Deloitte European Hotel Investment Conference

18 November 2008 – The Dorchester, London

‘2020 Vision’

It is twenty years since Frank Croston, Kay Dymock and Simon Turner first conceived the European Hotel Investment Conference.

Speaking on the eve of the 2008 conference, Turner, returning to London in his new role as President of Global Development for Starwood, told Sleeper Magazine their motivation had been “the lack of a pan-European forum,” in spite of the increases in cross-border transactions and political integration that were taking place at that time. And what a rollercoaster ride those two decades have been. Of course, the rollercoaster is on a downward trajectory at present, but if delegates needed reminding that it will eventually climb again, the evidence was there to see in the video presentation which opened the twentieth conference. Rattling through headlines from both the mainstream press and the hotel industry, the montage offered a timely reminder that the hotel sector has survived great challenges in the past, to enjoy improved growth and returns when the cycle eventually turns.

In spite of the economic clouds gathering above, the 2008 conference began jovially enough as Marvin Rust, Global Managing Partner, Hospitality, Deloitte, took to the stage in a glam rock get-up, to the strains of “Do You Wanna Be In My Gang.” In truth, such levity was always destined to be shortlived. Returning to the stage in more sombre attire, Rust opened the conference saying that “Twelve months ago the view was that the credit crunch would be over by Q1 08, and that it would be limited to the banking sector. How wrong that was.”

BURST BUBBLES AND BRUTAL CYCLES

“Since September, the economy has fallen off a cliff. This is just the start,” warned economist Roger Bootle of Capital Economics, describing the situation as “much worse than other recessions...more like a depression of three to five years of negative growth.”

He predicted that property prices would have to drop further to return to historical levels – by around 25% in the UK, 10% in the US – and believed more bank bailouts would be needed in a programme of “rolling recapitalisation”. “The penny has dropped that letting Lehman Brothers go to the wall was a mistake,” said Bootle. The big question was whether banks would continue to lend in face of the inherent contradiction between “an economic imperative to keep money pouring out,” and “a financial imperative to keep purse strings tight.”

The “worst downturn since the war” was the result of not one but two shocks: the credit crunch and a bubble in commodity prices. Whilst the credit crunch had got worse, commodity inflation had got better. But the bigger danger on the horizon was deflation. Although there were similarities with the situation in Japan in the 1990s, Bootle took a longer term historical view, pointing to the large amounts of national debt racked up after each of the World Wars of the earlier 20th century. In each case there had been “no explosion of interest rates or inflation.” On the contrary, said Bootle in conclusion: “inflation will collapse, interest rates will go very low, banks will be cautious and governments will pour money in to keep the system going.”

Barry Sternlicht, Chairman & Chief Executive of Starwood Capital, also believed this would be “a different kind of recession to 1990-91”. In an on stage interview with Alex Kyriakidis – Global Managing Partner, Tourism, Hospitality & Leisure, Deloitte – Sternlicht said this turning of the cycle would be “longer and more brutal.” There would be similar opportunities to the last downturn but Sternlicht – described in Kyriakidis’ opening comments as ‘synonymous with innovation and deal making’ – admitted he wasn’t sure of the timing. “It’s early,” he said. “The tide is going out but the world is only just adjusting, and banks are still in denial.”

LIFESTYLE STILL WORTH A LOOK?

The lifestyle sector was one which several speakers believed to be stronger than most. Nick van Marken, Global Sector Leader, Corporate Finance, Deloitte, pointed out that the lifestyle was still in vogue, referencing deals such as KOP Capital’s acquisition of a 50% stake in Stein Group and Abu Dhabi-based Mubadala Development Company’s purchase of a 50% stake in KOR Hotel Group. Peter Anscomb, Corporate Director, Head of Hotels for The Royal Bank of Scotland also believed there was growth in the lifestyle sector, as guests were “looking for something more differentiated.”

Barry Sternlicht recounted how he had created W, arguably the most successful lifestyle hotel brand to date: “I wanted a brand for me,” he explained. “Hotels had become commodities, the brands couldn’t differentiate or create loyalty. I fixed all the stuff that bothered me. With W we wanted to change the experience. We didn’t do any research. I sat around the kitchen table with my wife – who’s a copywriter – and I needed a short word. I liked ‘W’ because it was an upside-down M for Marriott.”

Professing himself to be a great fan of Ian Schrager, Sternlicht said his opportunity had been to add comfort and service to the boutique proposition. Other factors – such as “borrowing” Schrager’s club operator Rande Gerber – had also helped.  He was less complimentary about the recent development of W: “It’s now a schizophrenic brand. The international ones are nicer than the domestic product.” It had been conceived as a 3-4 star brand, not “a rival to Four Seasons,” he said, arguing that investors would not get a return on “$1m a key”. For his own part Sternlicht is coming back into the lifestyle sector with ‘One’ – a “niche eco-brand” with openings planned in Washington, Vancouver and Manhattan.

But the luxury sector is the main focus for Sternlicht at present. One of the more positive pieces of news to come out at the conference saw Sternlicht confirm that Starwood Capital had struck a deal to sell a group of hotels from The Concorde Groupe to Sheikh Mohammed Bin Issa Al Jaber’s JJW Hotels. The hotels represented “the bulk of the luxury properties” in Concorde but not the Crillon or Louvre hotels. Sternlicht expected the transaction to complete in 2009 once union approval has been agreed.  “Hopefully they will do it before the world ends,” he joked. He said of Starwood Capital’s 2005 acquisition of Taittinger Group (and its subsidiary Societe de Louvre) “I knew how hard it was in Paris. Any opportunity to get property [there], in the hardest city to build in France, had to be worth taking,” Paris was a “brutal place to get things done...I was warned, and it’s worse.” The Baccarat brand, also a part of the Taittinger deal, was a name that “instantly signifies expensive” and the Crillon name would be used to rollout a group of international hotels, although renovation of the Crillon in Paris is on hold: “If you’re getting 91% occupancy and 850 euros a night, why renovate?“ shrugged Sternlicht.

Overall though he was a firm believer in investing in bricks and mortar. “Design is your product,” said Sternlicht. “If I could only spend money on one thing it would be architecture and design.”

BUDGET A BETTER BET?

Other speakers saw the budget sector as the safest bet in the current uncertain climate. Speaking on a panel entitled “Investors: Holding Out For A Hero,” Ryan Prince, Vice Chairman, Realstar Group said the budget sector was the best place to be at present: “I wouldn’t want to be in luxury hotels where costs are harder to control.”

Speaking on the Lending Panel (subtitled ‘Where Have All The Cowboys Gone?”) Bill Waite, Head of Hotel Financing for AIB Capital Markets, said he was seeing a disconnect between perceived values on the part of buyers and sellers. The market was trying to get a feel for performance and remained nervous. But the hotel sector was still in structural growth, he said, despite the downturn, and he would lend to the budget sector. Speaking on the same panel Sandy Gumm, Chief Operating Officer, Prestbury Investment Holdings Ltd, said they would look at all projects if the price was right, but all other things being equal, budget was the best place to be. The challenge was finding debt, and investors needed courage to write big equity cheques in the current climate. Peter Anscomb sounded a note of caution, believing there was a danger of oversupply in the budget sector.

CONTROLLING COSTS

There was some disagreement between speakers on the various panels as to how far operators should go in cutting costs – a question which found its focus in the issue of bathroom amenities, following Sir David Michels’ assertion that in times of recession “the soap always gets smaller.” Marty Kandrac, Managing Director of Blackstone’s Real Estate Group, suggested swapping “Bvlgari toiletries for Neutrogena.” Peter Tyrie, Chief Executive of JJW Hotels & Resorts, on the other hand, said: “You cannot downgrade soap – it’s integral to the brand and the customers will notice.”

The line-up of “Smooth Operators” on the final panel of the day was challenged by moderator Frank Croston, Managing Director, Hamilton Hotel Partners, as to what strategies were in place prior to the downturn. “What about cost control?” he asked Kirk Kinsell, President EMEA for InterContinental Hotels Group. “Customers are looking at value, not price,” countered Kinsell. Simon Turner, President of Global Development for Starwood Hotels & Resorts, believed lessons had been learnt in the aftermath of 9/11 and the two Gulf Wars. His company now had the skillset to survive. “We know where to take the expense out and how to stimulate revenue. These things are now coming into play.” His company had begun to look seriously at ‘cost containment’ at the end of Summer 2008, devoting an hour every Tuesday to the subject. By October, it was taking up two hours of their weekly discussion, he said.

SOVEREIGN WEALTH TO THE RESCUE?

There was plenty of gallows humour to lighten the mood. “If it carries on at this rate the only banks left will be the blood bank and the sperm bank,” joked Nick van Marken, before going on to describe the situation as “an equal opportunity financial crisis” from which no sector was immune. Referring to the lack of transactions ($20bn compared to $100bn for the same period the previous year) van Marken warned that sovereign wealth funds would not necessarily come to the rescue, and if they did, they would only do deals on aggressive terms.  “They’re no pushover.” Nonetheless High Net Worth Individuals and Sovereign Wealth Funds were more likely buyers than propco’s or private equity groups. In conclusion van Marken believed trading would get worse before it got better: “Covenants will be breached,” he said. 

Perhaps the most upbeat, and certainly the most blunt, assessment of the day was that offered by Barbara Cassani, Executive Chairman of Jurys Inn Group, who implored the “good time Charlies” to “quit whining and get back to business.” She argued, “If you have a good model and you know how to make money, you’ll be fine. Sit back and think about where value lies. Not flipping – that’s fake value – but real value.” As Sir David Michels said in his introduction, things might be bad but to his knowledge “not one 100+ bed hotel has ever closed its doors”. The ownership and branding may change but the hotels themselves do not go out of business. Having said that, “RevPAR has not changed in 40+ years,” according to Michels. “The only way to make money from the hotel business is through buying and selling.”

www.deloitte.co.uk/hotelinvestmentconference