of ZeroTwoZero Communications. Subscribersare reminded that the publication is circulatedto named individuals only, on the understandingthat material contained herein is not copied,reproduced, stored in a retrieval system orotherwise disseminated, whether inside oroutside subscribers’ organisations, without the express consent of the authors or publisher.Breach of this condition will void thesubscription and may render the subscriberliable to further proceedings.

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

Nakheel Hotels is a name set to becomefamiliar to operators around the world asDubai World, one of the most prominentsovereign wealth funds, begins to flex its muscles.

The newly enlarged Nakheel, which wasbolstered mid December by combining theassets of Istithmar with the existing Nakheelbusiness, already has in excess of $3bn hotelinvestments under management.

Joe Sita, previously head of just IstithmarHotels, now heads up the combined group.So far, the investments range from stakes inKerzner International, owner of the Atlantisand One & Only brands, and InternationalHotel Investments, owner of a portfolio ofhotels under the Corinthia brand, toinvestments in budget hotel brands includingthe Middle East master franchise rights foreasyHotel and an investment in fledglingMalaysia-based budget brand Tune Hotels.

The consolidation of the hotel investmentoperations was part of the wider coupling ofthe two real estate groups. These will comeunder the Nakheel banner and be headed byChris O’Donnell who joined Nakheel in 2006from Australian property company Investa.

The wider issue behind what is an internalconsolidation is the growing confidence of theactivities of sovereign wealth funds and theirever more prominent role on the globalbusiness scene.

Estimates of the size of SWFs vary with the consensus guess currently around the$2,500bn mark – or $2.5 trillion if you wantto save on digits. This means SWFs are alreadybigger than the hedge fund industry (which inany case has a significant chunk of SWF moneyin it). Hedge funds are thought to managesomething less than $2 trillion globally.

The key factor with SWFs is that they aregetting bigger quickly and they are becomingmore aggressive in their investment strategy.In terms of size, again estimates vary withMorgan Stanley believing that SWFs will haveabout $17.5 trillion within 10 years andMerrill Lynch suggesting a fourfold rise by2011 to $7.9 trillion.

This means that their presence will become

Commentary by AndrewSangster

ever more visible as they take equity stakes in the biggest global firms: Blackstone andCitigroup, which this year have enjoyed thelargesse of China and Abu Dhabi respectively,are just the start.

It seems highly unlikely, however, thatSWFs will step straight into the shoes of theprivate equity funds. Political sensitivitiesabout seeing household names fall into thehands of Chinese or Arab governments are toostrong (as demonstrated during the purchaseof British ports and ferries business P&O byDubai Ports which was forced to divest whatis now Ports of America to AIG at the end of 2006).

If the aggression seems likely to be limitedto taking small minority stakes in householdnames, there seems much less reticence intaking complete ownership of chunks of real estate.

It is also true, however, that the likes of Jumeirah, which is also controlled by theDubai government but through Dubai Holdingrather than Dubai World, is building a morevisible presence in the hotel industry by bothowning and operating hotels under its ownbrand name.

And Indian and Chinese hotel brands arebeginning to emerge (although interestingly,not yet Russian or Brazilian).

But the real economic power of the hotelindustry lies with the owners of the real estateand this is where the hotel business is likely to see a big impact.

Historically, SWFs have behaved like highnet worth individuals. Given that in many casesan SWF is controlled by the country’s ruler(Sheikh Mohammed bin Rashid Al Maktoumin the case of Dubai) this is not surprising.

Over the past few years, though, there hasbeen a change in approach as teams of wellqualified advisers have been hired, chargedwith making a return rather on investmentrather than just acquiring a status symbol.

This means these hugely well capitalisedfunds are direct competitors of traditionalinstitutional cash such as insurance andpension groups. But they are not straight-jacketed by quarterly reporting and can makelong-term investments.

In many ways this makes them the idealhotel investor: they have an investmenthorizon of a decade or more and can thusextract the superior returns (when comparedto almost all other real estate asset classes)hotels have historically delivered for investorsprepared to stay the course.

Nakheel gives taste ofsovereign wealth funds

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sMillennium & Copthorneappears in no hurry to find a replacement CEO.Thecompany’s interim CEO Wong Hong Ren is insteadconducting a “comprehensivereview of the group’smanagement structures and systems”.In the meantime, it is business as usual withno plans for either acquisitions or divestments.

Splitting operations from property was alsoruled out.

The third quarter showed that trading wassolid and the company said it was on target to meet its projections for the final quarter.

Sales at the 111 hotels were up 6.0% to £160.6m, thanks to revpar climbing 9.6%,with hotel operating profit up 27.5% to £34.8m.

Although trading is robust, the biggestthreat to the company, as an owner of most of its assets, is any fall or stagnation in hotelproperty values. The combination of the creditcrunch and peaking commercial propertymarket make this a big potential problem.

The share price of M&C has already

suffered over the summer as the realities of the commercial property market becameapparent to investors. Given that most of thevalue of M&C lies with its property holding,the continuing trading strength is unlikely to provide much of a fillip to the share price.

The “comprehensive review” is notcomprehensive enough to consider splittingoperations from assets. Hong Wong Ren saidhe did not think there was any plan for that.

If the share price keeps heading south,however, it might surely be a possibility thatthe company will be taken private by itsmajority owner Kwek Leng Beng. The shareprice finished 2007 at little more than £4having reached a high of 773p on May 16.

Millennium & Copthornein no rush for CEO

The impact of the creditcrunch is still unclear,delegates at Deloitte’s 19thEuropean Hotel InvestmentConference heard.While smaller deals that involve a single debtprovider are still being done, anything larger is struggling.

Nick van Marken, Deloitte’s lead partner in corporate finance, said that nobody wastaking a particular view. He noted that overthe summer, however, the predicted length ofthe problem was being extended with currentforecasts pointing to three to four quarters ofdifficult times ahead for the banking sector.In terms of transactions, the current conditionswere making them more difficult to complete,with disconnect between vendor expectationsand buyers.

Nonetheless, the bumper start to 2007means that the full year will not see significantlyfewer deals done than in 2006.

Van Marken pointed out that not everythingappeared to be stalling, giving the examplesof the sale by Westmont to Blackstone ofAlliance Hospitality and the sale of a halfshare in German motorway service operatorTank & Rast (which includes 50 hotels) byTerra Firma to Deutsche.

During other sessions, aAIM’s CEO JamesElton said that the credit crunch had caused

leverage levels to fall and left a lot of bankssitting on the sidelines. Lending margins wereup 50 to 100 basis points he believed, withbanks preferring smaller deals.

In terms of values, he thought there hadbeen a 10% fall in hospitality, following thetrend in other commercial property. He saidthat prime offices were going for yields below4% before the summer and now they were 50 basis points higher.

Ramsey Mankarious, CEO of Cedar CapitalPartners, said he expected nothing to happenfor three to six months. “Lenders are still therefor single asset but they are taking longer inthe credit committee,” he said. Syndicateddeals were simply not happening.

The impact on the luxury sector will be lesspronounced, argued Mankarious. “There isalways another source of capital. It’s a very safeplace to be,” he said.The most difficult segmentwould be the mid market, he predicted.

“There is so much capital chasing hotels.The challenge is that there is not a hugeamount of supply,” he said. “Once liquidity is back, we will have the same amount ofinvestors as previously.”

Ryan Prince was encouraged that so far there had not been much of a change inconsumer behaviour and trading remainedstrong. On the transactional side, he concurredwith van Marken in that there was a “largebid ask spread between buyers and sellers”.

In terms of yields, Prince said there was aseparation between primary and secondary.

Prime assets like Claridges had not seen yieldsmove that much.

Pauline Bradley, head of transactions inQuinlan Private’s London office, said: “All thebanks tell you they are open for business butin practice, few are. The relationship betweenborrower and bank is key.”

The number of transactions had probablyincreased, she said, but the question waswhether they would all be funded.

In terms of valuations, she said thatanecdotally the drop could be as much as20%. She added that valuations have not yet bottomed out.

Peter Anscomb, corporate director andhead of hotels at the Royal Bank of Scotland,said, that the commercial mortgage backedsecurities market was closed and thatsyndication was far harder. “If deals are small enough, then they are doable”.

The real problems will emerge fromprevious deals when it comes to refinancing,he predicted. It was a combination of adownturn in valuation and in what bankswould lend. “If trading levels do not showenough growth, then there will be problemson refinance,” he said.

Andrew Wilson, business developmentdirector at REIT Land Securities, said that the band separating primary and secondaryreal estate had become too narrow prior to the summer credit crunch. He remainedencouraged by the fundamentals in the hotel industry, however.

Credit crunch impact still unclear

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Sol Melia bought the Innsidehotel chain in Germany for€16.5m, in mid November.The acquisition of theleasehold chain was struck at a multiple of 2007 EBITDAof 6.0 times.Sol said that it enabled the chain to enterGerman cities, including Berlin, Munich,Frankfurt, Bremen, Dusseldorf, Dresden andAustria’s Vienna. The move also gives it amodern hotel concept that fitted with itscurrent brand strategy.

The 1,848 rooms in the Innside chain wereacquired at a multiple below the 7.5 timesthat Sol is prepared to pay. The lease contractshave an average of 17 years left to run. Thereare four additional lease contracts in thepipeline that are expected to open between2008 and 2010.

Sol’s presence in Germany is now 28 hotelsand 3,789 rooms. The former shareholder of Innside is teaming up with Sol to developnew hotels in Germany, Austria, Benelux and Switzerland.

Despite this expansion, the main concern

of the company has been its share priceunderperformance since the start of the creditcrunch this summer. Since the beginning ofAugust its share price has slumped 10%.

The blame was put on three factors: fearsof the cycle; fears over Sol’s exposure toSpain; and concern about the propertyelement within the company.

Sol’s retort was to point out that its resortbusiness has been resilient despite difficultiessuch as the slowdown in the German economywhich led to demand falling from that country.

In its Spanish city business, Sol said thatrevpar was still 31% below the peak of theprevious cycle (in 2000) in real terms and7.2% below in nominal (not inflationadjusted) terms.

Looking ahead, it said GDP growth inSpain was expected to be robust and abovetrend for the Euro zone in 2007 and 2008 at3.7% and 3.0% respectively. Hotel supply inkey Spanish cities (Barcelona and Madrid) wasalso projected to increase more conservativelythan in previous years.

Regarding exposure to Spain, Sol said that 49% of EBITDA was now generatedoutside of its home country with the DominicanRepublic representing the biggest portion ofthis at 22%.

The biggest European contribution came

from the UK where the company’s sole asset,the White House in London, contributes 5% of total EBITDA.

The impact of any downturn in the Spanishproperty business would not be huge on Solgiven that it represents just 10% of EBITDA,argued the company.

In terms of the robustness of propertyvaluations, Sol’s case was boosted by theagreement to sell five hotels in the fourthquarter for €30m at an EBITDA multiple of18.1 times. In the year to date, Sol has sold€130m worth of hotels at an average discountof just 0.76% to the recent valuation by CB Richard Ellis Hotels.

For the first nine months of this year,revenues are up 5.9%, EBITDA up 2.3% andnet profit up 14.1%. Revpar was up 6.3%.

Sol said its numbers were boosted by a goodsummer in most of its Spanish and DominicanRepublic destinations, strength in its city hotel business, and strength in the timesharebusiness which showed revenues up 29%.

Next year, the resort business is set to perform even better given favourablenegotiations with tour operators.

Earlier in November Sol Melia’s controllingshareholder, the Escarrer family, bought anadditional 0.36% stake giving it a totalholding of 61.25%.

Sol buys Germany’s Innside

Aman Resorts, the chain of 22 luxury properties thatmany travellers rank as theworld’s best, has been sold in a deal worth $400mincluding debt of $150m.

The buyer is India’s largest listed propertygroup, DLF, in what is its first move outside of its domestic market.

Despite its big reputation, last year Amanlost $14.9m and has been suffering since thetourist downturn caused by the 2002 Balibombing. Reports suggest the EV / EBITDAmultiple was 15.6 times, markedly short of the34 times that rival luxury chain Four Seasonsfetched a year ago. On a per room basis, thechain fetched $357,000.

DLF, which struck a deal at the end of 2006 with Hilton to roll out its brands in India,has bought 50% of Aman from Hong Konglisted Lee Hing Development and othershareholders in majority owner of Aman,Silverlink Holdings.

Silverlink is to exit its ownership positionand the deal will see Adrian Zecha, the founderof the 20-year old Aman chain, take a half-share in the business.

The official statement by DLF said thatZecha had “formed an equal partnership with DLF which has entered into definitiveagreements to acquire a controlling interest in the Aman Resorts group”.

The sale of the stake comes as Amanmakes its first move into cities. The first projectis to open in New Delhi next year on the siteof Lodhi Hotel, formerly a government ownedfour-star hotel.

Zecha said of the deal: “With the financial

backing of DLF, Aman Resorts will now have the resources to significantly scale up its development plans. While we expandour global footprint we are committed topreserving and enhancing the distinctivecharacter of the Aman experience.”

Last year the average rate at Aman was $778 and it is maintaining this level ofexclusivity while both expanding the conceptand returning to profitability that will be a big challenge.

For DLF, it has acquired a heavyweightluxury brand for what seems like a bargainprice. Last month it raised $1.5bn fromoverseas investors to finance its growth acrossall sectors. As well as Hilton, it is building ahotel in Gurgaon, India, that will be managedby Four Seasons and separately, in the samecity, a satellite of Delhi, it is building a mixed-use development including a hotel in a jointventure with US company Hines.

Aman sold to DLF for “bargain price”


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The stand-off betweenInterContinental and Expediawhich has seen the formerrefusing to let its hotels appearon the latter’s websites isfinally over.

But the signing of the multi-year agreementby IHG marks a new phase of conflict betweenhotel operators and third-party intermediariesrather than the end of it.

Back in August 2004, IHG stopped doingbusiness with Expedia (and sister sites such ashotels.com) claiming that Expedia was failingto honour its code of practice for third-partyintermediaries.

This stated that the intermediaries werenot to “engage in confusing and potentiallyunclear marketing practices” and had to“respect IHG’s trademarks”.

IHG was particularly miffed at third-partiesthat bought up website names and keywordsthat were similar to its brands and then directing

traffic to the third party’s own websites.Although IHG’s sentiments were shared by

most of its rival hotel brands, it was only IHGthat went so far to publicly castigate Expedia.

The battle three years ago was around themerchant model where the third party websitesbought up allocations of rooms and sold themoff to consumers. Hoteliers had handed overthe rooms at knock-down prices thanks to thecollapse in demand that occurred from 2001 butthe superior distribution and marketing muscleof the third parties meant massive mark-upswere obtained, as much as 30% or even 40%.

Strengthening demand and wiser headsat the hotel companies led to the balance of power shifting back to hotel operators.So what is there to worry about now?

The business model of the third parties has moved on with Expedia, the biggest of thebunch, leading the way. Rather than just be anOnline Travel Agency (Expedia has the biggestshare of the OTA market in the US with morethan a third of sales), Expedia and others arenow generating significant revenues throughadvertising on its sites. Citigroup analystsreckon Expedia’s sales through advertising

are already worth $200m a year. The depth ofuser reviews is a particularly powerful weaponin this arena and Expedia owns leader in thetravel field, TripAdvisor.

The IHG deal sees IHG pay both per bookingand for clicks on its hotels made by visitors toExpedia’s websites. Expedia intends to roll outthis model with its other hotel suppliers.

The big fear in the first intermediary warswas that hotel brands would be commoditisedwith OTAs becoming the main hotel brandsthat travellers identified with.

The second war is seeing this over-simplifiedperspective changing. A possible analogy is tosee OTAs becoming the retailers while hoteloperators and brands become the suppliers.

The hotel brand still matters but theconnection with the consumer at point ofpurchase is at risk of becoming more distant.How long before we see own-label OTA hotel brands?

It is significant that the biggest threats to the OTAs in their push into regions such as Europe is not seen as hoteliers but existingbricks and mortar travel agents as the latterraise their game.

InterContinental ends Expedia rift

InterContinental has 16 Express propertiesin the country and is going head-to-head withHilton in the hunt for franchisees. Hilton hasyet to establish a presence in the country withits economy or select serve brands but Spain isone of five core European markets (alongsidethe UK, Russia, Germany and Italy).

Travelodge wants to reach 100 hotels in Spain by 2020. It currently has three hotelsin that country, a growth started while underForte’s ownership, but wants to have five moreopen and 15 in the pipeline within three years.

It has hired Horacio Alcala to head-updevelopment. He was previously responsible forhotel development at Metrovacesa, the largestlisted property company in Europe. Prior to thishe was a developer for the GDO / Med Grouppartnership, a major franchisee for Express.

The appeal of Spain, according to Travelodge,lies both in its relatively unpenetrated budgetand economy hotel market (Travelodgeestimates there are about 100 propertiesunder this classification) and the rapid take-upof the internet by consumers.

Travelodge CEO Grant Hearn said:“Spanish consumers’ appetite for budget

products, coupled with a surge in internetusage complement our low cost brand andinternet sales model. Travelodge has animportant role in international markets, likeSpain, which are building high demand for the no frills approach.”

He went to claim that the Travelodge movewas “the first genuine budget branded offer in Spain’s hotel sector and follows successfulSpanish launches by other budget leaders,such as Ikea and easyJet”.

In an attempt to confound the acceptedwisdom that budget hotels appealoverwhelmingly to domestic customers,Travelodge claims that its UK customer basewill provide an important secondary marketalongside domestic demand.

Travelodge’s international pushcomplements that of French chain B&B whichhas struck a deal with German service stationoperator Tank & Rast. B&B has signed-up for a three-year agreement to develop 34 hotelsalongside German roads. The properties areboth existing operations and new builds. Aspart of the deal, Tank & Rast is to pump €50minto hotels on its service stations.

Travelodge makes move on SpainThe €1bn push into Spainannounced by the UK’sTravelodge during Novemberis an interesting choice giventhat both Germany and Italy,two hotel markets of roughlysimilar size, have a muchlower penetration of budgetand economy hotels.While Travelodge believes in both theconsumer readiness for its brand and theexpansion opportunity for its leasehold model, so do its competitors including Accor, InterContinental and Hilton.

Of the international operators in theeconomy and budget segment, Accor has thestrongest foothold in the country with 33 Ibis,four Etap and six Formule 1. It is particularlykeen to roll out its Etap brand and reckons it already has a market share in the segmentof 38%.

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December saw Whitbread announce that it isgearing up for a major marketing campaignfor Premier Inn in the spring.

The move will almost certainly make it thebiggest spender on brand advertising forhotels in the UK.

This is not a difficult accolade to win. Hotelcompanies, despite much talk about investingin brands, rarely spend more than 1% of theirsales in a territory on direct brand marketingefforts such as press, broadcast or internetbanner advertising. This compares with asmuch as 5% of gross sales for fast foodrestaurants.

Whitbread did not reveal any figures for itsplanned investment in advertising but it haspreviously extensively used press andbroadcast. And as the UK’s biggest hotelbrand by room numbers with a share of about

5% of the total bedstock, it has the firepowerto mount a serious campaign.

Revenue at Premier Inn is likely to come in at just over £300m for the full year, so thecampaign need only exceed £3m to break the 1% barrier which gives an idea of thecomparatively tiny marketing budget for whatis the biggest hotel brand in the UK.

A couple of years ago, figures slipped outfrom Expedia that showed it was spending£12m a year in the UK on above the linemarketing, which gives some feel for thechallenge ahead in brand building terms.

During a conference call to discuss salesfor the 39 weeks to November 29, WhitbreadCEO Alan Parker said he was confident of asustained and substantial UK expansion forthe Premier Inn brand. In a month or two,he said the company would be revealing

a “significant increase” on its growth targetsfor the brand in the UK.

Total sales at Premier Inn were up 15.0% forthe period and up 10.8% on a like-for-like basis.

Helping Premier Inn’s sales was a 6%growth in average rate. Part of this was drivenby “event pricing” under which the usuallyfixed price of a Premier Inn is nudged upwardsduring an event in the local area that isdriving demand.

Parker also said that it was “a question of when not if” concerning increasing leveragein the company. Plans for a securitised bondissue were put on ice over the summer due to the credit crunch and as the commercialmortgage backed securities market remainsclosed Whitbread was looking at otheroptions, although it stressed a sale andleaseback deal was not one of them.

Premier set for big ad spend

The shrinking yields in Europe had made it difficult to strike sensible deals in the pastfew years, according to delegates at HOFTEL’sannual conference held at the SheratonSkyline in Heathrow in November.

The credit crunch might create someopportunities but the outlook was still unclear.In the meantime, delegates favouredinvestments in the US, taking advantage of the weak dollar, and Asia.

Deals were continuing to be struck inEurope, however. Jones Lang LaSalle Hotels’Mark Wynne Smith said his firm would sell

more than 25 hotels between the start of September and the year-end.

In fact, in the UK alone, deals worth over£300m had been sealed by JLL in previousweeks. The 19 hotels involved included the11-strong Express portfolio operated bymorethanhotels; five hotels previouslyoperated by Marriott and part of the Quinlan /Ahouvi portfolio; London’s Bonnington Hotel;the Hythe Imperial in Folkstone which will beoperated by Accor; and the forward sale of the new Travelodge at Heathrow.

But the optimism at the conference was

tempered by the ongoing gloom in the widercommercial property market. The quarterlyindex published by Investment PropertyDatabank produced its first negative totalreturn, while its monthly data showed the first negative return since May 1990.

The fall in commercial property values in thethird quarter wiped out capital gains made inthe first two quarters of this year. IPD said thefall was due to investor concern that risk hadbeen re-priced on all asset classes and propertyvalues must fall to reflect that. In addition,investors were worried for occupier demand.

HOFTEL: deals difficult in Europe

Accor and Hyatt announced major upscalebrand launches during at the end of November, demonstrating the increasingfocus on branding in upmarket hotels.

But the flood of names arriving in themarket has more to do with badging than thecreation of long-term brand value which isseen in other industries.

Hyatt officially opened its first Andazproperty in mid November, the Andaz LiverpoolStreet in London, formerly the Great Eastern.It is described as fusing a five-star offeringwith a boutique, design driven product.The brand ethos is “casual luxury”.

Accor, meanwhile, yesterday said that itwants to elevate Sofitel into the premium endof the international luxury hotel market. It iscreating two sister brands: Sofitel Legend, which

is a collection of unique properties; and So by Sofitel, a “creative, edgy and stylish offer”.

Accor has created a separate business unit to look after Sofitel, headed by RobertGaymer-Jones as COO. He joins from MarriottInternational where he had been area vicepresident for UK & Ireland.

PricewaterhouseCoopers reported earlyNovember that the US had seen 34 hotel brandlaunches since 2005, with the luxury segmentaccounting for 18 of them. This was thelargest number of luxury brand introductionsin a three-year period since 1982.

Interbrand’s annual publication Best GlobalBrands ranks what it considers is the mostvaluable 100 brands in the world: not one hotelcompany is on the list. Hospitality brands arepresent in the 2007 survey (published summer

2007), notably the fast food giants such asMcDonald’s, Pizza Hut and KFC and so too isStarbucks.The only travel industry brand is Hertz.

Certainly one factor why hotel brands donot feature is that branded hotel rooms are stillprimarily sold to business guests. Citigroup, forexample, estimate that 80% of hotel industryprofits come from corporate travel.

This varies by segment with typically themore upscale, the more business-to-businessthe hotel becomes. Nonetheless, the historicimpact has been to diminish the direct role ofthe brand in favour of direct sales where whatmatters is the corporate rate negotiation.

As the hotel industry evolves, however,and a distinction becomes ever more apparentbetween operations and brand, the role of thebrand can only become more important.

Luxury brands are more like badges


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Beni Stabili Hotel, a subsidiary of Frenchhospitality REIT Fonciere des Murs, has paid€128m to buy six hotels in Italy, its first moveinto the country and the first move away fromAccor as its preferred hotel operating partner.

The hotels, operated by the Metha groupunder the Holiday Inn brand, further extendFdM’s reach beyond France (it already hasholdings in Belgium and Portugal), making it both the largest and most international of Europe’s listed hotel owners.

The six hotels in Italy are located in Rome,two in Milan, two in Florence and one in Turin.Metha operates a total of 21 hotels, underbrands including Marriott and Ramada.

The acquisition of the hotels is over an 18-month period and will be realised via anItalian real estate investment fund.A subsidiaryof Beni Stabili, which is 80% owned by FdM,will manage the fund.

The portfolio is expected to generate atotal annual rent of €8m under nine-yearleases, renewable once for another nine-yearterm. Net yield is 6.25%. Debt is €87m froman Italian bank.

The relationship with Beni Stabili was firststruck back in July when Fonciere des Regions,which owns 23.6% of FdM, bought 68% ofBeni Stabili. A tidying up exercise is currentlyunderway at Beni Stabili that is seeing it

absorb a number of subsidiaries in order for it to qualify for SIIQ (the Italian REIT) status.Fonciere des Regions will also reduce its stakein the business to 51%.

Since the start of this year, FdM has boughtmore than €950m worth of hospitality assets.These include a Club Med property in Portugal,the Jardiland chain of garden centres, a chainof health clinics, the Quick burger chain and fourholiday parks operated by Pierre & Vacances.

As at the half-year mark, prior to the latest deal, hotels represented 59% of FdM’sportfolio by value with Accor as its soleoperator partner. Net debt was €1.291bnrepresenting gearing of 54%.

Fonciere des Murs makes first movewith Italian hotel REIT

The $1bn purchase of Regent Seven Seas by Apollo Management demonstrates thatprivate equity remains a significant presencein the travel and tourism space.

It also divides the ownership of thefledgling Regent brand between the newmasters at the cruise ship and privately-owned hospitality giant Carlson. But it mayalso be a sign that the disparate interests ofCarlson will be brought into focus.

Carlson chairman and CEO Marilyn CarlsonNelson said in a statement: “As owners of the Regent brand, we remain committed to expanding its scope and success both

on land and at sea.”Bjorn Gullaksen has been made president

of the Regent Luxury Group by Carlson.He will also continue in his existing role ashead of the managed hotels and resorts in the Americas which puts him in charge of 29 full-service and select serve properties.

Apollo has been aggressively consolidatingthe cruise ship space in the past year. Itbought a 50% stake in NCL Corp for $1bn inApril having paid $850m for Oceania Cruisesin February. Regent Seven Seas and Oceaniawill be put together under the Prestige CruiseHoldings umbrella and NCL will continue to

be held separately.No financial details of the latest cruise

deal were revealed but presumably Apollo is confident about getting debt funding. This is contrasting news to the deal by aAIM to buy19 former Queens Moat Houses properties for£400m or its £200m stab at Kew Green.

Both deals are not thought to havecollapsed with all sides declaring that the situation is one of delay rather thantermination.

Meanwhile, interest is gathering in what Carlson will do with the cash from its cruise ships.

Apollo buys Regent cruise business

Interstate Hotels & Resorts, the listed UScompany that is focused on managing thebrands of other hotel companies on behalf ofowners, has formed a JV with Ireland’s HarteHoldings to buy four hotels from Blackstonefor $207.8m.

The deal sees Interstate take a 20% stake and further pursue its philosophy of securingits management position through taking a sizeable share of ownership.

At the beginning of December, Interstatecompleted the purchase of another three UShotels from Blackstone for $118m, this timepartnering with Investcorp and taking a 15% ownership stake in two and buying the other outright.

Interstate owns seven hotels outright andhas a minority stake in 25 (excluding the latest

Harte deal). It manages 192 hotels with 43,000rooms across five countries, mostly the US butincluding Russia, Belgium, Canada and Mexico.

Interstate has been the worst performingof the major US hotel stocks during the yearwith its share price slumping by more than a third, according to Citibank research.Weighted by market capitalisation, theaverage drop to date was 6.3% in Citibank’sbasket of hotel stocks as at November 19.

Part of the bearish attitude to the stock has been promoted by fears that Blackstone’sacquisition of MeriStar in February 2006would lead to Interstate’s managementcontracts being terminated on around 45hotels. This has led to Interstate’s push intominority stake and full ownership positions.

The latest JV with Harte is expected to lead

to further deals according to both parties.A press release quoted Donald Kelleher,investment director of Harte, as saying: “Welook forward to expanding our relationshipwith other similar opportunities.” Leslie Ng,Interstate’s chief of investment, concurred in the same release.

Harte already has partnerships with otherhotel management companies, notably theStein Group and resort operator Dolce. Harte’sStein properties include three in London: theRoyal Park, the Cranley and the Elizabeth. Hartealso owns the Ramada in London’s Docklands.

The Dolce property is the Dolce Sitges, aSpanish property bought by Irish private equitygroup Inchydoney last year. Inchydoney hasrecently bought the Dolce Fregate in France,its third Dolce property.

Interstate develops ownership strategy

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The pursuit of Orient Expresstook a further twist duringDecember as two circlinginvestors built theirshareholdings.First came the disclosure that hedge fund SACCapital, a vehicle of billionaire Steve Cohen,holds a 5.6% stake. While Cohen does nothave a reputation as an activist investor, hisstake building is a further sign that corporateaction is expected at Orient.

And Taj-owner the Indian Hotels Companyupped its stake from 10.0% to 11.5%,providing sufficient reason to make anotherapproach – only to be rebuffed once more by Orient’s management.

But the board’s out-of-hand rejections may soon draw the ire of OEH’s independentinvestors and will force the board to takesome form of action.

OEH CEO Paul White did not mince hiswords: “We believe any association of ourluxury brands and properties with your brandsand properties would result in a reduction inthe value of our brands and of our businessand would likely lead to erosion in the revparpremiums currently achieved.”

He added: “Further, your approach tobranding, whereby longstanding hotel brandsare replaced with the Taj brand is contrary to our approach, whereby we develop and enhance individual hotel brands andultimately extend these hotel brands toadditional properties.”

IHCL, which is owned by the giant Indianconglomerate Tata, has previously made clearit does not want to go hostile, talking insteadof a “partnership”.

But with both IHCL and, separately,Jumeirah-owner Dubai Holding, buying upshares at $60 or more there may soon be

appetite for a more muscular approach.With the board controlling 81% of the

company, mounting a direct hostile bid willclearly not work. But long-term, sustainedpressure will ultimately force the board toconsider more radical proposals includingmaking its own take-private move.

Already there are press reports suggestingthat some shareholders would be keen to exitin the $70 to $80 range. A report earlier thismonth in The Business magazine quoted threeseparate (unnamed) hedge funds with holdingsin OEH as stating they expected the OEHboard to take any offers above $80 seriously.

At the moment there is a whiff of chauvinismin the air: OEH derives half of its operating profitfrom its European properties and just over afifth from North America – and it is listed inNew York and headquartered in London. Assuch it is an established Western companyselling its luxury brands into an affluent Westerncustomer base. The unspoken subtext is: whatcan upstart companies from the East offer?

But Dubai Holding and Tata have colossaleconomic power.Tata is currently demonstratingthis in its bid to buy the automotive brandsJaguar and Land Rover – and is running intothe same chauvinism there. Opinion leadersincluding trade unions, politicians and businesslobby groups can be heard arguing that Westernconsumers will not accept the company beingowned by outsiders such as an Indian firm.

It is arrant nonsense. Consumers rarelydisplay any interest in who ultimately owns a company provided it provides what theydesire. While the OEH board clearly has a dutyto talk-up any bids, it must also avoid backingitself into a corner through aligning itself withchauvinistic outlooks.

There is an argument to be made thatneither Dubai nor Tata make a good fit, butthis is only valid up to a certain price. Offersabove $80 – more than third above thecurrent share price and placing a $3.4bn

value on the company – probably negate the good fit objection.

Back in November the board of Orient heldan investor day during which it emphasised itsdetermination to remain independent. Theboard has already fought off advances fromDubai Holding, which has a 9.2% stake. Thecase made by Orient was that managementwill be able to exploit opportunities in fourareas: portfolio management; expansion;property development; and brand opportunities.

A key point was that the company will nowenter into joint venture deals rather than goalone as it has previously. This, alongside anoverall sharpening of acquisition policy, wouldexpose more opportunity.

One such opportunity is the Donnell branchof the New York Public Library which will be a150-room hotel by early 2011 at a constructioncost of $220m on top of the $59m paid forthe site.

The hotel will be the first of a new branddubbed 21. This brand will be rolled out as ahotel and residences concept across a numberof US cities with Chicago,Washington, Las Vegas,San Francisco, Miami and Boston targeted.

A similar brand expansion is being lined-upfor the Copacabana Palace in Brazil. It ishoped to take the Copacabana Palace nameacross South America.

The Copacabana property was refinancedin October with a $120m loan facility led byAIB Capital Markets.

Orient Express is also helping to shore upits defences by finding a CFO to replace PaulWhite who stepped up into the CEO slot inJuly. Martin O’Grady is joining Orient inFebruary, leaving property investment firmOrion Capital Managers where he has beenCFO since the start of 2006.

With the dollar plunging against currencieslike the rupee and pressure for the dollar pegon the dirham to end, the potential bidders for OEH look in a strong position.

Orient Express feels the heat

CBRE Investors has swooped on a portfolio of 19 budget hotels in France using itsDynamique Hotels investment vehicle.

The deal, for an undisclosed price, makesDynamique one of the five biggest hoteloperators in France and it has indicated it is hungry for more acquisitions.

The CBRE fund is launching its secondcapital raising exercise, seeking €75m afterthe success of its initial €72m fund raising.The company is headed by Gerard Ezavin

and he is seeking to take the group onto the stockmarket in the next couple of yearsand then convert to the French REIT regime SIIC.

The latest portfolio, sold by agent Christie& Co, involves more than 1,000 rooms acrossFrance under the Bonsai brand including thesub-brands Bonsai Escale, Bonsai Etape andBonsai Relais.

In just over 12 months CBRE has boughtsix Geo hotels, the Royal Mirabeau hotel in

Aix-en-Provence and the RMH group whichowned the 160-strong Balladins hotel chain.

In October, CBRE Investors researchquarterly showed why the group is currentlyfocused outside of the UK. At the end of thethird quarter, UK commercial property stockshad produced a total return in the first ninemonths of 2007 of -25.5%. It noted thatwhile cap rates (yields) were rising in the UKthey were still compressing in parts of Europe,although this was now moderating.

CBRE Investors looks for more


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European chain hotels – performance report

Movement for the 11 months to NovemberOcc Change ARR Change RevPAR Change Payroll Change IBFC PAR Change

Amsterdam 0.2 6.30% 6.50% -1.4 10.20%Berlin 1.9 -0.90% 1.70% -0.1 2.10%Budapest 0.2 -0.20% 0.10% 4.1 -17.50%Hamburg -2.1 -2.40% -5.20% 0.3 -6.70%London 0.1 10.30% 10.50% -1.3 15.00%Moscow 0.5 27.50% 28.50% 1.2 18.70%Munich 3.7 4.00% 9.20% 0.9 14.60%Paris 4.8 8.30% 15.10% -2.4 25.30%Prague -2.3 -2.90% -5.70% 1.2 -6.90%Vienna 0.2 10.70% 11.10% -1.5 18.70%

The 11 months to November 2007Occ % ARR RevPAR Payroll % IBFC PAR

Amsterdam 84.1 169.9 142.81 28.9 85.34Berlin 72.5 141.62 102.62 30.4 56.99Budapest 71.3 107.47 76.59 30.9 38.42Hamburg 71.5 106.97 76.47 30.6 42.02London 84.9 197.85 168 24.5 118.61Moscow 68.4 204.09 139.5 19.6 141.35Munich 77.8 124 96.43 29.6 55.25Paris 81.7 216.74 177.13 35.9 97.98Prague 73.9 125.73 92.96 22.6 67.19Vienna 75.5 152.87 115.42 40.2 53.43

The 11 months to November 2006Occ% ARR RevPAR Payroll % IBFC PAR

Amsterdam 83.9 159.86 134.12 30.3 77.43Berlin 70.6 142.89 100.87 30.5 55.8Budapest 71.1 107.7 76.55 26.9 46.58Hamburg 73.6 109.58 80.64 30.3 45.03London 84.8 179.32 152.1 25.7 103.1Moscow 67.8 160.03 108.52 18.4 119.05Munich 74 119.26 88.28 28.7 48.21Paris 76.9 200.15 153.9 38.2 78.17Prague 76.2 129.44 98.62 21.4 72.18Vienna 75.3 138.05 103.93 41.8 45.03

Source:TRI Hospitality Consulting

The London chain hotel market is the bestoverall performer in Europe in revpar terms,according to the latest HotStats survey of 10European cities by TRI Hospitality Consulting.

And London enjoyed the highest room salesand occupancy in November, plus the secondlowest payroll costs, resulting in the secondhighest profit per available room, as measuredby income before fixed charges (IBFC).

Although occupancy dropped by 1.8percentage point to 86.7%, London’s chainhotels were the fullest in Europe. Amsterdamand Paris were not far behind with occupanciesof 84.8% and 83.8% respectively.

“Overall, London’s chain hotels aregenerating the most revenue due to thewinning combination of high occupancy andhigh rate,” said Jonathan Langston, managingdirector, TRI Hospitality Consulting.

MTV Awards help profits jump in MunichHotels in Munich experienced the largest jump in profitability during November. TheBavarian capital saw a sample of its chainhotels enjoy a 47.8% hike in IBFC peravailable room to €62.82.

“November is always a strong month for trade fairs and Christmas-related leisuredemand in Munich. But the influx ofinternational pop stars and their entouragesfor the MTV Awards provided an extra boostto profits, particularly for the city’s five starsegment,” said Langston.

However, starting from a relatively lowbase in November 2006, Munich’s improvedIBFC PAR still only took it to sixth place in the survey.

BATIMAT boost profits in ParisParis enjoyed the second highest profitimprovement with IBFC up by 44.1% to €93.48.

This was the result of occupancy up by nearly10 percentage points compared to November2006, strong rate and revpar growth, plus a3.2 point reduction in wage costs.

A major contributor to Paris’s strongperformance was the bi-annual BATIMATinternational construction exhibition held atParis Expo, which attracted a record 447,738visitors over its five-day run.

However, in absolute terms, Amsterdampipped Paris to the post as the third mostprofitable city in the survey with IBFC of€94.13 PAR compared to €93.48 in theFrench capital.

London shows strength

Developments in economic structure and hotel demandThe fundamental and most powerful driver of the growth in hotelchains in Britain over the past 20 years was the development in the structural balance of the economy. Over the period there wascomprehensive growth in the contribution to GDP by servicebusinesses, up from 22% to 36%.

The contribution of agriculture and industry declined sharply over theperiod, citizen services remained broadly flat, while crucially, servicebusiness escalated. As a result, the story of hotel demand in Britainsince 1987 is that the fastest growing segments of the economy werealso the segments that provide the highest volumes of business andleisure demand into hotels. The decline in the significance of agriculturehad little impact on the hotel business because agriculture producesonly microscopic volumes of domestic business demand into hotels.In the case of the industrial sectors – manufacturing, utilities andmining – only a small proportion of employees, mostly sales andmarketing executives travel on business and need hotels. So, althoughthe decline in manufacturing was not positive for the hotel business,the loss of room nights was not material. Throughout the period,citizen services remained the largest employer by far, but theproportion of employees in citizen services involved in business traveland requiring hotel stays is minor and spending is tightly regulated by the government. During the period the volume of hotel demandgenerated by citizen services increased, but spending growth rose nobetter than in line with inflation. Then there was the fabulous growth in service businesses such as retailing, financial services,communications, logistics, professional services, travel and hospitality.All of these businesses and more have been transformed over the past20 years, triggered by the Thatcher reforms that were designed toreduce unemployment and to expand the economy. High proportionsof executives in service businesses need to travel on business and stayin hotels as an integral part of their jobs and this is the crucial benefitto hotels. There are two reasons for this, first, many service businessessuch as retailing and hospitality operate out of a mass of venues andrequires a range of executives travelling to the venues. Secondly, manyservice businesses such as financial services, communications andpersonal services involve a high instance of executives travelling to clients. Whereas salesmen are the main business travellers inmanufacturing and utility companies there is a necessity in servicebusinesses for executives across the whole corporate structure to travelon business and to stay in hotels. A further benefit that grew stronglyfor the first 10 to 15 years of the period was conference and meetingsdemand in hotels from service businesses. Most of the growing service

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In the previous two editions of Hotel Analystwe reviewed the secular growth of hotelchains in Britain as well as the transformationand turbulence that occurred among hotelchains. In the last of this trio of notes wemove on to explain why these dramaticchanges occurred and to make twoproposals, one to improve the structure of the hotel business and one to improve the performance of hotel chains.

Why hotel chains grew in Britain 1987to 2006 and how can this be improved

Changes in British Economic Structure 1987-2006Citizen Service Total

Agriculture Industry Service Businesses GDP

1987 1.7% 38.7% 37.5% 22.1% 100.0%2006 1.0% 26.2% 36.5% 36.3% 100.0%

Source: World Bank and Otus & Co


Anal

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businesses did not have an office infrastructure throughout the countryto accommodate meetings such as corporate meetings, trainingsessions or promotional meetings and they used hotels as quasi offices.This meant that the benefit to hotels was not only in selling morerooms, but also in selling conference packages. It was for this reasonthat it was not uncommon early in the period for provincial chainhotels to convert bedrooms into meeting rooms to meet the demand of their larger corporate clients.

Domestic business demand was not the only demand source thatexperienced secular growth. Domestic leisure demand also grewstrongly. The previous 20 year period from the late 1960s had seen a decline in domestic leisure demand into hotels as holiday makersincreasingly went on package holidays to the Mediterranean resorts.At this time the short break market into hotels was embryonic and inthe main involved visits to London, but by the late 1980s hotel basedshort breaks was expanding nationwide and the volume of demandwas rising significantly. This was a natural development that mirroredthe switch in Britain from buying consumer durables to buying services.It also matched the shifting structural balance of the economy towardsservice businesses. In terms of domestic leisure demand over the periodfrom 1987, hotel short breaks became the focus in Britain rather thanlonger holiday hotel stays. This demand growth was derived, in the firstinstance, from the pre-baby boomer generation, some of whom hadbegun to benefit from the capital appreciation of owning their home as well as having other means of saving such as insurance policies,pension schemes and stock market investments. Couples were stillearning when their families had grown and left home. They alreadyowned a wide range of consumer goods making them a key market for spending on services and hotel short breaks became one of theservices that they began to buy. As hotel chains developed hotels inlocations throughout the country where domestic business demandneeded to be so they were faced with the challenge of filling thesehotels at the weekends. The solution was not to promote the location,but to promote the activities that were organised into short breaks athotels. The approach paid off and was a factor in the terrific growth inweekend demand. However, the demand story did not end there. Theperiod also benefited from the growth in foreign demand into Britainfrom both business and leisure travellers. The big spenders at the startof the period were Americans, but progressively over the period theirsignificance declined as the volume, frequency and spending in Britainby continentals grew, as did demand from other long haul destinations.Otus estimates that in 1987 hotel chains achieved room occupancy of around 65%, generating 30 million room nights sold. By 2006,we estimate that all hotel chains in Britain achieved room occupancy of 70%, generating 69 million room nights sold an increase over theperiod of 39 million room nights sold. As a result hotel chains grewtheir share of total hotel room nights sold in Britain from 34% to 63%.In parallel, room nights sold in unaffiliated hotels fell from 57 million to 40 million.

Hotel chain synergiesWhen mass hotel demand emerges, the wholesale markets are not farbehind and this was the case in Britain over the period. Offline travelagents, online travel agents, leisure travel managers, corporate travelmanagers, hotel representative companies, hotel booking agents andconference organisers have all grown over the period. When thewholesale markets are active in processing hotel demand they needconsolidated hotel room stock to make the process effective. This wasone of the drivers of the dramatic growth of hotel chains in Britain overthe past 20 years. Unaffiliated hotels were unable to meet theescalation in demand for a catalogue of reasons including: havinghotels without the necessary type or quality of facilities, having hotelsthat were too small, being in the wrong locations, or being managedineptly. In addition, hotel chains provided operational synergies andhad greater cash flow to invest in brand infrastructure and demandgeneration. Their labour productivity was also higher as the result ofattracting graduates to careers, in contrast to unaffiliated hotels whomerely provided jobs. These benefits were not lost on the capitalmarkets and hotel chains gained access to a wide range of capitalsources. Simultaneously, unaffiliated hoteliers were confronted by theprogressive and irreversible decline in access to capital. On all fronts,including greater and more effective demand generation, moreeffective performance and greater and more attractive access to thecapital markets, hotel chains could only increase their share of themarket and unaffiliated hotels could only decline.

Current issuesThere is a host of issues about the future direction of hotel in Britain,but there is only space here to discuss two: the problem of unaffiliatedhotels and what can be done about them and then the question of theportfolio management of hotel chains. First, the problem of unaffiliatedhotels increases as their share of the market declines. As hotel chainshave grown so unaffiliated hotels have been left to dominate supply in marginal regions such as the Scottish Highlands, the Lake Districtand the West Country where the dominant demand is from leisurecustomers and the heavy seasonality means that many hotels still closefor several months per year or at best have minimal demand over thewinter months. As a result, unaffiliated hotels have progressivelybecome marginal hotels. The first shock that this fact delivered to thebanking system was in the early 1990s when the recession, doubledigit interest rates and Gulf War I created the conditions for 20,000 to 30,000 rooms, almost entirely in unaffiliated hotels, being managedby receivers and resulting in most of the major lending banks having to take failed hotels onto their balance sheets. This experience madethe banks aware of the high risk associated with lending to individualsto build new unaffiliated hotels and since then it has been increasinglydifficult to raise capital to construct such hotels. Consequently, buyersof unaffiliated hotels have been restricted to acquiring old hotels,predominantly in more marginal locations. They have been smallerhotels whose historic performance has been poor, which raises

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questions about the capital that has been invested in theirmaintenance. Too frequently they are owned and managed byamateurs whose hotels make Fawlty Towers appear attractive. There is no better recipe for further decline. However, the issue is how quicklythe worst of these hotels will be removed from the market. Sadly, thereis no systematic data on hotels that are removed from the Britishmarket, but the persistence of several of the major banks in lending toprospective entrepreneurs to acquire unaffiliated hotels is limiting therate of removal. The fastest way to remove obsolete hotels from themarket and the biggest service that these banks can provide to thehotel business is to stop lending to individuals to acquire unaffiliatedhotels. In our analysis there are up to 50,000 unaffiliated hotel roomswhose removal from the market would be a boost to the hotelbusiness, but until their lenders realise the economic and reputationalrisk that they endure the removal of obsolete hotels will be slow andact as a drag on the more effective development of hotel chains.

The second issue that hotel chains need to address is their portfoliomanagement. There are three elements to the portfolio management of a hotel brand. First, there is the management of the supply variables,which include the market level, the configuration and the size of thehotels. Then there are the location variables including the structuraldevelopments of the economy as well as the conurbation size and type in which the hotels are located. The second element of portfoliomanagement is the creation and management of the brandinfrastructure to generate premium demand for the brand and the thirdelement of the portfolio management of a hotel brand is the corporatevariables including the management of the pattern of affiliationbetween the brand and its hotels and the management of the marketshare of the brand in each country and city. None of this is easy andrequires technology and insights not only about what has happened in the past, but also about what is likely to happen in the future.The problem for hotel chains in Britain is that the over the past 20 years portfolio management has been more reactive to single hoteldevelopment opportunities and too little concerned with proactivedevelopment based on an effective understanding of developments in economic structure as well as trends and expectations in sources of hotel demand and in hotel supply. As a result the performance of most hotel chains has been sub-optimal.

The overall growth of hotel chains masks the fact that 109 of the 163 hotel brands in operation in Britain at that end of 2006 had lessthan 10 hotels. The shorter the hotel brand the fewer the synergies andweaker the performance. The short chains achieve minimal premiumover an unaffiliated hotel and in these cases portfolio management is invariably based on the chief executive’s thoughts at any time ratherthan systematic analysis. The larger chains have greater synergies, butin our experience systematic portfolio management has been sacrificedfor portfolio growth. The chains do not have the technology or theinsights to interpret the data on all of the variables or to assess theimplications for any hotel brand, which are the bases on which mainboards should be making decisions about the future direction of thecompany. Consequently, in our analysis hotel chains in the UK have not yet achieved the level of medium to long term performance thatthey ought to and the change that needs to occur is the introduction of systematic portfolio management. If the portfolio management ofhotel chains was effective then we would not have 109 brands withless than 10 hotels and neither would we have the astonishing averageannual brand turnover of 10 over the past 20 years. Finally, there is the most telling example of the strategic failure, for which we have thedata to substantiate. Over the past five years, most hotel brands in allof the key cities in Britain have lost market share.

ConclusionsThe structural development of the British economy has been the primedriver of demand into hotels over the past 20 years. The emergence of the wholesale hotel markets required hotel chains for theireffectiveness and the superior performance of hotel chains overunaffiliated hotels opened access to the capital markets that wereclosed to the unaffiliated hoteliers. We believe that hotels chains inBritain have reached the stage at which the basis on which decisionsabout future development and growth needs to be brought onto amore systematic basis. Central to this is the adoption of systematicportfolio management by the larger chains. The case for doing so isthat it is the way to improve the performance of hotel brands to enablethem to deliver the returns that hotel owners and investors crave.

Paul Slattery, Otus & Co Advisory Ltd, [email protected] Gamse, Otus & Co Advisory Ltd, [email protected]

Why hotel chains grew in Britain 1987 to 2006 and how can this be improved continued


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The top 10 tips forbuying in CEE asrevealed byDLA Piper’s

Jasna Zwitter-Tehovnik

The hospitality and leisuresector is booming in CEE.More and more, the marketopportunities are movingfurther east from thetraditional CEE locations suchas the Czech Republic andHungary into Russia or theUkraine. However, evenmature CEE markets offeropportunities with potentialin the long term.The challenge therefore is to find a balancebetween rushing into the CEE market withoutprior research and losing current interestingopportunities which are opening up.

Here is a summary of “do’s and don’ts”for CEE hotel transactions from a commercialand legal perspective.

1) Firstly, you will need patience. It will take at least three to five years from the time youhave found the appropriate property until theopening of the hotel. In some locations in CEEthe development of the hotel property mighttake even longer. This is due especially to thefact that it can be very time consuming toobtain the necessary authorisations. Also, youmight be confronted with a market dominatedby domestic investors, which could make yourpenetration in the market more difficult.

2) Do be aware of an overheating market.As the business moves more and more east,land prices have adapted quickly. Movingfurther east into Europe offers good returns if the investment is well-planned.Understanding the legal differences betweenvarious jurisdictions can help you to save a lot of time and costs. It can be the key factorfor your success.

3) Be careful when selecting your property.There are still excellent locations, even inmature markets such as the Czech Republic,Hungary and Poland. The selection of thelocation will to a large extent depend on the type of hotel to be developed and theeconomic prognosis for the location. A keyfactor to assess is whether the location hasenough potential for the hotel to be bookedout during the week-ends and throughout the whole year.

4) Expect to pay 20% to 40% from your hotel budget for the property. Property inEastern Europe has become more expensive.A few years ago one could expect to payabout 20% from the hotel budget for thepurchase of a property. Today, paying 40% of the hotel budget may still be a good deal.This amount will depend on the price categoryof the hotel: in general, the better the standardof the hotel, the more you will need to pay for the property.

5) Be careful in selecting your local partner(s).Do take into account that they sometimes lack international expertise. An experiencedpartner will know which documents andwhich authorizations he will need from you in order to keep within the time schedule.Approvals from the board which do require an apostille and an official translation aretime consuming. If they are not requested on time, it will be hard to keep within thedeadlines. Therefore, keep control of theproject by finding as much information aspossible about the legal environment and the procedures before engaging in a project.

6) Be aware that speed matters. A thoroughdue diligence is important, however this is not always easy to find and to implement.Once you have identified a property, remainthorough in your due diligence but do notdelay negotiations with the seller. The price of the property and competition for property is rising. You may consider allocating money

prior to a transaction so it can be injected into a project quickly if required.

7) When you need financing, be aware of who your operator is. Nowadays, banks will notprovide financing or refinancing, especially inmature markets like the Czech Republic, Hungaryand Poland that are based on managementagreements with no-name hotel operators.

8) Be prepared to provide the financiers with a full collateral package. Financing bankswill to a large extent request a full package of collateral. This will range from mortgagesover the property to assignment of claimsfrom the hotel operation as well as floatingmortgages on the moveables and the businessundertakings themselves, taking into theaccount the legal specifics of the particularjurisdiction. Do co-ordinate the timing of thecompletion of the project documentation withyour financing bank.

9) Be aware that Croatia and Montenegro are quite different markets. They providesubstantial potential for the development of luxury resorts. However, due to the shortfull season it is recommended to have suchdevelopments structured as combined resortswith hotels and (condominium) residences to increase the return on investment, inparticular in the initial phases of the project.It is particularly necessary in Croatia andMontenegro to conduct an extensive duediligence, review whether the privatisationprocess of the mostly corporate owners hasbeen carried out properly and whether theownership of the project site can be evidencedby an appropriate title chain. It should also benoted that Croatia and Montenegro still haveforeign exchange restrictions that need to betaken into account.

10) Do not underestimate restitution issues.Even though the terms for filing a restitutionclaim have largely elapsed, claims fordamages on incorrect restitution orprivatisation proceedings may still emanate in certain jurisdictions.

• Jasna Zwitter-Tehovnik is a partnerwith DLA Piper, in the Vienna-basedProjects & Finance team and is also co-head of DLA Piper’s Hospitality &Leisure group for CEE. Jasna, who hasmore than eight years’ experienceworking in these markets, specialises in debt capital markets and structuredfinance in CEE.

Buying in Central and Eastern Europe

It is particularlynecessary to reviewwhether theprivatisation processhas been carried out properly.

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Simon Allisonchallengesthe receivedorthodoxy ofbrand ownersselling assets

Some of you will recall the last major downturn inhotel shares – a double dip,with first 9/11 and then acombination of the secondGulf War and economicdownturn sending hospitalitystocks tumbling.

Part of the received wisdom which has grownup since then is that the market simply didn’tunderstand hotel companies. Both hotelanalysts and the investment managers towhom they reported apparently had greattrouble in properly valuing a company whichcontained both an earnings-driven business(hotel management) and an asset value-driven business (hotel property ownership).

As a result, when hotel companies werevalued on an EV/EBITDA or a P/E basis, thevital element of asset appreciation was simplyignored, meaning that a vast chunk of theirvalue creation went unrecognised. This camehome to me very strongly during the defenceof Forte from Granada’s hostile bid, on whichmy JP Morgan hotel team worked.

One of the criticisms of Forte was that itmade a very low return on its assets – I recalla figure of about 4% being mentioned. Thiscriticism, however, took no account of the factthat Forte revalued its assets every year.

The return on historical acquisition costwas far higher. Forte could have avoided thisproblem by not revaluing, but then anybodylooking at the balance sheet would have beenunable to see the real size of the business;a scenario of “damned if you do, damned

if you don’t”.With such experiences under their belt,

the hotel companies bought into the greatsell-off strategy of the last five years. Billionsof dollars of hotel real estate have gone underthe auctioneers’ hammers, with very few hotelgroups (outside Asia at least) willing to defythe market trend to sell their crown jewels.

And with private equity groups, assetsyndicators, sovereign funds and the likewilling to pay top dollar for such assets, atyields well below prevailing EBITDA multiples,the logic of the sale strategy was clear to see.

Hotel groups sloughed off their propertybaggage, returned oodles of cash to theirshareholders and were promptly re-rated by the analyst community so that they wereworth about as much without their assets as they had been with them.

So far, so good. Another benefit of losinghotel property is that earnings from owninghotels are far more volatile than earnings from management contracts, which are oftentop-line driven. The expectation wouldtherefore be that hotel company earningswould be more stable in the future and theirshares would be much less volatile.

Now that the markets are in turmoil, wehave a chance to test that theory. What hashappened to hotel shares in the past sixmonths? Have they been as badly hit as lasttime around?

The simple answer is no. Marriott is downonly 39% (vs 47% last time), Accor only 26%(vs 50%), NH 40% (vs 53%), Sol 49% (vs80%), M&C 47% (vs 63%) and Starwood47% (vs 56%).

So one could, at first glance, conclude that hotel shares have indeed ridden out the storm better than before. But hang on a second, in the last downturn, when mosthotel shares slid by 45-65%, the overallmarkets also slumped – the FTSE 100 forexample, went down 50% i.e. about the same as the hotel shares.

This time, the picture is completelydifferent. During 2007, hotel shares slidgenerally about 40-50% but the markets are off their peaks by only 6% (UK) – 10%(USA). In other words, the last year has been a catastrophic one for hotel companyinvestors which massively underperformedagainst the underlying indices.

What happened to the re-rating? Well,perhaps, I thought, the large falls are simply a correction to the correspondingly largerecoveries. In other words, if hotel companieshave been doing all the right things since2003, and their share prices have got ahead

of themselves, then it makes sense that whenthe correction arrived, their falls would be that much sharper. And indeed, the data bears that out – apart from NH, all of thehotel stocks mentioned above have risensignificantly higher than the FTSE or DJIAsince their last troughs.

Except that the 2003 trough for hotelstocks was a particularly unusual event, withthe double hit of travel insecurity and weakeconomic growth. And hotel companyearnings were falling severely along with theirshare prices. This time, travel trends are stillup. So, look instead at where hotel stocksstand relative to their last peaks in around2000 and compare that with the indices.

And that, dear reader is not so good.The FTSE is at 91% of its 2000 peak – theDJIA is actually 9% higher (and rememberthat there was an internet boom going on in2000 too). But while Marriott and Accor areabove their 2000 share prices, all of the otherhotel shares in my little survey are lower –Starwood fractionally, M&C 20% and both Sol and NH about 30%. IHG, which didn’texist as a stock in 2000 but has been the most aggressive seller of property has actuallyfallen further than any of the other shares,down 52% from its peak early in the year.

If there has been a dramatic re-rating,it’s not that obvious. What is also interesting is that there doesn’t seem to be a greatcorrelation between those companies that got rid of their real estate more aggressivelyand those that didn’t. Indeed, what isapparent instead is a “flight to quality”whereby the global leaders – Accor, Marriottand Starwood – are doing better than thesmaller chains (NH, Sol and M&C).

Overall, then it’s the same old story –hotels are in vogue for about a year in everycycle and then rapidly fall out of favour. Thestory that most fund managers seem to like,most of the time, isn’t “asset light”, it’s “hotel company light”.• 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).

Asset light was a lightweight strategy

The vital element of asset appreciationwas simply ignored.

If there has been a dramatic re-rating,it’s not that obvious.

Volume 4 Issue 1 15

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www.hotelanalyst.co.ukFeatured businessesaAIM 3, 7Accor 5, 6, 7, 14, 16AC Hoteles 16AIB Capital Markets 8Alliance Hospitality 3Aman Resorts 4Apollo 7Barcelo 16BBVA 16Beni Stabili 7Blackstone 2, 3, 7Carlson 7Carlyle 16CBRE Hotels 4CBRE Investors 8Cedar Capital Partners 3Christie & Co 8Citibank 7, 16Citigroup 2, 5, 6Delek Real Estate 16Deloitte 3Deutsche Bank 3DLA Piper 13DLF 4Dolce 7Dubai Holding 8Dynamique Hotels 8Expedia 5Fonciere des Regions 7Fonciere des Murs 7Forte 14Four Seasons 4GDO / Med Group 5Goldman Sachs 1Granada 14Harte Holdings 7Hilton 4, 5Hines 4HOFTEL 6, 14Hyatt 6Inchydoney 7Indian Hotels Company 8Interbrand 6InterContinental 5, 14International Hotel Investments 2Interstate Hotels & Resorts 7Investa 2Investment Property Databank 6Istithmar 2Jelmoli Holdings 16Jones Lang LaSalle Hotels 6JP Morgan 14Kerzner International 2Kew Green 7Land Securities 3, 16Lee Hing Development 4Marriott 6, 7, 14, 16Mercapital 16MeriStar 7Merrill Lynch 2Metha 7Metrovacesa 5Millennium & Copthorne 3, 14Morgan Stanley 2Nakheel 2NCL Corp 7NH Hoteles 14, 16Occidental 16Oceania Cruises 7Orient Express 8Orion Capital Managers 8Otus & Co 10,11,12Pierre & Vacances 7Ponte Gadea 16PricewaterhouseCoopers 6Property Partnerships 16Quinlan 3, 6, 16Regent Seven Seas 7RMH Group 8Royal Bank of Scotland 3SAC Capital 8Seiler Hotels 16Silverlink Holdings 4Six Senses Resorts & Spas 14Sol Melia 4, 14, 16Starwood 14Stein Group 7Tank & Rast 3, 5Tata 8Terra Firma 3Travelodge 5, 6TRI Hospitality Consulting 1, 9Valanza 16Westmont 3Whitbread 6

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The Insider

Delek Real Estate, the company listed onLondon’s AIM with its roots in Israel, is set to reapa tidy profit on the sale of five Marriott hotels.

The assets, part of the 47 bought by Quinlanand a consortium of investors brought togetherby Igal Ahouvi, are to fetch £69m against the£36m they are in the books for following theiracquisition in April this year.

The £33m profit is prior to costs and theshare of profit that previous owner the RoyalBank of Scotland is entitled to. Delek’s sharein the portfolio is 17%.

But Delek is itself getting cold feet onsome deals. In early November it, togetherwith Igal Ahouvi, pulled out of the CHF3.4bnpurchase of the retail property business ofJelmoli Holdings in Switzerland.

Subsequently, Jelmoli went on to take an 80%

share in Seiler Hotels, the owner and operatorof three upscale properties in Switzerland.It acquired a 36% holding in April 2005.

Meanwhile, Quinlan is beginning to attractcritical press attention in the Republic of Ireland.The Irish Independent described the timing ofQuinlan’s July €1.5bn purchase of the Citibankoffice tower in London’s Canary Wharf as“truly awful”.

Following the acquisition of Jurys Inns,which closed in July, Quinlan was, accordingto the newspaper, “taking a very long time”to raise €400m in equity to top up the bankloans on the €1.165bn deal.

The profit on the sale of the five non-coreMarriotts from the portfolio of 47 should helpplacate investors. Quinlan has a near 50% inthe portfolio.

NH Hoteles and AC Hoteles are looking at buying individual hotels from Spanishdomestic rival Occidental, bringing to aconclusion the pursuit of the Occidental groupwhich has been ongoing for more than a year.

The owners of Occidental, Inditex fashiongroup owner Amancio Ortega and bankBBVA, are selling all but two of the company’s15 Spanish hotels and another 17 in andaround the Caribbean.

Occidental has been in play since 2006when its then main shareholder Mercapitalsought an exit. Back then NH made anattempt to take out the whole company withboth Barcelo and Sol Melia also taking a look.

The 30% stake owned by Mercapital was

bought by Ortega through his Ponte Gadeainvestment vehicle and, together withValanza, the private equity wing of BBVA, atotal shareholding of 80% was acquired for€706m at the start of this year. Ortega hadbeen pursuing Occidental for more than fiveyears and has seen off rival bidders includingSpanish operators and private equity rivalssuch as Carlyle.

For NH, the opportunity to buy individualassets rather than mount a portfolio bid, issurely a blessing. It can pursue assets to infillrather than be left holding a number ofunwanted additional hotels. While NH wantsto secure prime properties in its domesticmarket it is keen to push geographic diversity.

NH eyes Occidental properties

Land Securities, the UK’s largest REIT and to date the only REIT to include hotels in its portfolio, is breaking into three parts.

The hotels are being hived-off into theoutsourcing division, separating from retailand the company’s London portfolio.

The move is being made in the hope thatthe share price of the three separate businessesis buoyed by the removal of any conglomeratediscount and the introduction of focus.

The outsourcing business is officially calledProperty Partnerships and features a numberof Government and private sector outsourcingcontracts run by Land Securities Trillium operation.

During the six months to September 30,Trillium’s operating profit on its Accor portfoliowas £11.6m. Turnover at the portfolio was up 5.6%.

The hotels portfolio is less than a fifth ofthe overall underlying operating profit at thedivision where the biggest single source is amassive contract with the Government. Thismeans there is little chance of hotels breakingaway to form a specialised REIT in their ownright and thus further highlighting hotels asan asset class. However, the inclusion of hotelsinside the overall outsourcing portfolio is ofitself encouraging.

Land Securities splits into three

Delek reaps reward on Marriotts

no change in the cycle - hotel analyst · from australian property company investa. the wider issue...

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