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Analysis

#TIF18 | The change in hotel investment model: from Conrad Hilton and Bill Marriott to Blackstone and Covivio

Our sector has experienced many turnarounds. What will tomorrow be like. It is important to know your roots, which is the basis of our industry, it is also important to look at the weaknesses that need work and strengthening to redefine the next growth cycle.

For the year 2017, if we look at the evolution of RevPAR in Europe, figures were good until September 2018, when results deteriorated in some destinations.

If we look at the long term, we can see the positive effect of the 2012 Olympic Games on the market in the United Kingdom.

Let's look back at the history of our sector, there was a time when integrated value creation meant a customer base, know-how and walls. Then enter OTAs, which started the emergence of specific actors. Most of the distribution went to the OTAs, while the customer base, know-how and walls remained in the hands of the franchisees.

Under management contracts, distribution remains with the OTAs, while know-how and customer base with the brands and the walls are the responsibility of the owners.

We are seeing the emergence of specific actors: third party managers, investors, administrators.

What is the value creation strategy for operators? Within 10 years the market will have at least 3 operators with 1 million rooms. Cash flows are becoming one of the major indicators of the valuation of a hotel group since the net cash valuation is generated by the hotels' business. Operators invest very little CAPEX.

Operators have different strategies, AccorHotels has carried out a capital increase partly reinvested in acquisitions that have enabled it to brands that have brought the high-end and luxury brands to represent 24% of its fleet. IHG has opted for the payment of dividends and the redemption of shares.

Hotels have become an attractive asset class for new types of investors. Concerning this new class of actors, namely landowners, rates will be fundamental in terms of the underpinning on which they are based. Their goal when they invest a lot of money over the long term is to outperform inflation. It is interesting to look at how well RevPAR and hotel revenues are performing. This is what will be used to calculate the rents and the overall effort rate on the assets. If we look at Europe since the early 2000s, we see that the hotel industry is performing well in relation to inflation. However, there are wide disparities from one country to another.

Take Spain, for example, which has been experiencing a "recovery" for several years and is outperforming, allowing an investor who entered the market in 2015 to see double-digit growth in the performance of its assets over the past three years. This of course has an impact on transaction prices and asset values.

In Italy, assets underperformed inflation before the 2007 crisis and are gradually recovering. It would appear that the Italian market is entering an interesting performance cycle.

For France, performance was good in the 1990s, it fell sharply in 2016 following the terrorist attacks and rose sharply in 2017.

It is important to integrate the value creation levers for the different actors. Everyone focuses on how to create value in their business model. Operators such as Marriott or AccorHotels... will want to create value on management contracts, EBITDA or even differentiation with the main objective of creating maximum value on EBITDA.

The approach is different for real estate companies such as Covivio, AccorInvest, Pandox or Host, which will have a more long-term vision of return based on secure real estate collateral, given that this type of player is focused on a return higher than inflation.

Then there are private equity investments such as Investment Management and Extend AM, which allow acceleration for high-potential players.

And finally, third-party managers such as Interstate or Algonquin, who have a more regional or national structure because they have a very operational and field-oriented deployment in order to maximize the profitability of the properties.

In 2018, the macro dynamic for investment is extremely favorable, the performance of the hotel sector has led us to consider that it is a class of assets in its own right for institutional investments, there are also exogenous factors that create value for hotel assets.

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