• Indian quits OEH race as luxury drives sector

Indian Hotels confirmed that it has abandoned its USD1.2bn bid for Orient-Express Hotels, citing other priorities.

The decision brought its year-long pursuit to a close, leaving the group to turn its attentions away from the luxury sector, and leave the spoils to the established players.

Indian Hotels is thought to have faced competition at one point for OEH from Jumeirah Group, at a point when OEH was weakened by debt. The luxury operator has since built itself into a strong defensive position with the help of a series of asset sales and improved fundamentals.

Indian, however, saw its quarter net loss widen from INR63.3m (USD1.1m) to INR3bn for the quarter ended 30 September, after writing down the value of its overseas assets, including its stake in OEH, by INR2.87bn. It now remains to be seen whether Indian will retain the OEH holding, with a sale seen as a likely while the group tries to reduce its own debt.

The ongoing strength of the luxury market was witnessed elsewhere across the sector this earnings season, lead by Hyatt Hotels Company, where the group has accelerated its expansion, reaching what it described as a record level of openings for this year, with more than 45 hotels so far. The company has opened in over 60 new markets since its IPO four years ago.

In addition to speeding up growth, the group has also pressed ahead with its asset recycling activity, in line with the recent increase in liquidity and capital looking for hotel investments, particularly in the luxury segment. The group has undertaken six sale and manage-or-franchise back deals for a total of USD433m, at around 15x trailing 12-month Ebitda.

The group expects to sell further hotels, both full service and select service, over the next six to nine months, but it is also acquiring, having bought the Peabody hotel in Orlando for USD717m in October and, the month prior, a 20% stake in Playa Hotels & Resorts for USD325m. The deals meant the addition of the group’s first large convention hotel and its entry into the all-inclusive resort market.

While revpar for the US was up 7.7% in the US, driven by rate, ASPAC and EAME/Southwest Asia was weaker, while China fell and London’s comparison with the Olympic year dragged the UK down 15%.

Mark Hoplamazian, Hyatt's president and CEO, said: “Having said this, our overall outlook remains positive, and that's due to strong occupancy levels and continued healthy demand among transient guests in the US.”

At the Reits, where ownership is the business model, Host Hotels & Resorts warned that the government shutdown would hit its fourth-quarter earnings by as much as USD7m. Adjusted Ebitda for the full year is expected to be in the range of USD1.29bn to USD1.3bn.

CEO & president Ed Walter told analysts that the Reit was being stymied in its efforts to buy more hotels by a combination of high prices and “fewer attractive acquisition candidates”, with the pickup in hotels coming to the market lead by limited service portfolios and sites in secondary locations.  Host was instead making like Hyatt and selling more assets, with several hotels currently being marketed, some of which may close by or shortly after year end.

Within the US, Host has been looking at other ways to add value, with the extension of ground leases and through management agreements, which Walter described as “another source of value enhancement opportunities, especially as competition between operators is increased over time”. The group’s European joint venture had more success in acquiring, picking up its first hotel in Sweden, a 465-room Sheraton Stockholm Hotel for USD135m.

In the US, Walter said that Host was considering adding more select service hotels in urban locations, describing them as “something that we think can work and can make sense”, while remaining cautious.

In contrast, Strategic Hotels & Resorts increased its full-year guidance after seeing revenue growth of 16% reflecting higher rates and occupancy. The Reit now sees revpar growth of up to 8%, against  a previous potential high of 7%.

Rip Gellein, chairman & CEO, was flying the flag for luxury leading the recovery, commenting that “the high end quality of portfolio the markets we’ve chosen to operate in and our best-in-class asset management capabilities are driving our out-performance”.

The group is also involved in sales as it deleveraged, with Gellein describing the appetite for high-end hotels as becoming without question more active, something Strategic is hoping to take advantage of with the marketing of the Marriott Grosvenor Square.

For those seeking to enjoy the luxury segment without the battle to buy a chunk of it, Choice Hotels International announced that it had seen the Ascend Hotel Collection, its portfolio of independent hotels, expand outside the US with a site in Ireland and one in Australia. The company added 45 hotels under the flag in the third quarter, against nine in the same period last year and said that the collection had seen 9% revpar growth, against wider portfolio growth of 3%.

Stephen Joyce, president & CEO, described the brand as marking Choice’s “surge” into the upscale segment.

The group reiterated its revpar growth forecast of 2% for the fourth quarter and 3.25% for the full year, having previously lowered it from 3.5% to 4.25% growth, primarily due to recent revpar performance, which has reflected the impact of the government shutdown on our fourth quarter results.

At Morgans Hotel Group the current issue is one of who owns the group itself, with militant shareholder Ron Burkle making a move on the company after months of litigation and griping aimed at the current board. It is the likely that the only way to avoid Burkle will be for the group to find an alternate buyer, which is possible given interest over the summer in the group, including two bids from an unnamed large international hotel company.

Performance-wise, the group saw revpar up 3.6% (8.8% in the US) and forecast revpar growth at 8% to 10% for the full year. It continues to pursue growth through management contracts and signed a hotel in Colombia during the quarter, adding to its pipeline of nine, four of which are due to open next year.

At Millennium & Copthorne, the group saw operating profits for the third quarter, drop 6.6% on the year, largely due to an ongoing refurbishment programme and less favourable trading conditions for some hotels in Asia.

Chairman Kwek Leng Beng said that the group had kept revenue “steady”, by adapting its sales approach “to the prevailing trading conditions”. In the case of London post-Olympics, this meant pushing occupancy at the cost of rate. As with those also reporting in the past fortnight, the US remained a bright spot, with revenue improvements from its New York hotels and improved trading in its regional US division.

 

HA Perspective: As far as luxury hotels go, those who haven’t got them can’t afford them and those who have them are looking for people who can afford to buy them. Happily for them, the latter seem to be on the rise as lenders note the segment’s resilience, but not the extent that they want to bankroll too many new ones and upset the balance. If you have the Marriott Grosvenor Square in your back pocket, now’s the time to look smug. If you spent the pre-2007 era running up debt, less so.

The money-go-round that keeps the owned part of the luxury segment functioning is looking increasingly healthy, with more private activity helped along by increasing activity on the debt side and a greater appetite for leverage than the listed Reits, which Host noted. The non-listed Reits, such as American Realty Capital, are also continuing to raise capital and invest in luxury (in this case, the Viceroy New York).

For the branding element, operators must remember that true luxury is, to a great extent, about rarity. Just ask the vicuna, a relative of the llama which produces the world’s softest wool, but starves itself in captivity and can only be shorn once every three years, should you be able to catch it. It doesn’t take too much crow-barring to see the vicuna in the luxury sector, or indeed those who invest in it. Creating a successful luxury brand is hard, expanding it without losing what makes it luxury, more so.

As Starwood Hotels & Resorts has maintained, it is luxury which is the most resilient of all the segments and this has lead to growth in brands, putting that rarity at risk. Fortunately, UBS and Wealth-X, a Singapore-based firm that tracks ultra-high net worth individuals, said in September that the world’s super rich – those with at least USD30m in net assets – reached a record 199,235 members, a 6% increase from the previous year. The number of billionaires is now at 2,170.

While they are rising, so are their demands and, with more guests seeking rarity, more investment is needed to achieve it. Who foots the bill, as luxury brands pile in while luxury owners are more constrained, could be a source of conflict.

 

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