Spanish hotel group NH has celebrated the completion of the first year in its five year recovery plan, by purchasing a Colombian hotel group.
The deal to buy South American chain Hoteles Royal will give NH 15 hotels in Colombia, four in Chile and one in Ecuador. Of these, three are owned properties, 12 run under long term variable leases and five through management contracts. Immediately, it catapults NH to a market leadership position in Bogota and a leading position in Santiago de Chile, both locations where NH was already present and had targeted for growth.
The deal will also impact Radisson, which will now lose six of the Colombian hotels, until now marketed under the Radisson brand. Radisson has agreed to take back its franchise in South America that was previously with Hoteles Royal, while the six properties will rebrand under NH Hotels and NH Collection.
NH will acquire an immediate 80.77% stake and has undertaken to subsequently purchase the outstanding 19.23% of the business in a deal totalling EUR87.1m. The funds for the acquisition will come in part from the recent sale of the NH Bogota Parque 93 hotel in Colombia, which netted EUR21.5m, plus some of the proceeds from the Sotogrande sale last year – effectively meaning there will be no need to increase debt.
“This acquisition delivers growth in Latin America, one of the core objectives contemplated in our business plan, without implying any deviation whatsoever from our stated commitments,” said CEO González Tejera. “We are certain that the process of integrating the Hoteles Royal properties into the NH portfolio will be natural and easy given the product and positioning match. We are confident that the integration will be successfully completed during the course of this year.”
Alongside 20 operational hotels, Hoteles Royal delivers two development plots and a hotel in Panama under construction. Most of the group’s properties are under variable leases and management contracts, while the look and feel of the properties is a good fit with NH, requiring little repositioning spend; May is the planned date for the rebranding of the properties. Payments for the acquisition are staged through 2015 and 2017, easing NH’s cashflow.
Aside from the South American acquisition, NH has produced a year end report after the first of its planned five years of recovery. The plans aim to turn around NH and give its lenders and investors comfort that a revitalised group can pay down its substantial debts and start delivering a positive return once more.
The mood is positive, with revpar, occupancy rates and revenues all moving in an upward direction. The target for asset disposals in 2014 was exceeded with a total EUR244m of deals, of which the sale of the Sotogrande resort delivered EUR178m. Also during 2014, the group acquired Banca Intesa’s 44.5% stake in NH Italy, giving it control of its activities there.
NH starts from a position of fifth largest hotel brand in Europe. While a small number of its 363 hotels (excluding the Royal acquisition) are in the Americas, it has a quarter of its business in Spain, a further quarter in Benelux, 29% in eastern Europe and 18% in Italy.
The push, under the NH, NH Collection, nhow and Hesperia brands, is on making the group the preferred choice for travellers heading to European city centres. NH has over 2,000 rooms in Milan, Berlin and Amsterdam, and more than 1,000 in Rome, Frankfurt, Munich and Brussels.
“Today NH is a group in the midst of transformation with the ambition to become the top choice in the urban hotel segment on product and service,” said Tejera. “In this first year we have tackled major refurbishments and taken strategic decisions which are enabling us to make our hotels more profitable, improve our positioning and generate better guest feedback, while at the same time paying off corporate debt.”
The four star NH properties are declining in importance, as hotels are repositioned into the upper upscale NH Collection and nhow brands; the aim is that the upscale proportion of the portfolio will slip from 85% in 2013 to 70% in 2018, as the upper upscale properties expand from just 1% of the portfolio in 2013, to 20% by 2018.
The substantial investments already made in upgrading and revamping hotels appears to be paying off, as dated interiors are replaced with a more modern look. The group’s TripAdvisor percentile ranking has moved from 65% in 2013 to 71% in 2014, with consistent quarter on quarter improvements in guest rankings. Individual hotels subject to refurbishment have seen dramatic changes in fortunes. The NH Collection Eurobuilding in Madrid, for example, has moved from 153rd to 14th in TripAdvisor city rankings since its refurbishment, and the brand’s Venice hotel from 164th to 26th. Revpar in the last quarter averaged a 15.8% improvement, too.
Market awareness has also improved, with brand awareness scores up in Germany, Italy and Holland, while research shows an improved likelihood that a customer will recommend. Selective investments in marketing have included signing more of the group’s high end hotels up under the Preferred Hotel Group’s marketing umbrella. A new website, launched in November 2014, is already delivering substantially better booking conversions, with the “look to book” ratio up by at least 30%. Currently, NH is achieving 49.1% of its sales direct, and the aim is to take this up to 60% by 2018. Agencies currently provide 22.3% of the indirect sales, with OTAs delivering 17.1% last year.
NH has also got its head around its loyalty programme, with 25% of its now more than 4 million members signed up in the last year. Playing the loyalty game seriously is also delivering results, with now 30% of revenues generated from NH Rewards members, up from 21%.
Tejera promised that the current year will see continued investment, yet many of the five year plan’s initiatives should start to yield visible results. Around EUR90-100m will be spent on capital expenditure to reposition the hotel properties, with many converting to the NH Collection brand, and around 80% of them will be completed by the year end. New front and back end systems will be put into the hotels, along with the implementation of the new pricing strategy.
The result of these actions should be a 5-7% growth in revpar, and a 30% increase in ebitda.
NH remains under pressure to reduce its debt load over the medium term, with substantial paydowns due in 2018 and 2019. Last year, asset sales were ahead of target, helped by the deal to sell the Sotogrande development and the sale of the Amsterdam Center hotel, with EUR244m in total being recovered. The current year will see around EUR70m of debt paid down, while there is EUR21m of revolving credit to be renewed through the year.
This year should see a further 13-15 hotels removed from the portfolio, after 17 exited last year. The major portfolio sales have been achieved, so NH is expecting less from disposals in the coming year, and around EUR30m overall in the next two years.
Aside from the Royal acquisition, there are plans to continue to judiciously grow the NH portfolio, strengthening its European presence. Six hotels were signed last year while a further 10 sites are in negotiation. All of the additions will be asset light, the majority under management contracts. The first steps are also under way to leverage the Chinese connection of major shareholder HNA. In September, the pair each committed to fund a prototype hotel there under the NH brand, and will look to build a wider hotel presence in China.
Overall revenues during 2014 were up 3.8% at constant currency. The home Spanish market turned positive, delivering an overall result of revpar up 4.7 in the year. The only weak spot in the portfolio was Benelux, where a weak third quarter reduced results and revpar advanced just 1.8% in the year. The group’s Latin American properties were star performers, delivering a 27.2% revpar increase in the year. The only concern from this region was a drop in occupancy in the last quarter, albeit room rates held up.
Operating costs increased due to expenditure on more personnel in the key areas of web, revenue management and marketing, but a reduction of EUR10.6m on rents was achieved, due to renegotiations and cancellations.
HA Perspective [by Chris Bown]: So far so good for NH, with good results from hotels that have had a makeover, and been repositioned. Revpar up and ADR is running ahead of occupancy growth. Shareholder positions have stabilised and, apart from the expectation that Santander will sell its stake during the year, investors look to be in for the medium term.
Visuals in the presentation show before and after images of revamped hotel rooms. It is no wonder that NH is getting better rates and satisfaction rankings from its upgraded hotels, as the pictures suggest their hotels had been overdue a refit for many, many years.
Analysts suggest they would rather management concentrate on fixing NH at home, than expend their energies expanding overseas. This year is seen as the most important one of the five year plan, with substantial capex planned in hotel refurbishments; by the end of 2015, around 80% of the planned expenditure will have been deployed. That will need to show a return in improved rates and occupancy.
Sonia Ruiz de Garibay of Beka Finance said she would have preferred NH to wait before looking to international expansion; the flip side is, at least the Royal acquisition is not expensive, will be paid in two tranches to ease cashflow, and should be ebitda positive. It also taps into South American markets, which look to be delivering strongly now, and should benefit from the positive association of the 2016 Olympics which, while based in Brazil, will effectively showcase the continent.
Hoteles Royal’s introduction means the American portion of the NH portfolio moves from being 6% of the total, to 11%. In other words, it still leaves NH as essentially dependent on European market recovery, for a continued improvement in its fortunes. In this situation it is not unique, but with substantial debt positions to cover two and three years from now, the NH management will be hoping more than most, that European leaders nurture economic growth and manage the political hiccups of the Eurozone carefully.
One bonus for the rest of the hotel world is likely to be greater transparency about the hotel markets of South America. The move to buy Royal means NH now has substantial presence in a number of countries and key city markets, and its duty to deliver regular market updates will give a better flavour for how this dynamic region is progressing, quarter by quarter.