Business of Brands
Hotel asset company SAMHI, branded and managed by some of the world's best hotels, sees huge opportunity in India despite a downcycle in the sector

Own a hotel and use a big brand to run it, is what SAMHI does and based on the upcycle or downcycle of the market, branding or rebranding is done in the world of hospitality. 

Taking cues from Host Hotels US, the largest publicly traded Real Estate Investment Trusts (REIT), SAMHI, a privately owned hotel asset company that develops, acquires and owns branded hotels and sees big opportunity in Indian market despite a downcycle in hospitality sector.

This private asset owner has 25 hotels, 3500 rooms and is present in 14 cities across India flaunting big brands like Courtyard by Marriott, Sheraton, Hyatt Regency, Hyatt Place, Fairfield by Marriott, Four Points by Sheraton and Renasissance hotels.

Recently, InterContinental Hotels Group and SAMHI teamed up to bring a 14-hotel portfolio in India under Holiday Inn Express brand. Taking over about 2,000 guestrooms across 10 existing hotels and four under construction, IHG will expand its presence in the country by 34 per cent.

The two hotel groups have planned to temporarily shut down all 10 existing hotels to completely renovate and convert them into Holiday Inn Express properties. With this move the presence of Holiday Inn Express is understood to have surged to 90 per cent across tier 1 cities.

American multinational finance company Goldman Sachs had picked up a significant minority stake in SAMHI Hotels for Rs 441 crore. Equity International, GTI Capital Group and IFC are its other investors.

Seeing an opportunity flow from flaws in the hospitality industry with a complete lack of asset ownership Ashish Jakhanwala and Manav Thadani founded SAMHI and decided to get into the space in 2011.

As Ashish Jakhanwala, MD & CEO, SAMHI recalls, “While globally there’s a clear segregation between hotel ownership and the business of managing and running hotels, with large portfolios being owned by institutional groups and managed under various brands, In India, majority of the rooms are owned by the brands themselves like the Taj, Oberois and the ITCs, thus becoming asset heavy operators.”

They realised the opportunity for pure play between an asset owner, asset manager and a brand.

According to him, hospitality business is value run on EBITDA multiples. In most matured markets, the highest EBITDA multiple lies on pure asset light companies or brands like Hiltons, Marriotts, Vyndhams or Choice Hotels, who don’t own any real estate but just give out their brands. Their EBITDA multiple is the highest. The next in cue, Asish says, are asset owners like the Host Hotels – a $16 billion company. It only owns hotels but doesn’t manage or brand them. Then come the asset heavy operators, which in an Indian parlance would be Taj, ITC or Oberois. The EBITDA multiple of asset heavy operators will always be at a discount, he adds.

“We realised, as Indian financial markets mature, there will be a need for financial discipline and simplicity. We saw a lack of pure institutional hotel owner in the country. There were largely operators who owned assets and 70 per cent of the hotel stock in India was owned between, ITC, Taj, Oberois and some smaller operators or real estate developers who made hotel investments on the site but there was no asset ownership company. That was our genesis and in 2011, I went with the same pitch and got funded, raising my first $100 million by Sam Zell led Equity International and GTI Capital Group,” he recalls.

As he claims hallmarks of assert owners is financial discipline, which brands are least conscious of. For a brand, he says, customer is the prime and locations are super prime. Leela for example owns a hotel in Chanakyapuri in Delhi. It is overpaid because a brand’s financial prudence is not linked to its return on capital employed but to its consumer. “However, for a pure asset ownership company extreme and high degree of financial prudence is most important. We only invest where we see return on capital employed. We follow profitable customers. By separating asset management and brand from asset ownership you can create a very healthy stress, when you are asking the manager of the brand for performance. Whereas, if you are the brand yourself you cannot be doing that so efficiently,” he argues.

For him the most important issue is capital allocation, based on  markets, project locations or segments that would give the highest yield. He adds “In Coimbatore I respect the market which is worth Rs 4000 a room and build the Fairfield by Marriott, in Nasik I will get only Rs 2500 so I build a Formule1 / Holiday Inn Express. If I am in Bangalore or Pune I build Courtyard by Mariott or Hyatt that can give me a rate of Rs 8000.”

SAMHI says it can get any brand so far it creates financial opportunities. That’s why in the last 6 years it has seen a fast growth. “From 0 rooms we are now 3500 rooms today. Comparable companies have taken a decade to get there,” Asish clarifies.
The revenue model is simple – it owns the property with entire profit and loss (P&L). It appoints the brand to manage the show and in return pays it a fee of about 6-7 per cent of its topline apart from indirect costs. “Brands are paid in two levels - based on the percentage of the revenue and incentive fee which is a percentage of the profit. Operating P&L and assets are with the owners. We are like a hypermart where we can sell 5 brands simultaneously. We are yield investor. We own, run, use the brand,” he explains.

Between 2007 and 2010 Bangalore became one of the most expensive hotel markets in the world. However, there is a downcycle in the hospitality industry and the sad part is India doesn’t stand even in the top 10 rank as far as tariffs are concerned. Today an average roon in JW Marriott in Mumbai is sold for Rs 8000. “Room rates are at 5-10 per cent discount if compared at 2006 rates in absolute terms and with inflation adjusted it’s at a 50 per cent discount, for, ideally there is a 4-5 per cent inflation every year if that is multiplied. It’s been a brutal last decade for hospitality industry. Many a times if the property is not doing well you take a hard call of marking your losses or cutting your losses and selling them. We have been fortunate enough not to face that stage, but cannot deny it in days to come,” Asish says.

What are the yardsticks?

Well, before you sell you make a lot of minor and major improvements, change the brand/ operator but still if you find it’s not viable, you let go, he explains.

There are provisions under the contract like performance test, which the manager has to pass or you have the right to terminate the contract. If the market is underperforming, you cannot do much but if market is doing good but the manager is underperforming, then contracts can be negotiably settled.

“We bought many hotels that carried local brand names like Regenta, Royal Orchid, Caspia, We have gone and rebranded them to Four Point by Sheraton and Renaissance because we felt those markets have the potential for higher returns. We put in money in those hotels and post rebranding we have seen a significant improvement in those hotels. So far we have done local to global rebranding but it can also happen otherwise. If the market remains depressed for a long time it doesn’t make viability to carry a global expensive brand,” he says.

Globally asset owners are very responsive to an upcycle or downcycle and there are many instances of rebranding. Red Planet chain of hotels in Southeast Asia, for example, was earlier Tune Hotels owned by Tony Fernandes of Air Asia fame failed to perform and got rebranded.

“We have a Fairfield by Marriott in Bangalore which has a room size of 19.5 sq m / 210 sqft running at a rate of Rs 5000. In India a typical Rs 5000 hotel room has a circa 3000 sqft. We believed in the location and have been able to leverage the location and the product to its optimum use. Other owners may have spent 50 per cent on real estate. My return on capital employed in that hotel is 12 per cent in the second year whereas most others would be struggling at 6-7 per cent,” claims Asish.

Sometimes each market offers you with an opportunity, which can be leveraged by pitching the hotel with the right price point. “You choose the right price point, product and the brand and that’s how you make most money in this business,” he says.

This privately held company has been growing. Its last balance sheet, says Asish, was circa Rs 2500 crore of total networth. “We have done four rounds of capital raise since 2011. After the first round of $100 million in October 2011, we have done three more rounds –as a rights issue with the existing investors, with International Finance Corporation Washington and the last one was with Goldman Sachs two years back. Overall we have raised about Rs 1500 crore. Ours is a capital-intensive business and we will raise more equity in years to come. We see opportunities that are much bigger than what our internal accruals can support,” Asish adds.

Sudeshna Banerjee