• Sol Melia eyes global expansion

Sol Meliá is to widen its view from its traditional markets of European cities, the Mediterranean rim and Latin America and towards the US and China as part of its medium term expansion plans.

The company, which recently used its own money to launch its ME by Meliá brand in London, said that it would work with local partners in China.

The group's current pipeline represents 7,455 rooms, 9.5% of the current portfolio. Of this, 82% is under management and franchise agreements and 89% outside Spain. Sol Meliá is also planning to build its presence in European gateway cities and in Latin America, where the company's plots of land will be developed, first in Mexico and further into the future in Brazil.

The company added that it would increase its focus in Asia, primarily China, and on key cities in the US due to their importance as a feeder market for its operations in Europe and Latin America.

The company paid Eu133m for the freehold of the ME London, which is scheduled to open in 2012, after a further Eu52m spend on the site. The acquisition was financed through previous asset sales and anticipated future sales, with the group justifying the break from its low capital-intensive expansion strategy by describing the deal as a "magnificent purchase opportunity" of a "strategic asset in a key destination" which positioned the ME by Meliá brand in "one of the most important feeder markets in the world travel industry".

Speaking at the group's Q3 results, Gabriel Escarrer, CEO and vice chairman, said: "Regardless of the profitability expected in the medium term, this flagship hotel will help the ME by Meliá brand to grow globally through management, franchise and joint venture agreements."

He added: "Additionally, following the recently opened Meliá Atlanta hotel, the company will increase its focus on the US, where we understand that there is a significant volume of potential demand for our hotels and resorts in Europe and Latin America. In order to increase its brand awareness and customer base, in the medium term the company will gradually increase its presence in key cities where it would make sense for us, i.e. New York, Miami, Orlando and Washington)."

The opening of the Meliá Atlanta in the US is a shift for the largely leisure-oriented group, in Atlanta's corporate-focused market. Unlike the London deal, Sol Meliá has taken over from another brand – Rennaissance – with Fundus America, the site's owner, investing $35m in renovating the hotel, which should be completed by 2013.

The hotel also marks the company's first solo expansion move in the US, following the deal with Wyndham to create a new Tryp by Wyndham brand in the country and other major markets.

Escarrer said that the group "would like to emphasise the moderately optimistic stance that Sol Meliá maintains in relation with the evolution of the business in 2011, taking into consideration that the recovery process in the sector is beginning to consolidate."

Adding: "In this environment, the efforts made from a brand equity standpoint reinforcing our brands globally, the expansion plan based on low capital intensive formulas focusing in the upscale and premium segments along with the financial strength and liquidity levels provides Sol Meliá enough level of comfort allowing us to focus the efforts on the operational management of the company within a framework of cautious optimism."

The company's third quarter revpar increase of 10.1% was fuelled by the performance of the upscale and premium hotels due to be tapped for expansion, which saw revpar rise by 15.3%, against its midscale brands, which were up by 5.7%. Escarrer attributed the rise to implementation of brand standards at Meliá and premium flags.

By region, the quarter saw revpar in European cities increase by 17.4%, due to progress in Madrid, London, Paris and German cities. In Latin America and the Caribbean revpar increased by 10.9%, as the region recovered from the impact of the Haitian earthquake and improvements in the business and leisure markets in North America fed into the area.

Revpar at the group's Spanish resorts was up by 8.3% on the year, mainly due to the Balearic Islands. The group said: "In the Spanish resorts, negotiations with major European tour operators indicate slight price increases for summer 2011. Volumes sold so far indicate an increase of reservations for winter 2011."

It added: "According to current bookings, the positive trend in the key Spanish cities is expected to be maintained in Q4 and 2011, particularly related to business groups and weekend travel and leisure segments in Madrid and Barcelona. A more cautious stance is maintained regarding secondary cities in Spain. Future projections for European cities indicates that the current positive evolution will be maintained based on business groups, tour operation and individual business travel."

The group said that the increases in revpar were primarily due to rate, which has been growing for the past seven months. It said it expected to see mid-single digit revpar growth for the group as a whole in 2011, primarily driven by rate rather than occupancy. 

The company, which has been looking to cut its debt, said that at the end of the quarter net debt was Eu946.9m, which it expected to remain the case until the end of the year. It said it would meet its covenants  – currently involving Eu492.5m – for the year end and remained confident about also meeting its obligations in 2011.

 

HA Perspective: It is hard to write anything about Spanish hotel groups without zooming in on the state of their home country, Spain.

Aside from Ireland, it is hard to think of a territory in Europe that had a bigger property bubble than Spain. And indeed, looking at figures from the Investment Property Databank, Spain's decline in terms of total investment returns for commercial property was second only to Ireland's for 2009, albeit nowhere near as steep at -9.4% compared to -23.3% in Ireland.

The problem for the Spanish hotel chains is that were property values to begin to drop along the same lines as those in Ireland, then their balance sheets would start looking extremely shaky.

Fortunately, the economy appears to have turned a corner. The Organisation for Economic Co-operation and Development said this week that it expects growth to be flat this year and start again next year. Unemployment is expected to drop from near 20% now to 16.5% by 2012.

There remain fears. Particularly given the increasing level of bad debt now being reported – some would argue still under reported – by Spanish banks. The latest figures from the Bank of Spain put unpaid loans as a proportion of total loans at 5.62% in August.

It is feared the bad loan ratio may creep up to close to double digits given unemployment levels. And the Bank of Spain estimates the total value of troubled loans to the construction and property sectors was Eu181bn at the end of June this year, up from Eu166bn at the end of 2009.

It is no wonder that Sol is looking beyond its Spanish hinterland for growth.

Share →