• NH positive as Spanish market improves

Hopes are high that the Spanish hotel market has finally bottomed out, with figures beginning to turn positive once again.

The news will be of the greatest relief to indebted Spanish hotelier NH, which has just completed a complicated refinancing that provides it with some working cash to invest in improving its hotels and operations.

A year end poll by CEHAT, the Confederation of Spanish Hotels and Tourist Accommodation, says the outlook is the most positive for four years. Close to 70% of CEHAT members are positive the market is improving, compared with just 55% a year ago. Tourist arrival numbers in 2013 could beat the 58.6 million record set in 2007, government officials predict. Summer bookings for 2014 from UK visitors are up 2%, as visitors from key source markets the UK, Germany and the Nordics look to return to their habit of seeking out some guaranteed Spanish sunshine.

NH has been struggling, with a predominantly Spanish portfolio, and a substantial debt overhang. The most recent refinancing has generated EUR700m, repaying a syndicated loan from 2012, and generating free cash for investment. Three tranches were involved: EUR250m of secured senior notes, EUR250m of unsecured convertible bonds, and a “club deal” generating EUR200m in the form of usable cash and revolving credit facilities.

The senior notes give holders a six year term with interest of 6.875% in the meantime. The bonds deliver investors 4% annual interest until a five year maturity, at which point they can be converted into NH shares, at a preset price that is a 30% premium to the current value.  The club deal funds are repayable in four years, and in the meantime will cost NH quarterly Euribor plus 4%.

NH has cut its losses on some existing hotels, dropping six Spanish hotels and two in Italy, so far this year. In addition, pipeline commitments have been cut on six planned openings in Spain, two in Italy, two in Hungary and one in the Czech Republic. The only openings this year have been in South America, in Brazil and the Dominican Republic. In June, the Hotel Krasnapolsky in Amsterdam was sold, returning EUR157m, though NH will remain managing the property.

After one false alarm, NH management finally managed to encourage Chinese suitor HNA to buy into the group, earlier this year, when it agreed to pay EUR234m for a 20% stake. In early November, the Chinese travel group upped its stake, buying a further 4% of the company’s shares from Pontegadea Inversiones, the investment vehicle of Zara chief Amancio Ortega.

The latest refinancing comes as there appears to finally be good news from the Spanish market. NH said its Spanish portfolio delivered a modest revpar improvement of 0.43% in the third quarter, the first time in eight quarters the ink has been black. Rates nudged up 1.69%, offsetting a fall in occupancy of 1.24%. Thanks to a careful focus on operating cost reductions, NH actually improved gross operating profit and ebitda in its Spanish operations during the quarter.

However, it appears the improvement in the Spanish market is patchy, and reliant on foreign visitors. While the coast is on the up, some city markets remain poor and still have further to fall.

On the plus side, fellow Spanish hotelier Melia has reported a strong summer on the Mediterranean Spanish coast, with revpar up 4.3% on occupancy up 4.8% through the third quarter. Weaker sales to Spaniards were offset by improvements in inbound visitor numbers from the UK, northern and eastern Europe.

Among the cities, NH reported Barcelona as the best Spanish market, something Hotstats confirmed in July, with increased room rates leading to a profit increase of 19.4% in the city during the month. Good food and beverage sales helped improve goppar by EUR16.54 against a year previously, while conference and banqueting activity was also substantially up. Melia saw its urban Spain sector deliver a 2.5% revpar increase in the third quarter, with Barcelona its best city market.

However, other Spanish cities are not faring so well, with Madrid suffering from the double whammy of fewer trade fairs and congresses, and low-cost airlines cutting back their flight schedules. Melia said its revpar in the city fell 11.6% during the last quarter, while NH has warned of further negative performance in Madrid, during the fourth quarter.

One group that feels the Spanish market now offers opportunities, are US buyout funds including Apollo Global Management which, according to recent Reuters report, is on the lookout for Spanish hotels to buy. Apollo is in competition with Blackstone, Goldman Sachs, Lone Star, and Orion. Speaking at a conference in Barcelona in November Rami Badr, investment director at Orion Capital Partners, told delegates: “A number of hedge funds and financial investors are now coming to Spain, which is perceived as a new El Dorado.”


HA Perspective: Everybody seems to be in love with Spain at the moment. Given the volume of private equity investors hopping on planes to the country the luxury hotel market should be booming. But so far, most are coming home empty handed.

At November's Mediterranean Hotel Forum in Cyprus, Mark Wyatt, a Paris-based partner at KPMG, said the liquidity in the current market has to come through portfolio transactions as the banks cannot sell asset by asset.

In Spain, in sharp contrast to the UK, portfolio deals are thin on the ground. This means deal making remains hamstrung and it seems unlikely anything will change in the short-term.

But the problems for Spain, especially in its resort markets, remain profound. While the business cycle will bring most of the Spanish city hotels back to profitability there are deep structural issues within the resort business.

Ironically, thanks mostly to the displacement effect of the Arab Spring, Spanish resorts have looked resilient over the last couple of years. But the resort business continues to be controlled by tour operators.

Peter Long, head of the UK business of Tui Travel, Europe's biggest tour operator, spoke at the Mediterranean conference. Long was keen to push the idea of Tui-exclusive partnerships which, he argued, drives higher quality scores and customer retention.

He also made much of Tui's push into the online market place, with its b-to-b businesses such as hotelbeds and its consumer facing businesses such as laterooms.com.

It is perhaps no surprise to see Tui take to the Online Travel Agent marketplace like a duck-to-water given its already somewhat lopsided relationships with its hotel partners.


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