• Leased pain at Rezidor

Rezidor is expecting the current difficult climate to continue for the near future, it said last week. Reporting its third quarter results it said there had been no major change in trading conditions and it was continuing its cost cutting and revenue focus.

And its fixed lease estate continues to be a drag on what would otherwise be one of the strongest performing hotel companies in Europe.

The Brussels-based operator, whose portfolio includes Radisson Blu and Park Inn, also reported that while business travel was still depressed, the summer saw a boost from the leisure market.

Speaking to analysts, Rezidor president and CEO Kurt Ritter said: "I think leisure is still going stronger than business at this stage and revpar drops are now due to rate falls rather than occupancy decline which has flattened out in this quarter."

He stressed that a strict control of cost savings, continued fee-based growth in emerging markets and an asset-light balance sheet based on conversions and not new builds were all having a positive impact.

He also pointed out that Q4 would provide a more accurate trading comparison with the previous year than earlier quarters because the global economic problems really hit trading in Q4, 2008.

The group reported revpar for Q3 at -15.9%, compared to down -22.9 in Q2. The improvement was due to leisure travellers taking advantage of cheaper room rates.

However, as in Q2, performance still fluctuates between regions. Eastern Europe suffered the biggest drop in revpar at -30% while the Middle East, Africa and Other was back in single figures at -9%. The UK, Germany and Sweden all performed relatively well, according to Knut Kleiven, deputy president and chief financial officer.

As in the previous quarter, the higher number of fixed lease commitments in Belgium, Germany and the UK contributed to the negative -€3.9m EBITDA for the leased hotels in the rest of Western Europe. Meanwhile the Nordics saw EBITDA of €9.6m, Eastern Europe reported €3.9m and Middle East, Africa and Others €2.2m.

Central costs fell during the quarter by €2.2m to €8.8m compared to the same period last year and Kleiven told analysts that Rezidor was on target to achieve a 10% reduction over the year amounting to around €4m.

These savings, teamed with aggressive portfolio management by way of re-negotiated contracts are key factors in the group's plans for the immediate future.

In terms of development, Rezidor's chief development officer Puneet Chhatwal said finance was non-existent in some countries. He stressed that independent hotels were looking for brands, but this lack of funds meant renovations or rebranding was proving difficult.

Despite the continuing difficult market conditions, Rezidor is pressing ahead with its pipeline – looking to consolidate its fee based managed and franchised hotels which reduce expose to the vagaries of the global economy.

During the quarter the group opened seven hotels – 90% fee based – with around 1,800 rooms. Over the same period it signed a further five hotels with 1000 rooms, all of which were 100% fee based.

This quarter's total brings the nine month hotel openings total to 27 – or 4,900 rooms with 88 of this new business also being fee based.

In the year to date the group signed contracts for a further 5,900 rooms – 60% of which are in the Middle East, Africa and Other region and brands are split almost evenly between Radisson Blu and Park Inn with a small proportion of Missoni outlets.

The 4,900 room openings over the year were more or less evenly split between the rest of Western Europe, Eastern Europe and the Middle East, Africa and other regions with the Radisson brand taking centre stage accounting for 66% of openings.

Rezidor says it is maintaining its current pipeline, which accounts for more than 100 hotels and 23,000 rooms and 50% of this is already under construction with 88% to be managed properties and 90% on a fee based model. Around 75% of the pipeline will be developed in emerging markets.

HA Perspective: The most impressive stat among Rezidor's numbers was that it has signed 30 new contracts in the first nine months of this year, all are fee-based. This is some achievement in the current market.

The worst stat is the pain being endured through its leased estate. It is seeking, where possible, to renegotiate these deals. But here there lies difficult choices.

Exiting a fixed lease now is akin to selling the asset at the bottom of the market. If you believe the hotel property has good long-term prospects, is it better to hang on to the contract and ride the upswing?

Looking at the numbers, the non-Nordic leased estate, which is mostly fixed leases in Western Europe, contributed a negative EBITDA of €21m. This is considerable pain.

The nature of the recovery matters hugely. If trading comes roaring back, then these leases will rapidly turn profitable. But if there is a long drawn out crawl back, the leases will remain a big drag on Rezidor's results.

Even though Rezidor has done well with its rate of new signings, it will take many years before the impact of the fixed leases are significantly diluted.

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