A strong US market helped hotel owners Hyatt and Host to better second quarter results. Higher occupancies, averaging over 80% in US markets, allowing rates to be pushed up. Host saw rates improve 4% in the quarter, pushing up revpar 5.1%.
But outside the US, patchy market performances made for a less satisfactory set of results at internationally based Millennium & Copthorne. And European additions also marked down Hyatt’s home market strength.
At Hyatt, a strong second quarter saw systemwide revpar increase 6.1% on a constant dollar basis, while ebitda was up 9%. Transient and group bookings improved, and already Hyatt has 60% of group business for next year booked.
At Hyatt, the addition of four trophy French hotels last year is not paying off handsomely in the short term. No incentive fees were paid in the early part of the year, blamed on seasonality of business, while CEO Mark Hoplamazian admitted “we currently expect to pay approx EUR15m in guarantee payments in 2014.” However, he added: “We continue to believe that the addition of these four hotels will be great for our brand representation in Europe over the long term.”
Elsewhere, hotels in Seoul and Bishkek in Central Asia left red ink on the balance sheet. In Seoul, income was hit by new supply and a rival hotel coming back into the market after renovation; while in Bishkek, occupancy has been hit by the closure of a local US airbase. Business in Bishkek had, said chief financial officer Gebhard Rainer “fallen off the edge” and would take some time to rebuild.
Hyatt is keen to recycle capital into new projects, with landlords being sought. “We took nine full service hotels to market in the first quarter,” said Hoplamazian. While one has been withdrawn Hyatt has now added hoisted for sale boards over a further 42 of its 44 select service hotels. “Given the current market environment for these types of hotels, we think now is a good time to explore options.” Hoplamazian is expecting bids from listed and unlisted Reits, and private equity players.
The cash will be invested in hotel properties in four key sectors: gateway cities, resorts, urban select service, and convention hotels. Hoplamazian said the Park Hyatt New York, into which Hyatt has committed USD390m ahead of an August opening, was a typical example. An original plan to acquire a two thirds interest has expanded into an outright purchase, he said.
The Park Hyatt brand in particular is doing well, insisted Hoplamazian. “The brand, the cachet and the performance continues to track very well. Vienna opened very strong with lots of great coverage and also guest response.” He also noted that the Park Hyatt in Tokyo, which has been open 20 years, is still performing strongly.
Hoplamazian said despite the number of properties up for sale, the strategy had not changed. “Our main belief is that we can generate superior long-term returns by growing the business.” Alongside recycling cash into improving the quality of the portfolio, there would be an ongoing return of capital to shareholders; over USD100m of shares were repurchased during the second quarter. Further authorisation for more than USD300m is currently in place.
Looking ahead, Hoplamazian said the best growth opportunities are in select service. He singled out China, where “we have a lot of interest in our select service brands” and also an improving outlook in India, following a hiatus ahead of recent elections. Meanwhile, in the home market, “select service opportunities continue to be the primary deal drivers”.
Host, too, enjoyed the benefits of improving occupancy and rate in the US, with ebitda ahead of expectations at USD411m for the quarter as occupancy hit 81% and rate increases of 4% were achieved; as a result, revpar improved 5.1%.
Host’s overseas hotels delivered a revpar uplift of more than 16% in the second quarter. The JW Marriott in soccer World Cup venue Rio enjoyed revpar up 182%, while the JW Marriott Mexico City came back on stream after refurbishment.
In Europe, Host has seen regional and resort markets outperforming urban centres in Spain and the UK. “I think a number of Europeans have been travelling inside Europe instead of outside of Europe this spring,” said president Ed Walter. “So as a result, the Spanish resorts did quite well and outperformed the Spanish urban centres.”
Across the hotels, group demand was strongly up, feeding through into increased banquet, food and beverage spending.
Host does have active acquisitions promised for later in the year, but nothing that Walter was yet happy to reveal. “We’d love to be an investor, but we’re disciplined about this,” he said. Higher end select service as well as full service hotels are in Host’s sights, with assets still overall trading at a discount to replacement costs: “I would generally say that in most markets, if you’re looking at full service product, it is still better to be a buyer than a developer,” said Walter.
But with the rising market, analysts pressed on how Host might find value in acquisitions. Opportunities would require work to extract value, such as property upgrading, said Walter. “Some of the opportunities that we are looking at in other places involve a change in operator or a change in brand.”
Opportunities are appearing in Europe, due to bank and fund liquidations, and “we are certainly looking at a couple of opportunities there. I will be disappointed if we don’t get some transactions done in Europe in the second half of the year,” though in contrast an acquisition in Asia is unlikely.
Also by the year end, around USD200m of disposals are expected to complete. “There are a number of factors that keep us optimistic about the remainder of the year,” said Walter. Apart from improving US economic indicators, supply growth outside New York remains constrained. Occupancy is already above peak 2007 levels, giving confidence about further rate rises.
In Europe, Host’s joint venture hotels saw revpar up just 0.6% in the quarter, with performance helped by a strong increase in food and beverage revenues. “We expect the second half revpar to significantly outperform the first half of the year,” said chief financial officer Greg Larson.
Host has cut borrowing costs both in the US on its main facilities, and in Europe where it has reduced interest costs on loans against its Brussels properties to 2%, secured until 2019.
At Millennium & Copthorne, problems in a number of the company’s international markets conspired to deliver a lacklustre set of results – which were exacerbated by the strength of the pound. “Group performance was disappointing in the first half of 2014,” summarised chairman Kwek Leng Beng. “This was due to a broad range of factors including geopolitical events unsettling the hospitality sector – especially in Asia – and the rapid appreciation of our reporting currency, the pound sterling. Management is adopting a more cautious approach and increasing its attention to cost control in uncertain markets. It is too early to predict results for the full year, but the group is cautiously optimistic that with appropriate actions, performance will meet management expectations.”
New acquisitions helped flatter regional first half performances in Europe and the US. The Chelsea Harbour hotel in London lifted an otherwise lacklustre European portfolio, which would otherwise have reported a 0.6% revpar fall in London. In continental Europe, falling rates at Paris hotels contributed to a 5.6% fall in revpar. In the US, it was the addition of results from the Novotel in New York, acquired in June 2014, that helped lift performance, along with two other exceptional items: without these, the revpar rise was just 1.9%.
In common with Host, Millennium & Copthorne saw US hotels return mixed performances.
In Asia, M&C faced tough conditions, with Singapore continuing to be a tough market to operate in, with revpar down 17.1% in the group’s reporting currency.
HA Perspective [by Chris Bown]: As M&C’s results demonstrate, taking hotels out of commission for major works can deliver a substantial hit to the balance sheet in the short to medium term; though inevitably, they do deliver a notably better performance, once transformed. And a small presence in many markets can, at times, mean exposure to a wide range of headwinds.
Any revamped hotel needs to relaunch into a local market that is still healthy. And it is this issue which is now focusing the minds of US commentators. There, the market is growing strongly and hitting a sweet spot with high occupancies, no new supply immediately in view – and the chance to ramp up rates and reduce third party commissions. How long will it last? Maybe not much more than two years, some are predicting, in which case there is little appetite for taking hotels out of commission for a lengthy makeover.
Hence Host’s preference for opportunities where a quick reflag can transform a property’s income. Now is not the time for lengthy reconstruction – at least, in the US market. Host is also looking more to Europe, where it sees greater opportunities to pick up major hotel assets, and the cycle is not so far advanced.
Hyatt, meanwhile, is looking for benign landlord investors in order to recycle its cash. The returns from the portfolio sale look set to go into a range of projects, but if many of them are as expensive as the Park Hyatt New York, then the number of new hotels it can actually fund may be small.