Hotel Analyst
Sector players becoming flexible
friends Operators are becoming less rigid in their relationships with owners and banks, as the economic climate puts increasing pressure on pipelines.
The need to be more lenient
over terms of agreements, with possible renegotiations on both sides is becoming more pressing, as the previous dominance of owners over operators in the boom years fades. Clive Hillier, CEO of Vision Hospitality
Management,
told delegates at this year’s International Hotel Investment Forum in Berlin: “In general, the operators are responsive. Their pipelines are decreasing, they need to put flags on maps. It’s not palatable to renegotiate their fees. We say: ‘Do you want to talk to the owner you know, the bank you don’t know, or the receiver you don’t want to know?’” The conference’s panel on
preventing and managing default focused on the dissolution of the Von Essen portfolio, seen by some as a cautionary tale of investors’ naivety. David Duggins, director,
Von Essen Hotels, said: “Fraud happens and it happens in every single industry. You have to be on your guard. “You need an appropriate level
of scepticism when looking at business plans. If you’re relying on the asset being sold to repay the loan, remember you’ve got to know that loan will survive
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whatever is likely to come up. If you’re planning to lend with the expectation you’ll get repaid by refinancing, that’s not banking, that’s gambling.” Tom Page, UK head of hotels
and leisure group at CMS Cameron McKenna, added: “When there’s been a lack of trust in the operator, that’s when the banks take action - if there’s any suspicion about how truthful the borrower is being.” Hillier said: “Von Essen’s an interesting study, but for every Von Essen there are 99 distressed situations that are caused by economic events, not fraudulent ones.” With much of the Von Essen
portfolio having been sold at the time of going to press, talk turned to the end of the era of ‘pretend and extend’ and the options to lenders when it came to selling properties in the current climate. Page said: “The banks need to
factor in how much the actual value of the building is. They need to assess the business plan and then look at a turnaround plan, or maybe it’s best just sell to the asset immediately. You also need to look at the future funding obligations - banks are unwilling to put good money after bad if capex can’t be funded.” Duggins commented: “Things
get blurred when you have an ‘extend and pretend’ approach. Covenants are waived, payments are waived. These situations are hard to explain, either to staff or creditors. When you see a default coming, you need a plan.” After the rapid expansion at the
top of the market, one of the issues facing owners was identified as lack of interest from brands, with Page commenting: “A lot of deals done at the peak are based on forecasts of keenly rising profits. The operators are not getting any
146 MAY / JUNE 2012
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incentive fees. From that point on, the operator has no alignment with you in the business.” Page suggested that it may be
worth changing the terms of the deal and returning an incentive element to the relationship. Elsewhere at the conference,
the CEOs panel saw some caution expressed over the ongoing straightened debt markets. Richard Solomons, CEO, InterContinental Hotels Group, said: “As brands we’re seeing a very good picture, for some owners it’s less good. Banks talk about lenders and finance, but debt’s the issue. We need our class of asset to be something which banks will invest in again.” He added: “You’ve got to be
concerned about the level of personal debt and government debt in Europe and the US. At some point this will have to be addressed.” The issue of pipeline maintenance was raised, with an increasing reliance among the operators on conversion, in particular in the European market. Steve Joyce, president and CEO, Choice Hotels International, thanked Solomons for IHG’s decision to remove hotels from its Holiday Inn brand as part of the flag’s relaunch, commenting: “We love his owners, we give them a home”, suggesting that the sector was not so much expanding as exchanging the signs over the doors. Long term, however, there was greater optimism for real growth. Frits van Paasschen, president
and CEO, Starwood Hotels & Resorts, said: “It’s hard to paint a picture that we’ll get out of this unscathed as a region, but as an industry we could be on the cusp of a golden age. There will never be another Paris, Rome or London and as wealth accumulates, people
will want to visit. “What we’re seeing now is one
of the great transformations of humanity. There are five or six billion cell phones out there and in three to four years they will all be smartphones. The next 20 years will see three billion people join the middle classes.” The hopeful sentiment was
carried over into the rest of the sector, with Duggins concluding: “The Von Essen portfolio has some properties that have never made a profit and yet we’ve still sold them. There’s always someone who thinks they can make money from hotels.”
HA Perspective: There is clear evidence that brand owning hotel operators are using their balance sheets to promote growth. But this should not be taken as a reversal of the asset light strategy. Where the balance sheet is
deployed, operators are looking for a clear exit in a comparatively short time frame (usually at most it is five or six years). Speaking in a separate interview
with Robert Shepherd, svp development for IHG in Europe, there are a number of approaches being deployed or about to be unveiled. IHG has four key markets in
Europe – the UK and Ireland; Germany; Russia and CIS; and Turkey. For Germany in particular some novel approaches are being wielded to enter what is a lease dominated market. According to Shepherd there is a
clear gap for development finance (something of an understatement in reality) and IHG is stepping in to help. For leases, IHG is prepared
to offer guarantees to banks on behalf of developers when a multi-site franchise deal is signed. Once the developer reaches five or
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