• Asset shake-out at Starwood, Rezidor

Starwood Hotels & Resorts and Rezidor Hotel Group used their first quarter results to underline their commitment to asset-light growth.
Starwood Hotels & Resorts spoke of a “deeper and broader market in terms of hotel asset sales”, while Rezidor’s board agreed funding to extend the group’s investment in leases, as it pursues asset management alongside expansion through management and franchise contracts.
At Starwood Hotels & Resorts, president & CEO Frits van Paasschen said that the company had more hotels on the market now “than we’ve had at in any time since the crisis, and that’s in response to what we see to be a deeper and broader market in terms of hotel asset sales, as well as strong performance of our properties”.
CFO Vasant Prabhu added: “We continue to believe the market for hotel sales is becoming deeper with a larger pool of buyers and more buyers looking for portfolio deals. We have a significant number of assets on the market in North America, Europe and Asia. Our intention is to get transactions completed on acceptable terms as fast as we can.”
Globally, the profile of buyers remains varied. Prabhu said that, in the US, the company was seeing much more private equity money “and, therefore, a greater interest in portfolio sales. So we would be more interested in now looking at portfolio sales to private equity or other institutional buyers in the US”. Whereas, he said, in Europe, the company has more trophy assets, which are more attractive to the private ultra-high-net-worth buyers.
Looking back at the quarter’s trading, the CEO described the global economy generally and the lodging recovery in particular as continuing to “bounce along with once again some markets doing better and others doing worse”.
Worldwide revpar was up over 6% – with North America up 7%, driven by strong corporate demand, while Europe was up 2.5%, described by Prabhu as “stable but sluggish”. Without better rate gains in the region, the company forecast that growth would stay in the 2% to 4% range experienced for the past few years.
China saw a jump in revpar, up nearly 12%, much of which was attributed to the 4,000-room Sheraton Macao, which ran at nearly 90% occupancy. Taking out the Sheraton Macao, revpar in the country was up nearly 6% – a figure reflected across Asia Pacific.
Van Paasschen also attributed the growth to the investment made in the country by the company, commenting: “This is a result of our efforts to leverage SPG [Starwood Preferred Guest, the group’s loyalty programme] and our Chinese language web and mobile channels, as well as the strength of our brands, our hotels and our teams. Our business is even more Chinese than ever. At this point, well over 70% of our occupancy are PRC nationals.”
He warned that China remained a relatively low occupancy market, with growth to be driven more by occupancy than rising rates. He added: “Wages have also been rising faster for some time now, so we’re adapting our staffing levels to maintain our margins”.
On the development front, the company said that tighter liquidity had tempered the pace of real estate development, with many of its new hotels slated for Tier 2 and Tier 3 markets and part of mixed-use developments. As a result, van Paasschen said that the time it took between signing and opening new hotels had become longer.
He concluded: “Even taking this into account, we believe there’s more risk in being timid in China and missing out on future growth.”
Looking forward, the prospect of widespread elections, particularly in the emerging markets, could lead to “further gyrations” in financial markets, van Paasschen said, adding “our worldwide presence makes us more susceptible to these uncertainties”. Nonetheless, he maintained the position that long-term, these markets represented “a huge opportunity” and the company raised its full year Ebitda outlook range “modestly” to USD1.21bn to USD1.23bn.
At Rezidor, the company was also focusing its future growth on the emerging markets, using its results to announce that, with Carlson, it had the strongest pipeline in Africa, according to STR Global. Wolfgang Neumann, president & CEO, said: “Africa is so much on our radar, with the leading pipeline at 30 hotels – led by Radisson Blu with 17 hotels in the next two years – we will be present in 22 countries on that promising continent.
“Africa offers excellent opportunities due to its huge natural resources and workforces, improved infrastructure, and a growing middle class. However, the continent still suffers from an imbalance between supply and demand for internationally branded hotels with world-class standards and services, and we want to change that.”
Helping the company’s expansion in the emerging markets was the backing by the group’s board of a rights issue of up to around EUR60m. Neumann said: “The capital raised from the rights issue will allow Rezidor to capture additional opportunities within asset management, continue to invest in the leased hotels at an accelerated rate and further drive focused growth in emerging markets.”
The group continues to pursue expansion through asset-light structures, while exiting unprofitable leases. Of the company’s new signings, 49% were in the emerging markets, 100% fee-based and 91% under the Radisson Blu brand.
The leased business was hit by the strong Euro and one leased property being closed for renovations, pulling down revenue by EUR3.3m. Fee revenue was unchanged compared to last year as newly opened hotels and growth in like-for-like was offset by hotel exits and foreign exchange.
CFO Knut Kleiven told analysts: “In some cases we changed from a higher variable lease to a low fixed lease and, as Q1 has low revenue in the first place, we do not see much benefit. That will come in Q2,3,4. We were also hit in some locations in Germany. The positive impact in the UK did not counter the negative impact in Continental Europe. We expect better leased numbers going forward.”
As at Starwood Hotels & Resorts, Neumann described the economic and political environment as “uncertain in some markets”, but said that forward bookings data was encouraging, with the group confident that it would deliver on its Route 2015 targets, which aim to increase the group’s Ebitda margin by 6% to 8% by the year 2015.
Like-for-like revpar was up 5%, improvement which was rate driven, in contrast to the first quarter last year, and continuing the trend from the previous two quarters. All four geographic areas were ahead of last year, with Neumann adding “if you look at the long-term trend, occupancy is back at levels seen at the last peak”.
Earlier this year Rezidor announced the launch of two new brands with Carlson, which, he said, would “strengthen our brand architecture”. Quorvus Collection will be a collection of five-star hotels replacing the “more prescriptive” agreements with Missoni and Regent, with an announcement on which hotels will be first to open due this month.
Radisson Red is aimed at the Millennial travellers, with Neumann commenting that “it’s important to reflect that this generation has very different expectations of a hotel. The competitive set is Aloft, Indigo and Hyatt Place, where we see opportunities in Europe where there brands are strong in America, but have less traction in Europe”.

HA Perspective: [by Katherine Doggrell]: When the market’s a bit rubbish and just persuading travellers to bring their weary heads through the door at all is an effort, worrying about whether now is a good time to sell is a moot point. A buoyant market brings with it all sorts of decision-making responsibilities and the problem with decisions is that not everybody likes them.
At Starwood, van Paasschen attributed the group’s shares underperforming in the first quarter after a “terrific” 2013, as possibly the result of global uncertainty. The analysts’ Q&A at the end of the call revealed that it was more the uncertainty about the company which was confusing the market. With the group announcing an increase in asset sales, the market wants to see share buybacks, general bolstering of positions and possible a special divided.
The special dividend it got, with a return of approximately USD500m heralding from the Bal Harbour development.
Van Paasschen went on to defend himself with the comment: “The reason for our underperformance in the first quarter, if I were to hazard a guess, had more to do with the emerging market selloff than lack of clarity around buybacks. I don’t think that our buyback strategy in fact got suddenly less clear in the first quarter.”
The CEO emphasised that the group wanted to play it safe with its balance sheet and pointed out that it had invested in refurbishments and in technology such as that behind its loyalty programme. Prabhu added: “In fact we’ve scaled back where we can on our infrastructure in the mature markets, but there’s absolutely no holding back on investment in where we see long-term growth”.
Talking to Hotel Analyst, Ryan Meliker, senior analyst at MLV & Co, said: “The challenge that Starwood has is that not one of these hotel stocks is cheap”. Starwood must prove its worth and, when it is playing the long game, with ROIC building so that share prices rise over a five to 10 year period, not a six month one, it has to sell this to investors.
Behind this confusion is the belief on the part of investors that hotels should own their assets. Currently, Meliker said, asset-light companies were “getting away with it” as revpar rises but that really, “you want to own – because then you have more operating leverage”.
Having strongly performing hotels is good for the owner and good for the owner-who-wants-to-sell but as to whether Starwood’s drive to sell is coming at the peak of the market time will tell. “The key driver of value is access to capital,” Meliker said. “If investors can get 90% loan-to-value at 3%, there will be deals. What we’re seeing are lending percentages up to 90% including mezzanine. Private equity is willing to take that on – public companies can’t”.
And, he added, for lenders, “with interest rates low, they will look for yield and they will be willing to push out the risk curve”.
So far, so 2007. A few jitters and Starwood’s slow and steady wins the race policy may yet have the investors applauding.
At Rezidor the picture was also restrained. Detail on the estimated cost of exiting the eight to 10 major loss-making leased hotels remained scant and the short-term pain for expected long-term gain remains an unknown factor. The company is continuing to play it cautious with a dash of risk – avoiding putting itself into debt to fund its lease exits, joining the current trends for Millennials/luxury collections and keeping it asset-light in Africa.
The company has been in Africa longer than most and built up important relationships there, but in Africa, the hotel doesn’t count until the foundation’s down and the signage has arrived and even then I’d wait until the breakfast buffet is laid. The group may yet find that if it wants to keep its envious position, it make have to make like Marriott, take that risk and buy some bricks.

Share →