Vision CEO, Clive Hillier Contributes to Property Week Article

Hotels need rigorous asset management to offset falling revenues.

Sir Rocco Forte must have breathed a sigh of relief this week after he managed to persuade his lender, HBOS, part of Lloyds Banking Group, to extend his £300m loan facility.

Hotels have been badly affected by the recession (see table) and Forte’s Rocco Forte Collection portfolio of 13 luxury hotels has not been immune.

Others have not been so lucky. Brentwood Hotels went into administration at the end of last year, causing difficulties for owner Pinton Estates (recovery, 02.10.09).

For operators, landlords and banks, managing the debt load and driving the performance of a highly specialised operating business is vital to keeping their heads above water.

Vision Asset Hospitality Management, which has 180 hotels under management (see box), is one operator that has a clear understanding of costs.

Clive Hillier (pictured, below), CEO and co-founder of Vision, says: “There was a 12% year-on-year revenue decline in the UK hotel sector [last year] and the key is for operators to takes costs out of the business. In every hotel, an investor’s income stream is dependent on the operating performance.”

Vision receives monthly balance sheet data from the hotels under its management and benchmarks every line of their profit-and-loss accounts. It uses this information to inform and assist investors and lenders in distressed situations.

“We get 180 hotel accounts every month on our desk. Looking at the balance sheets enables us to know what is going on in their business,” says Hillier. “We are now looking at helping hotel investors manage situations and it is very fertile ground.”

He says investors must ensure they have the right relationship with their operator. This can be tricky as operators have not signed on for the risks of property ownership and asking them to forgo or lower fees or waive termination fees could devalue their company as a whole.

Hillier says operators must be incentivised to cut costs, while investors need to understand the business and always seek maximum cashflow.

A basic understanding of an operator’s model reveals that 70% of a hotel profit is from the room rate and 30% from food and beverage services.

Luckily for many hotel owners, particularly in London, room occupancy rates held up well last year, but corporate trade was affected by the recession.

“You can’t stimulate corporate business trade because, if a businessman is not going to Leeds for work, he is simply not going to Leeds, whatever the room rate,” he says. “The procurement divisions in corporate businesses are very important to hotels now because they control where people stay.”

However, Hillier adds: “In general, the one joy of the hotel industry is you never have a long-term vacancy [like an office building might have] — there is always cash coming out of the business.” This is useful for an investor with a debt to service.

“There has been, on average, a 20% cashflow drop [last year],” says Hillier. “So, for anyone who bought a hotel at the peak of the market in the last three to four years with 80% debt, once you get that cashflow drop, there is stress. We have been helping investors drive cash through the business and renegotiate debt.”

There were large hotel sales in the last quarter of 2009, such as the Stafford in London’s Mayfair, which was bought by Britannia Hospitality for £77.5m. The price paid reflects a yield 4%-5%, which equates to £140,000 a room.

However, Hillier says none of the banks seem to have an appetite for distressed sales. “There have not been as many sales as people predicted and the vast majority of hotel deals will get restructured. We won’t see many coming to the market, unless there are political pressures in the banks,” says Hillier. “The banks are where the power is now.”

Article taken from Property Week 29.1.10

Written by Deirdre Hipwell, Deputy News Editor

http://www.propertyweek.com/story.asp?sectioncode=36&storycode=3157191&c=1