ProEstate 2010 Selecting a Hotel Management Company

1. ProEstate 2010 Selecting a Hotel Management Company September 10th, 2010 / David Jenkins

2. Who is the operator? • Previously hotel management companies owned many of their own hotels • From 1980’s onwards most hotel companies began to separate their real estate asset business from their operating business • Today very few operators own hotels • Hotel management companies (or operators) are specialised in providing a service to hotel owners – this service is the management of the operations and business of running the hotel on a day to day basis • Hotel owners will contract an operator to run their hotel as opposed to running it themselves – usually hotel owners are real estate investors with no desire to be involved in running the business of the hotel itself – they are interested in investment returns • Hotel operators are professionals at helping owners to optimise their real estate returns • “Passive owners” will be more likely to contract hotel operators than “active owners”

3. Who is active in Russia? • The key international hotel management companies with operations in Russia of a certain scale are Rezidor (includes Radisson Royal & Blu and Park Inn brands), Accor (with Novotel and IBIS brands), Marriott (Ritz Carlton, Marriott, Renaissance and Courtyard brands), IHG (Intercontinental, Crowne Plaza, Staybridge Suites and Holiday Inn brands), Hilton (Hilton, Doubletree and Garden Inn brands) and Interstate Hotels (franchising Marriott, Holiday Inn and Hilton brands in Moscow) • In addition major operators like Starwood (Luxury Collection, Sheraton, W), Hyatt (Park, Regency), Kempinski, Orient Express (Grand Hotel Europe), Corinthia, RF Hotels, Fairmont Raffles (Swissotel) and Vienna International are also present in certain cities • Projects are under way for significant new operators such as 4 Seasons and Mandarin Oriental • Rezidor, Accor, IHG, Hilton, Interstate and Starwood all have development offices in Moscow • Those with offices in Russia have tended to be more successful. They have specific brands intended to focus on expanding across the country aligned to a development strategy

4. What about the others? Why are they not here? • There are of course other major operators who are either not yet present or have yet to expand at a significant rate • These include Wyndham, Choice, Scandic, Whitbread, Travelodge, Jurys, Louvre, Golden Tulip, Park Plaza, Ascott International etc etc • The key to any significant expansion in Russia for an international operator is to have a development presence in Moscow • Those operators are not present would prefer to start with a hotel project in Moscow to build brand awareness, this is difficult as developers and investors are easier drawn to those companies with existing brand presence – risk reduction in the eyes of the investor • The hotel market is still immature, many operators deem it a risk or are still nervous to commit resources • Russia requires economy and mid-market hotels – operators are looking for investors / developers with multi-site deals to ‘launch’ the brand. Some have had such situations but failed to convert the opportunity and there are few such deals on the market • Operators based in Moscow are easier to find and are pro-active not reactive

5. What do the operators offer? • Internationally, hotel agreements usually come as either a lease or management agreement • The prefered model for those active in Russia is a management agreement. Lease agreements are rare for this time and not expected to appear in the nearest future at any scale • A management agreement is a contract between the owner and operator which includes several sections which cover Technical Assistance, Pre-Opening and the main Hotel Management Agreement • This is a long-term commitment, most contracts range from 15 to 25 years – longer than many marriages • Typical agreements would see the operator takes fees based upon a percentage of annual revenue and of annual profit – these percentages are all negotiable

6. Will the operator co-invest? • The simple answer is NO – in most cases! • The operator wants to sell their experience and their product which is a service – as mentioned, most operators are not real estate investors • There are times when, with a strong location and competitive tender process, that an operator could be convinced to invest a certain amount • Also if an operator wants to launch a new brand to the market we would advise investors to negotiate a contribution to the development cost/risk from the operator • Other schemes exist such as ‘key-money’ and FF&E contributions though mainly in the economy and mid-market sectors and typically tied to a multi-hotel agreement – and this was pre-crisis • It is rare also that an operator will offer a guaranteed return – as would be the case with a lease agreement.

7. Running a tender • A hotel management agreement is intended to be a very long term relationship. Such an influential agreement has to be sustainable for both parties. • A formal operator selection process is recommended to create a degree of competition and to maximize best commercial terms • We would of course suggest to hire a consultant to run the tender  This will help to negotiate better terms than an ‘off-the shelf’ agreement, reduce time wasted by all parties and optimise commercial terms. In addition a management agreement can have a direct bearing on the value of an asset and its sale-ability in the longer term • Prior to starting the tender it is important to understand some key points – what is the concept? (has there been a feasibility study?), is financing in place?, is the site secured? • It all depends on the project but the process from starting tender to signing management agreement can take from 6 to 12 months. A lot depends on the willingness of parties to meet and negotiate, the reality of expectations of the owner aligned to the ability and flexibility of the operator. Many negotiations in Russia break-down when the owner has unrealistic expectations of commercial terms an operator will agree to

8. Key Steps • Tender project to targeted operators • Receive feedback, indications of interest and general terms of business • Select short-list of 3 operators / brands • Ask operators to present brand for the project – why them? • Initiate key business terms discussions with selected operators • Select ‘preferred operator’ • Negotiate LOI (letter of intent) • Negotiate Pre-opening, technical and management agreements • Sign management contract • Legal aspects

9. Key Negotiables • Percentage of base fee (from revenue) and incentive fee (from profit) • Ranges of incentive fee linked to percentage of GOP • Owner’s priority if appropriate – aligned to debt repayment schedule • Right of owner to approve key management such as GM and CFO • Owner rights to approve annual budget • Performance controls / benchmarking / owner’s representative or asset manager • Non competitive zone • Pre-opening budget, Technical costs • FF&E / Capex amounts and approval policies • Termination, Ability for owner to sell • Operating Term

10. Thank you for your attention David Jenkinsdavid.jenkins@eur.cushwake.com+7 985 762 8176