Hotel Analyst
Strategic commits to
Europe exit Strategic Hotels and Resorts is bucking the current trend for international diversification amongst the hotel community, by pursuing plans to focus on its domestic market in North America and away from Europe.
The Reit, which has been strengthening its balance sheet with a series of asset disposals, said that its immediate priority was selling the InterContinental Prague, which was operating in what it described as a “challenging” market. During the second quarter the European portfolio reported revpar up by 8.5% on a 3.2% increase in average rate, resulting in an Ebitda improvement of 12% on last year. The Marriott London Grosvenor
Square saw an 8% increase in revpar during the quarter, driven by a nearly 15% gain in rate. The Marriott in Hamburg and on the Champs-Elysees in Paris reported revpar increasing by 19% and 11% respectively. In a conference call, president
and CEO Laurence Geller said that, with the group’s London properties seeing business “improving rapidly” and transient ADR up 18% in local currency, it had looked at recent deals in the city and was “carefully monitoring the market for an appropriate and well-timed execution of a capital transaction”. He said: “I think there has been
a little bit of pause in the credit markets in Europe given the uncertainties in the overall various economies there.” The group
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will wait to see what happens in September and until it has made its 2011 forecasts, later in the year.
Geller added: “Even if we
did start to work on a sale, it would be unlikely given the way the complexities of the various systems work in London that we would get that done this year.” Strategic cut its second-quarter
net loss to $47.4m (£30.3m) from $86.0m in the same period last year. Revenue was $195.97m, up from $185.40m, with Ebitda increasing 4.6% to $35.1m. North American total revpar rose 5.9%, with Europe seing 4.9% growth. Strategic said that rate became stronger in June, pushing revpar towards a 60:40 rate to occupancy mix. Food and beverage revenues were up 16% during the quarter, driven by a 27% increase in banqueting revenue, a further indication of growth. The company also recorded
signs of recovery from the same quarter in 2009 through the reduction of cancellation fees, which dropped from $6.61m in Q2 2009 to $2.1m. Geller said: “We are especially encouraged by significant revenue and profitability growth which was driven by broadly improving lodging demand and strength within both the corporate group and transient segments of our business.” During the period the company said that it had sacrificed occupancy in favour of rate and said that it was focusing on growing rate “aggressively” as demand improved. The Reit said that the growth in group and corporate transient demand in the second quarter had allowed it to “significantly” reduce the number of rooms sold through third- party websites such as Priceline and Travelocity. Geller said: “As a result, we sold 32,000 fewer
126 SEPTEMBER / OCTOBER 2010 WWW.SLEEPERMAGAZINE.COM
discounted transient rooms this quarter than in the second quarter of 2009. And that contribute to driving our overall average daily rate up 3.3% with transient rate improving 11% during the quarter. We feel we’ve been a leader in pushing rates and will continue to do so.” The company, which operates
at the luxury end of the market, said that it had seen group room nights up 24.5% on the year for the quarter, driven by a 41% increase in the corporate group segment. The resort properties saw room
nights up 44% compared to last year, which the group also put down to a resurgence of corporate demand, countering what Diane Morefield, CFO, described as the “AIG effect”, where businesses had previously felt they could not be seen to meet in high-end hotels. The group was confident that it would see demand for luxury hotel product increase, while supply would fail to threaten this, due to a lack of financing. Geller said: “On a macro level, second quarter luxury demand grew 12.1% from 2009 with supply growth falling to 1.8%, the lowest year-over-year supply growth statistic, since the fourth quarter of 2005. For our company all future competitive supply indicates approximately 1% growth, while less than half of that is actually underway. “And given development costs of
approximately $600,000 per room plus, which is exclusive of land, it should be some years before the economics justify significant new competitive supply.” As part of ongoing efforts
to strengthen and de-risk the balance sheet, the group raised £349m in May in a share offering. As a result, Strategic reduced its overall amount of indebtedness by over $350m and increased its
weighted average debt maturity from 2.2 to 3.3 years. After the close of the quarter,
Strategic announced that Rip Gellein, who has been on the board since October last year, has replaced Bill Prezant as chairman. Gellein was previously president of the global development group at Starwood Hotels and Resorts. Looking to the more leisure-
driven third quarter, the group forecast revpar growth between 5% and 7% in North America and margin improvement in the range of 150 to 250 basis points. Around 70% of that revpar growth was expected to come from rate and 30% from occupancy. Geller concluded: “As with
any economic recovery, we fully expect some bumps in the road along the way and are prepared to meet those challenges. However, we remain extremely bullish on the overall direction of the lodging market and the velocity of the improvement in the high-end sector.”
HA Perspective: Strategic’s exit from Europe is not surprising given the difficulties it has experienced in the region. But it is not at all clear that focusing on the North American market will provide that much better opportunities. Sure, Strategic knows the North American market better and with a shrewd deal maker like Geller at the helm there ought to be possibilities for outperformance. But beating the market in
North America (or Europe for that matter) is not likely to deliver the same level of returns as that offered by emerging markets, particularly those in Asia. With Host continuing to make headway in Asia, it is a surprise to see Strategic retreat back to its domestic market with its tail between its legs.
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