Time to buy into luxury hotels?
Posted on 05 May 2009 with no comments from readers
The Arabian Hotel Investment Conference closed yesterday with delegates largely in survival mode, and disposals more the talk of the town rather than acquisitions.
Prince Alwaleed has put the London Savoy up for sale, and Orient-Express wants to sell five or six properties to get its borrowings down. Nakheel Hotels CEO Joe Sita said his group was not in the market for new investments, a change of direction from high profile acquisitions.
And yet for the bolder investor with cash this is probably the right time to buy. The luxury hotel sector is flat on its back this year with occupancy and rates sharply down, and nobody too sure when a recovery might come. Hotels are therefore selling cheaply.
Opportunity knocks
Take the Orient-Express. This diversified group has just raised $150 million from a share sale in New York, bringing its finances back from the brink. Yet its $7 share price is down from almost $50 over the past year, and net asset value is three times higher than its market capitalization.
This sort of equity opportunity only occurs in the very worst financial crises, and of course you have to take a view on whether things might get worse before they get better. Orient-Express shares have been as low as $2.64.
Not everyone could afford to run off and buy the Savoy from Prince Alwaleed, but stock in luxury hotel groups is going cheap at current prices.
The biggest risk, apart from waiting for a recovery, is that you choose to buy a group that does not make it through the recession as a going concern.
Due diligence
A successful refinancing is usually a good sign as that will mean a rigorous due diligence has been past during a tough time. Look also for successful cost cutting. This is not always easy for free spending luxury hotels but it remains the only way to profits when revenues are falling.
Another useful indication of survival ability is innovation. Is the group using its brand strategy cleverly in a recession? Can it maintain some expansion even in a downturn?
Of course, it goes without saying that service standards must not suffer in a recession, and that the best staff absolutely must be retained. For no recession lasts forever and a luxury hotel group needs to be upwardly scaleable, even if survival is the name of the game right now.
