operator selection white paper mar 2016

Hotels, Hospitality and LeisureOperator selection

United Arab Emirates 2016

© Cavendish Maxwell 2016 | www.cavendishmaxwell.com © Cavendish Maxwell 2016 | www.cavendishmaxwell.com 32

Hotels, Hospitality and Leisure

Having lived and worked in this region since the turn of the century, it’s relatively easy to spot common themes; driving here is one, the weather is another; but professionally, heading down the ‘cheap’ route rather than investing in sound, valuable advice has risen to the top of the league.

Within the hotels division of Cavendish Maxwell, we work closely with numerous developers, investors and owners who have been ploughing the hotel investment field for a number of years whilst they seek optimum investment returns from their precious hotel assets.

Who can fail to notice the many hotels that have opened and closed within a short space of time, hotels that have changed management companies before we’ve even had time to notice the flag outside, the hotel white elephants that just seem to operate in dormancy and the properties that could outperform their competition if only they had the right partner on board from the beginning?

Why does this happen time and time again? In this region, advice is often misplaced, misconceived, misunderstood and missed altogether. So what are the misunderstandings, the misnomers, the myths and the mistakes that surround this sensitive but vital part of the hotel development process? We point out the do’s and don and why it is paramount that advice is sought to navigate the way forward.

Don’t just hope - Do commission an independent feasibility report

This is the first step on the road to failure. A fully-bankable report on the feasibility and viability of your development is essential in order to attract partners – not just any partner, but the right partner. This is the point. The report will contain your anticipated return on investment, demand demographics, site analyses, design features, competitive performance and, most importantly, a market positioning statement. This positioning statement will point towards certain types and niches of operator, all of whom will be recommended to you by your advisor.

You may not be familiar with of some of them, they may not be household names, they may not be who your best friend recommended, but what they will be is a pool of relevant operators, one of which will be the best fit, the best operator for your project and, most importantly, your best partner. If you don’t commission a bankable, feasibility report, not only will you find it a struggle to source investment funding, you won’t attract the right partners that will enhance the value of your asset and maximise your returns.

Introduction What are the Do’s and Don’t’s?

Don’t set your heart on one operator and tell them – Do look around

One of the most frustrating hurdles we have to overcome is the reasons for wanting a particular brand. “I like this brand”, “I have stayed there before”, “my friend chose this brand, so it’s bound to work”, “my brother signed with that brand”. This brand may be a good fit for one development, but it is by no means a good fit for all developments.

Letting an operator know you want them on board – and indeed contact them directly – is just playing into their hands. They won’t let you speak to anyone else, you never find out what your other options are and you end up signing a contract that you have had little influence over. The search for an operator needs competition from a variety of brands to ensure that you are aware as to what else is in the market, that you have the right partner on board but, most importantly, so that other operators know they are in a competition. This will cause them to be aggressively downward with their fee proposals because they all want to be associated with your project!

Engaging an advisor on your side of the table during the negotiation process will let the operators know you are going to the market, which means they will compete to be a part of your project. If they are serious about your development, they will be prepared to negotiate; if they don’t negotiate, they’re not the right partner to work with for the next 20+ years.

Don’t think you can negotiate alone – Do seek advice

You’ve already had some contact with operators; they’ve even approached you because they know about your development and they seemed enthusiastic about it. Before you know it, you’ve drafted commercial terms, signed a Letter of Intent and are more than half way to partnering with them for the next 2 decades or more. The ‘right-fit’ brand and a management contract that has been negotiated with an advisor by your side could mean the difference in value of more than 50%. Imagine an under-performing brand operating your property which you want to break from, only to find there is no break clauses or performance tests within the Agreement. This will seriously affect your Net Operating Income (NOI) and heavily affect the value of your asset!

Don’t be complacent – Do understand where it can all go wrong

You’ve chosen an operator whom you met at a recent hotel conference, where you signed draft commercial terms. The operator gives you their standard 100-page HMA template; the clauses should be pretty standard, right? Wrong! Too often, we see management contracts which have been poorly negotiated, if negotiated at all! They contain hidden fees - which the owners are not aware of - and heavily-biased commercial terms.

Typically, agreements with sub-brands are heavily weighted in favour of the operator, giving them total control of the hotel and heaping responsibility onto the Owner, who is already carrying the risk. Don’t let this be you! We have heard from Owners who think that the only terms that need negotiating are fees and the term. However, royalty fees, licence fees, marketing fees, training fees, reservation fees, loyalty programme fees, brand standard fees – and others – are typical examples where Owners not only don’t know that they are in the contract, they don’t know whether or not they are negotiable, or understand what they are for.

Additionally, the above fees are paid on gross revenues rather than the gross profit, which does not incentivise the operator to reduce costs.

Don’t be short-sighted – Do think towards the future

Handing control over design and build to an operator will mean that the development is built to that operators’ particular brand standards. If the Owner terminates the contract with that operator, the Owner is left with a property which may be restrictive in terms of being able to attract other operators to the development, as it may not conform to other operators’ brand standards.



We select an Operator who becomes your Partner

The Operator Search and Selection process is a key factor in the success of a hotel development and should be undertaken by specialists. The procedure should not be taken lightly; after all, this partnership is a marriage - and sometimes for longer. We have seen Owners sign robust and secure management contracts with highly-reputable operators, who fail to deliver on promises, where clauses are heavily weighted towards the management company and where the brand doesn’t fit the project. It only results in unhappy owners and frustrated operators, culminating in comments of “if only we had got it right in the first place!”.

We work for You

We are highly-skilled hotel specialists with over 30 years of experience within the MEA region. We know the operators, we know where they want to be, we know their negotiation parameters, we know how to connect you, we know who will create value for you - and we work for you.

Why choose Cavendish Maxwell?We enhance your return

The financial difference between choosing the right or wrong operator/partner can run into the millions. A reputable international operator will drive revenue through their wide distribution channels, return healthier profits, reduce your payback period, deliver a healthier balance sheet and hand you an exit strategy. It may mean that they charge slightly higher fees but, as the example opposite shows, the value to you is significant. Engaging an advisor will bring the right brands to the table and help you achieve this added value.

We know the trends, the region, the operators, the process and the end-game

In mature markets, initial contract terms and base fees have, historically, been put under pressure. Contract lengths of less than 10 years and base fees at less than 1% of total revenues have emerged in light of heavy competition. The hotel sector in the MENA region is not mature; operators are still very much in expansion mode and want to be associated with your project. Therefore, we fully expect the future

P&L Account Operator 1 Operator 2 Diff.

Total Revenues 8,000,000 8,500,000 6%

GOP 3,200,000 3,825,000 20%

GOP % 40% 45%

Base Fee 3% 4%

equivalent to 240,000 340,000 42%

Incentive Fee 8% 10%

equivalent to 256,000 382,500 49%

Total Fees 496,000 722,500 46%

Net GOP for owner 2,704,000 3,102,500 15%

Difference 398,500

trend to point towards a more mature market with downward pressure on fees. The more operators out there who want to be associated with your development, the more competitive they will be with their fees and the healthier your bottom line will become. Where we help you is bringing that competition to the table, so that the days of approaching one operator yourself will be a thing of the past. If you are talking to only one operator, how do you know how attractive another operator is if they are not invited to the negotiating table?

We make it our business

It’s our job to understand your objectives. We take you through an extensive checklist to make sure we have every angle covered on your behalf. For example, what deal structure do you want? Management contract, lease, franchise? Whilst many operators now have multi brands within their portfolios for different positioning statements, they are not all going to be your optimum partner. We know which one will be, we know what the negotiating points should be, we know what to look for, we know what the final Management Agreement should look like, we know how important your development is and we know how to help you achieve success.



Our services

Our specialist hotels, hospitality and leisure team consists of dedicated industry professionals with more than 30 years’ local, regional and international experience. We have an enviable track record having been engaged by all of the leading regional developers, investors and hotel owners on hundreds of high-profile projects.

We remain in close contact with our clients throughout the asset lifecycle, guiding them through the key milestones.

Our reports are recognised by the principal regional financial institutions – an essential requirement from our clients when raising finance.

Hotels, Hospitality and LeisureServices at Cavendish Maxwell

Thanks to the team at Cavendish Maxwell for the professional work undertaken relating to the valuation of our Tetra Hospitality Investment LLC assets. The work was insightful, thorough and showed a great understanding of the market. Your turnaround time was admirable given our own internal time constraints. We will definitely use your firm moving forwards.

Specialist areas

Peter Papas | Chief Executive Officer of Tetra Hospitality Investments LLC

Expert witness representation

Investment strategy

Acquisition and disposal brokerage

Feasibility

Valuation

Lease contracts

Site selection and due diligence

Operator selection

Asset management

Ongoing development consultancy and advice

PROPERTY SERVICESMIDDLE EAST & AFRICA

Commercial Valuation • Development Advisory and Real Estate Research Residential Valuation • Project and Building Consultancy Machinery and Business Assets • Investment and Commercial Agency

Also contact us for:

Dubai office

2205 Marina PlazaDubai MarinaP.O. Box 118624DubaiUnited Arab Emirates

T: +971 4 453 9525 E: [email protected]

Abu Dhabi office

1006 Corniche Bakery BuildingAl Firdous StreetTourist Club AreaAbu DhabiUnited Arab Emirates

T: +971 4 453 9525 E: [email protected]

CavendishMaxwell.com

Charles Bott Head of Hotels, Hospitality and Leisure

M: +971 50 617 7859 E: [email protected]

operator selection white paper mar 2016

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