Event review: BHA Hospitality & Tourism Summit 2014

John Wagner Weldon Mather Uploaded

Over 650 delegates convened on the Novotel in Hammersmith recently for the BHA Summit.  Attendees heard Ufi Ibrahim, CEO of BHA, announce the new Tourism Council to be chaired jointly by Helen Grant, minister of state for sport, tourism and equalities; Matthew Hancock, minister of state for skills and enterprise and Simon Vincent, president EMEA. The council intends to address the skills gap in the market and make the industry more attractive to the large cohort unemployed 16-24 year olds (19.6%).

My main interest was in the panel discussion "Accelerating Investment", looking at smart ways to bring in money and plan for future growth. There is no doubt that residential property prices in London are approaching what some are calling "bubble prices" and hotel prices, even hotels, in the regions are rapidly catching up with London, with yields falling and price per key (room) approaching boom time levels.

Jonathan Hubbard chaired the session (MD - Head of Investor Services EMEA, JLL) and reported that UK hotel sales in 2013 amounted to £3 billion with a 20 per cent growth forecast in 2014. Year to date over £1.5 billion has already transacted in 2014 (excluding Project Rock £1 billion IBRC, former Anglo Irish Bank sale) and prospects for Q3&4 are looking very frothy indeed with hotel regional sales gaining traction as the paucity of London hotels for sales becomes more pronounced.

Other panellists included Eric Bellquist (partner, Hutton Collins); Heiko Figge, head of hotels & leisure, Moorfield Group; Ron Pearson (partner, Bromark Capital LLP) and Mike Saul, managing director hospitality & leisure, Barclays. All contributors noted that hotels as an asset class have come back into vogue and are highly attractive due to the returns now available.

Looking across the capital stack, the chairman was especially interested in what are the issues facing industry players in terms of sourcing equity and senior debt. Securing mezzanine funding is somewhat more challenging due to preferential payment terms being demanded by some mezz providers. Mike Saul noted that the market is very receptive to hospitality and leisure funding but he stated the obvious that any business plan depends mostly on the quality of the management team. 

Funding levels are almost back on par with 2007 levels according to Ron Pearson and that there is an availability of debt "all year round" in reference to "evergreen capital" as they say in lending circles. In fact there is so much money in the USA due to quantitative easing (QE) that they are actively looking for safe havens for this "wall of money" hence large PE and investment funds are scouring Europe for distressed or sub priced assets in which to invest this cash.

Heiko Figge remarked that 15 months of sustained RevPAR growth has seen a surge in sector profitability however he questioned "does everyone believe in the optimism" even though the trending stats appear to back up the growth, particularly in London and the Gateway cities.

Barclays has noted an acceleration of debt repayment which drew one quip from the audience that "its because management were conditioned to set soft budgets" which drew a chorus of laughter. However Mike Saul responded that while landlords were scared in 2009 to push for higher rents, the market has changed utterly and now landlords are in the driving seat in a "white hot market". 

My view is that the balance of power has indeed shifted back towards landlords and that hotel operating agreements involving profit sharing with owners is going to be costly for the operators for as long as market indices and KPI's remain strong. Delayed cashflow "waterfalls" whereby deal promotors agree to wait longer for their return on investment but at much higher rates will see owners rake in very tasty preferential returns far in excess of what was envisaged at deal origination. In other words those with unsecured and risky investments are in the ascendency.  

The message was that if you are looking for funding as a new entrant to the industry or to restructure your existing debt (watch out for those early termination penalties) then its time to dust off your business plan, your organisation chart and most of all update your management accounts. Lenders are taking a keen interest in the quality of capability of your management team, in particular their ability to deliver on projections and budgets. Investors invest in both assets and people so make sure to put your best foot forward to secure the best possible term sheet and a "partner" that you trust and can work with long into the future.



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