While the US market is powering ahead, European markets are delivering a mixed bag of experiences for three major hotel owner groups.
Hyatt is haemorraging cash on its four luxury French hotels, where performance is falling way short of that envisaged. Host is looking to further disposals in France and the UK, where it sees asset prices peaking, while buying into upside in the German market. And Millennium & Copthorne is buying into Rome, as it sees mainland European revpar start to pick up.
At Hyatt, CEO Mark Hoplamazian delivered the bad news about the four French hotels with third quarter results: “We currently expect to pay approximately €15 million to €20 million in guarantee payments in 2014. We expect that the near-term will continue to be challenging for these hotels. The hotels continue to underperform versus our original expectations, due in part to market conditions in France.”
The four hotels – two in Paris, one in Nice and the Martinez in Cannes – were taken over by Hyatt in April 2013, as Starwood Capital sold them to new owner Qatar Holding. At the time, Hyatt saw the opportunity to more than double its presence in the French market, with the intention to rebrand the properties under Grand Hyatt, Hyatt Regency and Andaz flags.
Hoplamazian said next year would be not better, but worse: “Additionally, we are working with the hotels’ ownership group to finalize renovation plans, which we anticipate will create some short-term negative performance impact due to rooms being out of operation.”
“Further, the guarantee structure provides for increases in the annual hurdles over the first four years of the seven-year guarantee period that began in May 2013. As a result, we expect our guarantee payment to be higher in 2015, possibly in the range of EUR30 million to EUR35 million, depending on the time of the renovations.”
Host, which has considerable exposure in Europe through a minority interest in a joint venture, is looking to be a net seller in France. Chief executive Ed Walter noted asset pricing in some markets is too strong: “I think that both Paris and London, while they are spectacular long-term markets, right now capital is aggressively seeking assets in those markets, that’s one of the reason why we sold the Sheraton Skyline, and the pricing levels there are such that we would not view that as a good allocation of capital in the near term.”
In contrast, the company’s joint venture recently purchased the Grand Hotel in Berlin, paying EUR81m for a 90% stake in the 394 room property. “One of the reasons why we are buying in Germany is we generally think that Germany will have better growth than the rest of Europe, and we think the pricing levels make more sense relative to opportunities we might see elsewhere.”
Also buying in Europe is M&C, which recently purchased the five star, 87 room Grand Hotel Palace Rome, its first Italian property.
Both Host and M&C see European markets improving. Host reported a 4.1% revpar improvement from its co-invested portfolio of 18 European hotels, while at M&C the last quarter saw a 3.7% uplift in Rest of Europe – a figure that excludes the company’s London properties and notably the high performing Chelsea Harbour hotel, a recent addition.
“Our newly acquired hotels contributed to revenue and profit in the third quarter, together with the return of refurbished rooms to inventory and stronger trading in regional US and New Zealand,” said chairman Kwek Leng Beng. “Together, these factors helped to improve performance for the group as a whole despite challenges and economic uncertainties in some of our key markets and the continuing negative impact on reported currency results of a strong pound sterling.”
Having sold out of two major portfolios in recent months, Hyatt’s Hoplamazian hinted at some of the options for growth, specifically in the select service brands. “We have believed and do continue to believe that getting to some critical mass and coverage is really important. This next leg in our development plan is to really focus on urban as a huge driver of brand performance over time.”
He was also asked whether there were plans to add further brands in limited and select service. “As to acquisition of other brands, I would say it’s not only something that we would consider, it’s something that we’ve actually done.”
Host also saw its Latin American hotels performing well, but is for now focused on expanding its portfolio in the home US market, making judicious acquisitions where possible. There is also a move away from simply adding more mainstream brand flags, as indicated by the USD58m acquisition of the B2 Miami Downtown hotel. Walter said this was “part of our broader strategic initiative to increase our exposure to third party operators and/or independent or soft brands, in order to complement our existing portfolio of high quality brand managed assets in our target markets. We intend to convert this hotel to a true independent brand.”
Additionally, he noted: ”We currently have seven hotels managed by third party operators and we’re exploring opportunities for conversion to independent or soft brands with another three hotels we currently own.”
Walter also provided details of Host’s “deep dives” – a management initiative seeking to share best practice that has transformed profits at several hotels. Restructuring of the food and beverage operations at the Sheraton Warsaw had sharpened margins, while in Rome a more efficient staffing set-up would deliver a EUR1.4m annual saving.
A further indication that the European markets are on the rebound also came in the revelation from M&C that, in the first three weeks of the current quarter, group revpar is already up 6.8%. London is up 3.3%, New York by 4.5%, but the market in Singapore is still suffering with a fall of 4.2%.
HA Perspective [by Chris Bown]: In its desire to break into the European market by grabbing the Louvre luxury quartet of hotels, Hyatt looks to have agreed to terms that have left its Qatari landlords the clear winners in the short term. The sums payable are substantial, and the only way out is to deliver more customers, who will pay higher rates.
While Hoplamazian’s talk of critical mass was referring to his lower price brands in US markets, perhaps that is part of Hyatt’s current problem in Europe. It has just seven hotels in France, and little mass market exposure on the continent.
Host, meantime, must be hoping that recent weaker economic figures from Germany are one-offs, and that the recovery there will continue. It sees greater opportunities in the US markets, but interestingly is now looking to diversify away from the mainstream big brand flags – perhaps something Marriott should note.
European revpar figures are beginning to progress – falteringly – into a positive upturn. That’s good news for all the owners and operators, although it will be a long time before Hyatt is in a mood to celebrate.