• Starwood, Hyatt, embrace rising transactions

Starwood Hotels & Resorts described the next 18 to 24 months as potentially a “prime time” for asset sales.

CFO Vasant Prabhu said that the company planned to be “very active” in the market, a view which was echoed by Hyatt Hotels Corporation, which also expected to buy as well as sell.

Prabhu told analysts: “We believe we have the best hotel portfolio money can buy. We have been and will continue to be patient sellers to realise appropriate values for the assets we own.

“Since 2010, we've been able to sell hotels for good value, but markets have not been deep. There is a sense that this may be changing. If it does, we are ready to step up the pace of asset sales, moving to sales of portfolios of the hotels as market conditions permit.”

He added that the company remained committed to its goal of generating USD3bn before the end of 2016, “as always contingent on market conditions, the right price and the right partners”. Frits van Paasschen, president & CEO, reiterated that he was confident of meeting the goal, which is tied into the group’s commitment to having 80% of its earnings fee driven.

Prabhu said that the group has seen a shift from the Reits in the US buying single sites, to more buyers willing to do portfolio deals, including private equity groups and the ever-present sovereign wealth funds. He added that the company was feeling “pretty good” about sales in most regions, increasing to “very good” about the US.

Van Paasschen said: “Increasingly, we see regional buyers interested in hotels in the regions where they reside or where they tend to be more active.” He added that the company was close to completing negotiations to terminate a lease on an “important” hotel early, in return for a long-term management contract and the owner's commitment to undertake a significant renovation.

The CFO said that, having achieved an investment grade rating of BBB and reinvested in its core hotels, its priority regarding the cash generated was to invest “as needed” to grow its hotel pipeline, as well as investing in technology.

The group expects to spend around USD400m in the hotel business this year, lower than in prior years due to the tapering off of renovations and Prabhu said that, with strong cash flow and asset sales, the company would continue to assess potential acquisitions “that could complement our business, as Le Meridien did”.

At Hyatt, the balance of activity was weighted towards buying, rather than selling, with over USD500m of full and select-service hotels sold during 2013 at, the company said, “attractive prices” with new management or franchise agreements for each hotel. Hyatt deployed over USD1.2bn of capital into acquisitions and other investments.

Mark S. Hoplamazian, president & CEO, said that the investments were made as part of the group’s strategy in the past two years to “strategically expand our presence through investing our capital”. As a result of all the activity, the group increased net debt from about USD800m to about USD1.5bn over the course of the year.

Looking forward, Hoplamazian said that Hyatt planned to sell nine full-service hotels in North America this year. The hotels earned over USD40m of Ebitda in 2013 and Hyatt intends to retain them through long-term agreements.

The CEO added: “We also remain active in seeking out new investment opportunities to expand or enhance our presence in key markets”, although was not specific about any spending targets. He did say, having focused on convention hotels, “my guess is that we will end up spending more time and focus on the other areas, which are gateway city hotels, resorts and urban select-service hotels”.

One area where the group is planning to act is in its joint ventures, where the strategy will be to either control or exit.

Hoplamazian echoed comments made by Starwood Hotels & Resorts as to the profile of those involved in buying and selling hotels, adding that he had seen some increase in activity in Europe, which he attributed to “some activity on the part of the banks and other financing sources for existing properties”.

Both Starwood Hotels & Resorts and Hyatt were confident of maintaining revpar growth in 2014, with the former setting baseline at 5% to 7%, against 4.9% for 2013, at the low end of its outlook range of 5% to 7%, as a result of disappointing performance in Asia Pacific. Hyatt reported a 4.2% rise for the fourth quarter, with Hoplamazian commenting “We expect healthy occupancy levels in the US to support increasing strength in room prices”.

 

HA Perspective [by Katherine Doggrell]: The recent revival of the transactions market has thrown into dramatic relief the differing stances on ownership held by the global brands. While there was nothing doing they could take whichever side they felt like, but the need to maintain pipelines meant that asset-light was the predominant choice.

Now, with many sitting on reserves of cash, the option to increase the level of ownership again is there. Indeed, Starwood’s access to cash was the most repeated issue raised by analysts, who were beating the drum for returning cash to shareholders.

While the company reaffirmed that it would deploy cash to add another brand, it won’t do it for real estate. Van Paaschen was vehement, after the protracted efforts to sell the Bal Harbour development, that “all is well that ends well, but please be assured that doesn't mean we're going to do another project like this”.

The drop in earnings from Bal Harbour and from the hotels it has sold over the past year caused Starwood’s earnings to fall below estimates, pushing its shares down by over 2% following the results announcement. Clearly, if the company continues to make disposals which impact on its earnings, it will have to keep its shareholders sweet with buybacks and special dividends, both of which it has done over the past year. As the CFO said: “If you look at our track record, there's no evidence that we don't return cash back to shareholders”.

In contrast, shares at Hyatt rose to a record high, climbing by 8% on the news that its US-heavy estate was able to push rates up at its owned and leased hotels. The company made it clear that it was continuing to recycle its assets and was strengthening its position in existing jvs. The only question on the minds of analysts was at what point the company was willing to call the top of the market and focus more on selling. With warnings on bubbles popping up in the developed markets, this is an issue that most branded operators are now facing at one remove. For those still involved, the dramatic highs and lows of the real estate market are still there to be ridden.

[Additional comment by Andrew Sangster] There is a growing distinction between the biggest global majors (Marriott, IHG, Starwood, Hilton with Accor as the exception) and other big but slightly smaller operators.

For the biggest players, shareholders are demanding that the bulk of cash generated from disposals is handed back. Starwood pointed out in its conference call that USD10bn has been handed back in the past 10 years. The story at IHG and Marriott is pretty similar with Hilton looking to follow suit as well.

While Starwood made reference to the fact it continues “to regularly evaluate acquisition opportunities that could complement our business” it is hard to see a major deal like Meridien causing anything other than significant indigestion. This is especially so as shareholders are clearly hooked on the drug of cash being handed back.

The nature of the debate at Hyatt is sharply different with it spending more than twice as much as it realised through disposals. Shareholders seem prepared to accept that for Hyatt it is about ploughing cash back into the business rather than simply handing it back.

The bigger players need to shift the terms of the debate towards this approach. Accor’s split between separate owning and operating companies is certainly one to watch in how successful this will be. For the other global majors, bragging how much has been handed back is probably not the most sensible way of trying to persuade shareholders that they are capable of investing for growth.

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