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[#PAFh19] "Creating value in the hotel industry comes from operations and from people"

By David Fattal, Owner and CEO of Fattal & Leonardo Hotels.

So there was a guy and he works at the reception. He's doing a good job, so after a few months the hotel manager calls him and says I want to promote you to be the reception manager. He says, “Thank you.” Then he works as a reception manager and is doing a great job. The managing director of the company comes and says: “You’ve done a good job you're going to be the general manager of this hotel.” He says, “Thank you.” After a few months the owner of the company called him and says to him: “Listen, I've seen you make your way up and I'm very proud of you so I want to give you the job of managing director of the whole company.” So the guy says: “Thank you.” And the owner says: “All you have to say is ‘thank you’ after this promotion?” The guy answers: “Thank you, Father.”

I'm going to tell you some of the story of my company, which is a young company. It is 19 years of creating value from really 0 to 2 billion euros, and I'm going to talk about creating value. The story begins when I graduated from hotel school and went to work in a hotel in Haïfa, my home city in Israel, and I started and I didn't know exactly what a hotel is. Later, I started to create my real dream. After two years I became the duty manager of the hotel and before I turned 30 I was running the biggest hotel in Israel in the resort city of Haïfa on the Red Sea. Then an investment company recruited me to invest in some hotels, so I moved on to become the CEO of Africa Israel Hotels and Resorts that was an investment company. I negotiated with IHG and took the master franchise of the Holiday Inn and Crowne Plaza and we started doing hotels. We went very fast and I did about twelve hotels in about five or six years - that's a lot in my country. I had a dream to have my own management company and I was looking at other Hotel companies like the Sheraton, the Hyatt, the Hilton. The story was that they were all about 50-60 years old and they created something great. I said to myself listen they did it only by having the knowledge and the management, the right people and that is what is so important. And this is my belief for creating value in the hotel industry. At the end of 1999 I got the first hotel as a management company, signed a franchise with Meridien and started operating the first hotel as a management company.

In two or three years a lot of owners came to me and asked for help. They were terrible times for the industry in Israel.

I've been very lucky with very good people to have more and more hotels. By the year 2005 we became the largest hotel chain in Israel having 12 hotels, and this was all managed hotels. In 2005 a bank approached me and said: “Why don't you buy a hotel for a debt?” I said, “Okay, why not?” I can repay the debt. We did the calculation, and this was the first year we bought the hotel. Afterwards, a lot came but I didn't even think of buying or being an owner of hotels. I said to myself, the management company is great, you make a lot of money, no liabilities, but I started buying hotels. In 2006, we said to ourselves, “Okay we must move on", and we started our venture in Europe. We started in Berlin by owning and managing one hotel and very fast we ask ourselves what do we do? Are we taking franchise? Are we creating our own brand? And the idea was really to create our own brand because we saw that in most of the big cities in Europe there were a lot of hotels with the same name and we said to ourselves we are much better off putting these franchise fees into our own brand so we’ve been lucky to buy a hotel in Nuremberg which was branded Leonardo. It was a very nice brand with the Vitruvian man. And we said to ourselves we will buy the brand as well. So we started our own brand which is Leonardo. In 2016 we already had over 100 hotels, and today our company has 215 hotels of which 46 are in Israel and the rest in Europe. We made a jump in 2009 or 2008 when nobody wanted to buy any assets. Everybody kept their money in the company. We bought all the Sheraton and Accor Hotels in Israel and we jumped to about 35 hotels, and we continued to expand in Europe. Today, we have close to 42,000 hotel rooms in our portfolio. This is the way we started in Israel and then in Germany in 2006, then in Switzerland, Belgium, Hungary and Austria. England, Spain and Italy came in 2015; Scotland, Netherlands, Czech Republic, Ireland, and Poland in 2017, and Cypress and Wales in 2018, and Portugal and Greece lately. This is how we are spread around 18 countries in only Europe and Israel.

We’ve been very focused and that is why we have been able to run so fast. We said to ourselves: "We are going to be in the 4* segment with 3+ and 4+ star hotels, but we will not do any budget or deluxe hotels, apart from Israel where we have some deluxe hotels".

We are going to do city and airport hotels only. No resorts. We thought, this will be our strength vis a vis the local companies. We had the experience that we did so well being a local company in Israel in resorts, and I think being a local group gives you an advantage in resorts so we did the city and airport hotel only.

The way we are structured now, our largest country is Germany where we have 67 hotels; the second one is the UK and Ireland where we have 51 hotels, then comes Israel where we have 43 hotels, the Netherlands 15 and then we have Italy, Spain and all the other countries. In 2018, we decided to go public after a lot of hesitation. In 2014 I decided to go public and I did all the work, but then I was afraid that this is not for me and I canceled everything. In 2018 we did go public. It's less than 2 years ago and it was a smart move. We really get a lot of money out of the stock exchange with bonds with very attractive rates. So the capitalization of the company now is in Euros and it is about 2 billion euros. This was on the day when Trump was fighting with the Chinese, so the stock exchange collapsed but ours increased so we're very proud on this day.

We have a pipeline of about 32 hotels coming up in the very near future spread around all those countries which I mentioned before. Before continuing about our strategy, I’d like to share with you two stories about creating value, because that's what they asked me to do. One story is about Queens Moat Houses in Germany. In 2012, this company was on the shelf and nobody wanted to touch it. There was a lot of CapEx with 20 hotels in the westside of Germany, but we said we’re going to go for it. The only problem is we didn't have money so we started looking for partners. We negotiated with Goldman and KKR and after a while I went to see the Olympics in London in 2012 and somebody introduced me to some investment companies in London. Some South African people and they were willing to put 75% of the equity and we put 25%. The cost of the company was at 270 million euros so equity was 70 million so our 25% was money we could handle.

So what we did was actually create value. I really believe that creating value in the hotel industry comes from operations and from people. Driving up your EBITDA is the most important thing. There's a lot of people making a lot of money out of selling and buying assets. But this depends on the cost of the money and when the cost of the money changes, I mean there will be a change, so everybody's lucky that we can borrow, and we can play. Giorgio showed it with very low interest rates, but I think for long-term - very long-term, 10 or 20 years - the only way to drive value is by producing better results, a better EBITDA. So, we step into the company and we actually changed everything immediately because it was a company on the shelf, so it was run down for the last two years. We brought the EBITDA from 18 million to 35 million within 2 and a half years. Our South African partners said “Guys, it’s time to exit.” And we said, “No! We are long time players.” He said, “Listen, let’s do something where you will stay, and we will exit.”  So, we decided to do a sell and leaseback. This was the first time we met Giorgio. My intention was to give it to JAL, but when I met Giorgio we changed our minds. He really said from the first minute: “Give me a lease of 25 million, I will give you 400 million.” We didn't believe it, but, actually, he delivered and he did it very successfully. So we signed a lease with Pandox, a variable lease, a hybrid lease and we got 400 million which was 200 million above the debt and 130 million above the equity so we've been fortunate to do 310% in less than three years. So that was big money at the time and it's still big money. It was a way to really create value and bring capital to the company in order to do more things. I forgot to say that we do only hotels nothing else.

So that is the first case study. The second case study is about the Leonardo Royal Hotel in Munich. A few years ago nobody in Germany thought that Munich was a good city to invest, but we saw the city and all the markets and decided this is the city for us. Today we have 11 hotels in Munich more than 2,000 rooms. We discovered a plot of land not far away from the BMW building. Everybody said to us: “but it’s not in the center of the city” so we made a  destination. We created a 430-room hotel with a convention center. This hotel is doing about 10 million every year from the second year. Very stable with big growth. Doing the right EBITDA and the right performance will bring you value. Then they said to us: “why don't you do a sell and leaseback?” So, we decided to sell the hotel at 7.2 million as a lease. Eventually Giorgio sold it for us at 168 million Euro, the hotel we built from scratch which cost us 63 million. Again, the value is created by the EBITDA, by the results, by the people. We are not traders and we are not trading buildings. Unfortunately, I know that there's a lot of money in this and maybe much more money, but what we do is focus a lot of attention on the people and on how we run the company, on bringing results up.

What is our strategy for the future?
We have 215 hotels. We have a development rate of 8 to 10% a year in different countries. Each division has its own development people and they develop single hotels. We are very happy to do portfolio hotels. We did the Jurys Inn with the Swedish Pandox in the UK; we did the Apollo group in the Netherlands with Giorgio. We are very happy to do portfolios, but if we don’t have a portfolio, we are very happy to have 8% of new hotels coming into the system. The way we managed the group is by having five different divisions. Israel is one division; Central Europe is one division; the UK and Ireland is division; Netherlands is one division; and lately we've been doing resorts in Cyprus and Greece. Each division is in charge of operations, marketing, everything… and in charge of development as well. We really believe that central headquarters sometimes does the contrary of what you meant, so we'd rather have small head offices in each one of these five divisions. We run it not so much as asset management, but as a hotelier, but we're not putting someone or some group above those five divisions. This makes them more ambitious, more result orientated, etc.

So, like all of you, we see what's happening in the world in our industry, so we gave it a thought and we decided to do something.  It might be maybe 2% of the company, but we started a few ventures in the holding company. This is the venture and I will talk about them one by one in just a few minutes.

Co-working offices are called ROOMS. What we're doing in Rooms is putting co-working offices adjacent to or on top of hotels. We do have some that are separate from the hotel, but the name is ROOMS and that gives the atmosphere of the hotel. You can see the back of reception and when we are above the hotel we have lovely co-working spaces in our NYX Hotel in Tel Aviv. NYX is our lifestyle brand. We started only two and a half years ago, and we already have 22 NYX properties existing or in the pipeline. So, on top of the NYX Tel Aviv we have this area with people using the lobby, using the meeting spaces and the atmosphere is like a hotel. Unfortunately, we screwed up, but we are trying to make a profit from day one. The model is not about creating more spaces but creating a positive EBITDA. Master Collections is full-service apartments because Airbnb is so successful in Tel Aviv that there is double the amount of Airbnb apartments as hotel rooms. In Tel Aviv there is a lack of hotel rooms and so there are a lot of Airbnb. We wanted to know what is special? What makes people go to Airbnb? What kind of experience are they looking for? So, we created our own Airbnb but we call it serviced apartments because we're not taking different, individual apartments in buildings. We take all the building. We don't want to have neighbors and problems etc. We took some buildings in cities in Israel such as Tel Aviv, Haïfa, Belsheva, Jerusalem. One thing which is very very developed in Israel is start-ups with innovations. So, we decided to put some money in a Venture Capital Fund in travel tech and we created Journey venture. Today, we have nine companies in this fund. Each of them is doing travel tech and most of them are things we can use in our hotel. Two of them are already active in our hotels as a prototype, and if they succeed, they will move on to other chains and will exit with a lot of money. Really the target is to have things that help us better run our hotels or create value for our guests with these special and unique things.

We have a new terminal in Tel Aviv called Fattal Terminal. It's an executive terminal. Our vision to be a key leader in the hotel industry, hosting guests with professionalism and devotion while creating exciting and unforgettable vacation experiences for them. I won't go through our values except one which we are very proud of: working with the community. We are proactive recruiting people with special needs. All of our hotels, all 42,000 rooms have a standard: for each 100 rooms you have to recruit one person with special needs.

In England all our hotels have the same value and we are very proud of it. We contribute guest houses for children with cancer and their families in hospital. We have two more coming up very soon. I always say that we've been fortunate to contribute back to the community and this is one of our most important and maybe the strongest value in our company. We donate surplus food, and last year we donated 200,000 meals to institutions.

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