Learn about the panel and exchanges between Gianluca CALISTI, Legal partner, Dentons, Dominique OZANNE, Deputy CEO, Covivio, Hugo ROVIRA, CEO Division Southern Europe, NH Hotel Group and Valérie SCHUERMANS, Vice President Business Development, Radisson Hotel Group who analyse a sector in full transformation.
What does it take for a union between NH Hotel Group and Minor International to be a success?
Hugo ROVIRA, CEO Division Southern Europe, NH Hotel Group: "I think that for any process of this nature, what is important and what is not always easy is to avoid overlapping or superposition, and to seek complementarity. Both around the territories you will cover (in terms of countries and continents), but also regarding brands. The brands risk trampling one another, it's not easy. But also, the resort cycle is not always the same as the urban cycle. The client must understand what the merger is about and what is good for them. Complementarity is good for customers and investors."
Is it something that is part of a hotel takeover? What is and isn't included?
Dominique OZANNE, Deputy CEO, Covivio: "When you do a takeover, everyone at the shareholder level must be well aligned. It is essential to be totally in line about what will be done at the hotel with the operator. In other words, to create a real convergence of interests with the operator. This convergence can be the result of a contract with variable rent on turnover, or a contract with a rent that is variable on the NOI (Net Operating Income NDR). But it can also come through cross-shareholdings, with an operator that will take 5, 10, 15, 15, 20, 30% of an acquisition to ensure that the alignment of interest is complete."
What things need to be taken into consideration during this type of operation?
Gianluca CALISTI, Legal partner, Dentons: "Yes, I see a lot. Alignment of interests in fiscal matters is essential as you have investors and operators. And all these people, from a tax perspective, have different strategies because they have different tax systems. They also have regulatory contradictions that prevent them from entering into operations, otherwise they will lose their tax regimes and find themselves in default in relation to what they can do, in relation to their funds (be they sovereign or open funds). So fiscal interest alignment is very important because if you have mergers that are under different regimes, you will end up with people who will focus on yield and others on capital appreciation. And all this means that there has to be this alignment, otherwise things will not go well."
Concretely speaking, if you are looking for yield or capital appreciation, what do you recommend?
Gianluca CALISTI, Legal partner, Dentons: "Today, we see that there is a sophistication in recent years concerning how people invest in the hotel industry. A few years ago, we tried to combine real estate and business for tax reasons in particular, because people were looking for added value and therefore to be exempt. Today, new players have entered the market, including sovereign wealth funds. They do not want to be tied to operations and are looking for returns. These people, through the new types of contracts that are put in place, can have a return over several years without getting into the operating issues that are a problem for them. A recent example is AccorInvest for which you have sovereign wealth funds that absolutely do not want to be tied to operations."
On the operator side, we are talking a little bit about all these partner profiles (sovereign wealth funds and landowners), are there any with whom it is more attractive to work? How does it work with your operator card?
Valérie SCHUERMANS, Vice President Business Development, Radisson Hotel Group: "When we announced a development strategy focused on an asset-smart/right approach. We can still see that the door is opening up again to institutionals. It allows us to make more strategic and flagship projects. A good example is the signature of the Radisson Blu in Rome, which we signed with Rome Airport. At the same time, we are continuing the asset-light strategy, a strategy that focuses on our existing partners, with select partners with whom we were able to sign the Radisson Blu in Prague. At the same time, we continue to focus on local partners, more with franchises, like in Bordeaux."
Hugo ROVIRA, CEO Division Southern Europe, NH Hotel Group: "In the end, there are many companies dedicated to investment. In everything that is offices, retail, hotels, depending on yields, they diversify their business or not. For me, what really makes the difference is the level of know-how they have about the hotel business. When you talk to an investment fund, with a specialized team that knows the hotel business, it's very easy to get there and sign the agreement, so it's not a never-ending story. So, what is really very important, and each time we see it a little more, there are really companies that have a team with levels of knowledge of the hotel business, in these different facets, they are very advanced. This is often what makes it possible to do business."
What are the factors of differentiation?
Valérie SCHUERMANS, Vice President Business Development, Radisson Hotel Group: "The most important thing for me is to address this conflict of interest that naturally exists between the owner and the brand. This is something that must be addressed in the initial legal and commercial negotiations. It is necessary to look at the investor's profile, his knowledge of the industry, and address these key points for these two partners. There must be a pragmatic and business-minded approach on behalf of the manager to find these solutions. This is the key to reaching a balanced agreement."
Dominique OZANNE, Deputy CEO, Covivio: "The hotel business is very specific and quite complex. We need teams with their own expertise. It is also important to be long-term. This is a sector that needs long-term actors. We have had operators who have changed strategies several times and we have also been able to adapt and evolve with them. After that, we see increasingly limited conflicts of interest on contracts, and alignment is getting stronger. In sharp contrast, today we are discussing contracts where fixed fees are beginning to disappear in favor of fees that are totally based on results and the margin. And when you are aligned on the margin with the operator, you can only hear yourself. By definition, good news for one is good news for the other. It is a bit of a step for operators to take, because basically they were used to another way of operating, and I think that this reconsideration will be salutary for owners and operators in their mutual relationship."
Finally, on parle de relation depuis tout à l’heure mais vous imposez de plus en plus vos points de vue aux opérateurs.
Dominique OZANNE, Deputy CEO, Covivio: "We are increasingly satisfied when we have an operator that generates a very solid margin on its assets and everything is going well, that proposes projects to us and meets commitments made in relation to the promised results. What we want the operator to accept is that when he commits to figures and performances, he delivers them. Of course, we put underperformance clauses and clauses that allow the operator to be taken out. The operator must be able to hear if it is inefficient and ineffective. It is true that we have more and more management specialists who agree to say: I can be questioned every two, three, four, five years and on the other hand I will help you in your relationship with the franchisee, to obtain the best contract and the best conditions, the best brand on the asset concerned. Today, we have about fifty assets in walls and funds, and what we see in reality are increasingly shorter contracts, but where the operator can be renewed if there is good performance. And inversely, if results are bad, they're out."
Are there elements in the environment that have an impact on hotels?
Gianluca CALISTI, Legal partner, Dentons: "Yes, taxation and the fiscal and social environment are essential. The taxation of profits is not the most important factor in this industry. Recent developments in France's attractiveness, which are aligned with Europe, are rather good news. The drop in IS by 2022 will be to 25%, even if it is still far below what France's other partners have. All that is deductible from financial expenses for which we will reach the European standard in 2019. In the medium term, we will still be able to amortize goodwill with a harmonisation of the tax base in Europe. This is not possible at the moment in France. This project is very good for the sector."
Hugo ROVIRA, CEO Division Southern Europe, NH Hotel Group: "In terms of taxation, IFRS16 will have a huge impact that will force us to be much more selective. From now on, all rents will be considered as debts and therefore recognized as such on the company's balance sheets. We own 25% of our hotels, then we have 30% and 30% on rents and management. But the IFRS will have a sudden impact. And tourism is sensitive to many things, and I think that the law on OTAs and rate parities allows the weight of online distribution in hotels in France to be higher than in other countries, where this law does not exist. The GPDR is another law that will have a significant impact. And then, I think that the example of Paris is a good example, the regulation of Airbnb and the implementation of actions against this phenomenon."
Dominique OZANNE, Deputy CEO, Covivio: "Another thing about the regulatory aspect and the various incentives that could enable the renewal of the offer on the European market is the SIIC subjects (listed real estate investment companies ). We would not be here, we would not exist, without this regime. This regime has recently evolved with the possibility of making 20% of non-real estate purchase funds, meaning business funds. And today, it limits us a lot when you know that in the United States there are more than 25 real estate companies that build walls and funds and that benefit from this SIIC regime on all assets. It is true that we are somehow penalized in terms of competitiveness compared to American players. We have made several requests for this 20/80 to be revised a little bit and for us to be closer to 60/40 or 50/50 in order to be able to promote long-term investment in the hotel industry in France and Europe."
Gianluca CALISTI, Legal partner, Dentons: "Indeed, the SIIC regime has a very high degree of flexibility since it made it possible to carry out operations that were very complicated technically, where property owners were associated with people who were doing business. With regard to this aspect, considerations are being made about this system to remove risk in relation to the tax system."
Ar there markets that need to be watched carefully?
Valérie SCHUERMANS, Vice President Business Development, Radisson Hotel Group: "First of all, it must be observed that European countries do not all follow the same trends. There are some markets that are reaching a peak, such as Germany, and next to that the Amsterdam market has had RevPAR growth for more than three years. More cautiously, Radisson Hotel Group is focusing on Southern and Central Europe, where performances are attractive and promising. Leases and management contracts have been launched for both regions. And at the same time, we agree that in Paris we are seeing significant growth in RevPAR, which I hope will continue until the 2024 Olympic Games. We must look at opportunities in that spirit."
Dominique OZANNE, Deputy CEO, Covivio: « Difficile de ne pas être aligné. En ce moment, l’Allemagne est assez sidérante. On le voit, puisqu’on a acheté des portefeuilles il y a 3-4 ans, et on pourrait aujourd’hui vendre ses actifs là avec 25 ou 30% de plus. C’est aussi un bon moment de sortir en France parce qu’il y a beaucoup plus d’acteurs, types fonds OPCI ou family office, qui ont plus de liquidé. Et les taux de la dette sont très faibles et il y a beaucoup d’agressivité sur les pricing des actifs hôteliers. Nous, on le voit, nous avons beaucoup de sessions en cours et il y a beaucoup de demande. »
Hugo ROVIRA, CEO Division Southern Europe, NH Hotel Group: "Being partly in agreement, we must adopt this macro approach to understand the differences between resorts, urban areas, countries and even cities. Nevertheless, I think that each individual asset brings to the same city an asset in terms of the different hotels you can have in a city, with completely different returns. Sometimes it's too easy to say we're going to sell. It is necessary to analyse the performance of each hotel in greater detail, both in terms of its ability to generate EBITDA and cash flow, and to understand that some destinations have reached the top of the cycle. But some hotels in some destinations will still have excellent performance. Sometimes you have to have a much more micro approach because each hotel is a world in its own right."
Are there specific risks or opportunities?
Valérie SCHUERMANS, Vice President Business Development, Radisson Hotel Group: "I am convinced by the mixed use approach. This allows the developer to diversify risk and attract higher level tenants, tenants who are willing to pay more rent. We are creating a site or product that is more dynamic and that can exist 24 hours a day. At the same time, as an operator, it will allow us to redevelop in the city with strategic partners. These are challenging and positive projects."
Do you have examples in other sectors in terms of business strategy that could be considered by this one?
Gianluca CALISTI, Legal partner, Dentons: "For once, I'm going to talk about my sector. Generally, this is a fairly conservative sector. But the legal world is undergoing a revolution. Today, legal services provided by a single firm can generate customer costs that will center on added value. For example, you have a big trial and many tasks are done by people in the firm, but in the end, it is cheaper. They have the same training, but the price for the client is much lower."
Dominique OZANNE, Deputy CEO, Covivio: "On this subject, I will talk about what I experience daily. I joined a company ten years ago that only handled existing offices. Today, we handle offices and housing in Germany, and we have entered the hotel business in terms of both property and business. It had a huge impact because it allowed us to rethink our developments in terms of offices and housing. Concretely, we are launching a co-working activity in Italy and a co-living activity in Germany. And this involves us in projects with the Berlin City Hall, where we combine all our activities. Basically, we are able to develop mixed-use projects with a complete vision by being able to generate our own turnover on the assets we own. This transformation allows us to approach owners who master the notion of service and produce increasingly modular assets. When you own both the walls and business of an asset, you are in control."
Valérie SCHUERMANS, Vice President Business Development, Radisson Hotel Group: "For my part, I would like to be inspired by the operator and the brands. In the luxury industry, where the customer experience is increasingly important and where we are recognized by a certain service and positioning offer, I believe we must focus on the real brands, the ones that are key. At Radisson, we have communicated on the "Radisson" brand using a brand architecture whose value is recognized by the market."
Hugo ROVIRA, CEO Division Southern Europe, NH Hotel Group: "I think that today the customer already has a great deal of experience. He's looking for memorable moments. It is no longer just consumption. When you look at the world of shopping centres, a few years ago, it was about retail and period. They have developed their concept to integrate the world of experiences through leisure. In fact, they realized that it was not enough to have a super store in the mall, but to offer many more experiences. I think that the hotel business is not just about selling a roof and a bed, but also experiences."
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