• Luxury pain leads to drastic action

The extent of the devastation the recession is wreaking on trading at luxury and upscale hotels has been revealed in the first quarter results of three key players: Strategic, Orient Express and Host.

The three sets of responses are similar: raising funds, asset sales and drastic cost cuts in an attempt to shore up covenants.

At Strategic Hotels & Resorts, the REIT, revpar was down 24.1% in North America and 29.3% in Europe. At Host, the world's biggest hotel REIT which is more focused on upper-upscale than luxury, revpar fell 19.8%. And at Orient Express, the owner and operator of probably the most luxurious chain of significant size, revpar was down 26% in US dollar terms.

Strategic has put the Fairmont in Chicago on the block and it is in the process of marketing other hotels. During the conference call on the results the company also said that if its share price is above $1 (it is currently $1.14) then a share offering would make sense.

In terms of asset sales, Strategic CEO Laurence Geller said that he was seeing groups enter the market in the past 60 to 90 days that he had not previously seen or heard about.

CFO Jim Mead added that the recent contraction in spreads on property lending in the US was a "positive indicator" for the sales process.

Orient Express has already taken the plunge in terms of a share offering, raising a net $141m through a share offering of its class A shares.

The aim is to reduce the debt to EBITDA ratio to a range of four to five times, based on earnings over the cycle. In addition, it is selling hotel assets and its residential developments (11 condominiums at Porto Cupecoy were sold in the quarter). It expects to reduce debt to within its target range by 2011.

The company has signed a memorandum of understanding with a private buyer for the sale of one hotel in Europe and taken a deposit. It also has a letter of intent on another hotel at Bora Bora. The European hotel with the MoU is valued at around $400,000 per room and about 15 to 16 times peak EBITDA. Also, one property in North America is being listed for sale.

The cost cuts at Orient include reducing maintenance capex to 2% of revenues. The company believes it can keep it at that level through 2010.

Not being cut, though, are legal costs in relation to litigation around its dual voting structure. These came in at $515,000 for the quarter. Hedge funds DE Shaw and SAC Capital are driving the legal assault and are seeking to make class A shareholder have equal voting rights with class B, whose increased voting power gives directors of the company control despite not have a majority of the economic interest in the company.

India's Tata group is also continuing to breathe down OEH's neck after buying shares to prevent its holding being too diluted by the share offering. It currently holds a 9.7% stake.

Central costs were cut, however, to $5.1m from $6.8m a year earlier. Another cost cut has been to delay the opening of some Italian hotels until April. This increased European EBITDA by $0.9m but it reduced revenues by $1.7m.

Booking trends in North America began to stabilise in early April and the further away from Europe, the stronger the demand is, particularly for experiential type properties.

Pricing is being more radically adjusted for properties where there is heavy corporate demand such as Australia where it might be off 25% to 30%. For leisure dominated hotels there is less movement. In Italy, for example, high season prices are expected to decline by little more than 10%.

At Host, the decision to raise cash through a share offering lifted its share price to a seven-month high. The company raised $500m at the end of April. In addition, last week it raised $400m in a bond issue.

The first quarter saw it suffer a 16.2% drop in sales and report a net loss of $60m against the $63m profit it made in the same period last year. EBITDA fell to $88m from $174m. In Europe, for the 11 hotels in the joint venture, revpar was down 29% in constant Euro terms.

Host said it was selling about $100m worth of non-core assets, and some may be at less than book value. But CEO Ed Walter also said he was optimistic about the prospect of buying opportunistically.

The strengthening of Host's balance sheet through debt and equity issues was to enable the company to target a rich acquisition market, said Walter.


HA Perspective: Speculation about winners and losers in the luxury space has been rife. London's Maybourne is tipped as a potential seller after reporting a loss of £9.3m for the year to June 30, 2008.

But, as ever, the devil is in the detail and the drop in operating profit to £29.3m from £33.1m is due to the closure of the Connaught during the period and the need to retain key staff.

There is no doubt that Maybourne has suffered a marked downturn in trade since the end of this period and the speculation may well be right that it is seeking to unload assets.

The good news for potential buyers is that financing for luxury assets can be found, even for developments. Corinthia Hotels has secured full funding for its plans to turn the Metropole building in London into a luxury hotel.

A bank loan of £135m, matching the £135m of equity in the deal, was raised in a syndication led by Barclays. Other banks included Libyan Foreign Bank, the Arab Banking Corporation and the Bank of Valletta of Malta.

The 300-room hotel is set to have bedrooms averaging 45 sq m in size plus a spa and 12 luxury residences.

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