Hotel Analyst
can be in the cash-constrained environment remains to be seen. While the ongoing economic
woes of Spain are a huge problem, more than 75% of NH’s EBITDA are generated outside of the country. And it is now benefiting from its German exposure which until recently had been a source of woe. Not surprisingly given its debt
burden, expansion has been modest. The collapse of the deal with HNA further dented whatever hopes of growing out of the problem remained. Now the focus is back again
on Latin America with the first Columbian hotel opening in the past year. NH said it was in talks to enter the Brazilian market and is looking at other countries. All-in-all it looks like a
good effort in very difficult circumstances. Whether it adds up to something that will transform the company’s prospects is much less certain.
Meliá’s crumbling property
assets At the end of March, Spanish hotel group Melia announced the latest valuation of its hotel assets, revealing an apparently modest fall in values of 14% compared with its 2007 valuation.
The exercise, undertaken by Jones Lang LaSalle Hotels, suggests Melia’s estate is today worth EUR3,314m. Of that figure, EUR3,162m relates directly to hotel real estate. Today, the company owns
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90 hotels, while the valuation included a further 13 assets, and this is against a total portfolio under management of 323 hotels. However, while the headline
14% like for like decrease in value may not sound too bad, the overall valuation is not exactly comparing like for like – the devil is in the detail.
Melia’s press announcement
noted that “the 2007 figures also included the valuation of the hotel brands and the contracts for hotels operated lease, management and franchise agreements”. Melia insists the 14% reduction “is in line with the discounts observed in recent asset rotation activity”. One relief for the banks,
currently holding around EUR1bn of the company’s debt, is that Melia’s accounting policy has been conservative, in that it did not update its asset book values to reflect the rather more positive valuations evident in the 2007 valuation. As a result, the historical values
within the balance sheet mean that even today’s downgraded values are showing a 61% premium to historical book value. Melia notes that the declines in Spain are partly offset by improvements on assets elsewhere in Europe, and in Latin America. For the future, Melia is pursuing
an asset light business model, as illustrated by its announcement earlier this month of a project in La Defense, Paris. There, it will open a 369 room hotel in late 2014, having tied up construction of the project, and a German landlord, Union Investment, to finance the completed development. Melia’s most recent results demonstrated an increase in revpar of 9% during 2011, with performance improved by a switch to developing a presence in expanding markets in south
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America, notably Brazil, and in Asia-Pacific. During the year, the company
added 20 hotels with 5,056 rooms, all following the asset-light model, being one of management, lease or franchise. Expansion is focused on upscale and luxury hotels, which account for 84% of the pipeline. And it has promised an increasing focus on expansion in Brazil, Russia, Eastern Europe and China. And the company is no
slouch when it comes to social networking, it claims to be behind only Hilton and Starwood in its use of social media, with 500,000 Facebook fans, while its loyalty programme already generates 22% of room night bookings.
HA Perspective: Leaving aside whether having lots of Facebook fans is a benefit (it is bookings that count, as readers of our sister title Hotel Analyst Distribution & Technology will well know), Melia International is presenting the best face it can on what is an ugly situation. The latest valuation of Spanish
hotel assets shows a 17% decline from the 2007 peak, on a comparable basis (that is excluding the value of brands and so forth that were lumped in last time). Given that Ireland has seen a
50% plus crash in its real estate values and the Spanish economy is in a similar fix, the decline looks surprisingly modest. The depth of the problem was highlighted in late March with the acquisition of savings bank Civica by rival Caixabank at a third of book value. The deal saw a EUR3.4bn write-down of troubled real estate assets out of the total of around EUR10.5bn held by Civica. The problem for Melia is that it is incredibly close to its debt
covenants. These are set such that EBITDA must be 4.5 times net interest expense. In 2011, it was 4.52, a comfort margin of just 0.02. Any EBITDA slippage is going to see it breach covenants. Spain is now increasingly
seen as the next crisis for the Eurozone. And this is going to impact its international tourism business. Greece estimates that bookings from German tourists are down 20% to 30% for 2012. It has seen double digit declines from Britain, the US and Italy as well, according to the Reuters report from earlier in March that was based on an interview with Andreas Andreadis, the head of Greece’s main tourism association Greek Tourism Enterprises. Rioting and continued bad headlines about the economy have thus clearly impacted Greek tourism and it will do so in Spain. The net impact of this is surely to make the likely decline in Spanish hotel property prices more pronounced than those of other commercial property sectors. Melia claims that the 17%
drop in prices in Spain is in line with its “recent asset rotation activity”. But the reality is that very little is actually being sold and so it almost impossible to use a market comparison method for valuation. The projections used for the discounted cash flow analysis method are unlikely to have factored in a major decline in tourism revenue nor the massive economic contraction that is going to occur following the latest round of austerity measures that is taking EUR27bn out of the economy with 17% cuts to government spending. Without radical action, it looks
a certainty that Melia will join NH Hoteles in busting through its debt covenants.
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