easyHotel’s principal growth strategy is the roll-out of further owned hotels in major European gateway cities. Whilst the Directors see significant potential across European cities, the owned investment is likely to focus on the UK, principally London, as well as probably one other European country in the near term.
Given the high returns on invested capital generated from both existing owned and franchised hotels, the Directors believe that strong returns on invested capital can be achieved on owned asset investment in these major cities. A key feature of easyHotel’s roll-out strategy is the Board’s belief that there is sufficient demand in most European cities to accommodate multiple easyHotel assets. For example, the Directors believe that easyHotel can at least double its hotel estate in London over the next few years.
Franchised hotel growth will continue to be a focus for easyHotel; however, given the planned investment in easyHotel’s owned estate, such income streams derived from franchisees are likely to reduce significantly as a proportion of easyHotel’s overall profitability. Nevertheless, given easyHotel’s franchise model involves no capital outflows, the Board sees franchising as a helpful way of enhancing returns on invested capital using the strength of the “easyHotel” brand.
The Directors also believe there are opportunities for easyHotel to further optimise existing revenues. easyHotel’s management has identified the need to boost these opportunities through the hiring of a small number of central operation staff, such as marketing, in particular in the digital environment, as well as a need to boost social media presence. This would also involve limited spend on enhancing easyHotel’s website and enhancing its capability to accommodate bookings through mobile devices.
The Directors also believe that easyHotel can improve ancillary hotel spend, but the focus will remain on maximising hotel room revenues through high room occupancy rates in the existing estate.
easyHotel’s aim is to invest in freehold owned property in major gateway European cities. It is highly unlikely that easyHotel would enter into operating lease commitments as the Directors perceive the long-term risk inherent in these financial obligations to be significantly less valuable to Shareholders than investment in easyHotel’s own real estate. The Board’s policy is that the mature EBITDA minimum rate of return on invested capital will be 15 per cent.
easyHotel’s Old Street hotel was acquired in June 2012 for £10 million in an intra-group transfer from easyGroup. It was originally acquired by an easyGroup group company for £5.2 million and has had total cash investment by easyHotel of approximately £3 million. Following the recent expansion of the hotel from 92 rooms to 162 rooms as at the date of this document it was valued at £21.4 million (further details of which are set out in Part V of our Admissions Document). Following the opening of these additional rooms in March 2014, the Directors believe that the hotel is already on track to achieve the 15 per cent target hurdle rate on invested capital of £8.5 million during the financial year ending 30 September 2014.
The Directors believe that returns on Invested Capital can be enhanced by adding conservative levels of debt, which they believe will enable easyHotel to borrow at attractive interest rates given the strong asset-backing of the business model. The Directors expect easyHotel’s leverage levels to target three times net debt/EBITDA on the mature cashflows of the business, which the Directors believe to be prudent. This may vary from Admission as the Company will initially have net cash balances following receipt of the Placing proceeds and there will be lags between capital deployment and hotel operating maturity resulting in higher levels of leverage during investment phases.
easyHotel management has identified approximately 150 locations in Europe which could be appropriate locations for an easyHotel site, which include multiple hotels in some countries. Whilst easyHotel’s core plan is to grow in a few focussed markets within the next few years, the Directors believe that the concept is scalable and easily transferable internationally.
easyHotel aims to build hotels which have between 50 to 100 rooms which the Directors believe is a good balance between risk and the economies of scale of achieving appropriate returns. Therefore, easyHotel tends to focus on properties which offer space of 8,000 to 17,000 square feet. easyHotel would contemplate potential sites that are larger than this if the destinations’ consumer demand merited it. For example, in Central London prime sites, easyHotel would contemplate 150-bedroom projects. The Directors believe that the easyHotel offering tends to work best in expensive hotel markets, thus making a more attractive value proposition to a consumer willing to trade down on room size or room facilities. The most attractive sites for easyHotel tend to be those close to major travel hubs, often main train stations, given the international nature of easyHotel’s customer base. Sites generally require cafes, shops or restaurants nearby to provide customers with such services because of the strategy not to provide food and beverages within easyHotel sites.
easyHotel’s target is to focus on the conversion of commercial or retail properties into hotels. The Directors believe that a number of budget hotel brands in the UK will not contemplate offering inside facing rooms under their brand standards. easyHotel’s willingness to include inside facing rooms within its business model (helping to deliver value to price-conscious customers) ensures that easyHotel can optimise some building conversions more than those brands that would not contemplate such rooms in their business models.
All easyHotel rooms are built to a standard of high quality yet hard-wearing design with standardised brand features. However, the main fit-out costs of easyHotel’s hotels are the infrastructure such as air-conditioning, plumbing and electrical installation. The design of the rooms is also based on materials which are widely available in most countries, thus enabling easyHotel to expand internationally in a consistent brand style whilst avoiding high import duties into certain countries.
Conversion projects are contracted through a tender process with reputable builders, who enter into turn-key design and build contracts with easyHotel thus passing responsibility for all aspects of the build to the contractor. Projects tend to take around 20–25 weeks to build from contract signing to room sale, with any late delivery of projects involving damages payments from the contractors up to certain thresholds.
Whilst the Board would consider franchising opportunities, easyHotel’s main franchising efforts are likely to focus away from the major European cities, and into other regions such as the Middle East, Asia and eastern US.
The Board considers that franchising is unlikely to be more important than owned asset investment for easyHotel in terms of driving absolute profit growth. However, the Directors believe it remains an excellent way of enhancing easyHotel’s return on invested capital as well as expanding easyHotel’s brand in countries where easyHotel may deem it unsuitable to invest its own capital.
It is envisaged that easyHotel will hire a franchise development manager to liaise with existing franchisees and expand easyHotel’s franchise network. This will enable senior management to focus most attention on the owned hotel roll-out strategy in Europe.
easyHotel already has a consistent unprompted stream of franchisee enquiries, which the Directors expect to increase further as easyHotel expands its network and actively promotes new franchises. easyHotel is actively discussing various franchise leads in the Middle East, the US and a number of other countries.
easyHotel’s management intends to continue to be rigorous in controlling costs and maintaining operating cost flexibility. This will be achieved through the outsourcing of a number of operational contracts until hotel occupancy reaches maturity.
The Board envisages some limited recruitment of additional central staff by easyHotel within the next six months. The Directors envisage that economies of scale can be achieved with regard to outsourcing contracts and energy purchasing, as well as a general benefit of increased consumer awareness of easyHotel as it becomes larger.
The Directors also believe that easyHotel can improve its customer ancillary spend through sales of small unbranded goods in reception areas, the trial of WIFI sales at a low price, as well as further limited add-on services.
Whilst these are limited initiatives that easyHotel can pursue, the Directors believe that as soon as new hotels reach maturity easyHotel will see limited operational gearing in its owned assets thereafter given the high margins and low top-line volatility. As such, across the economic cycle the Directors believe that the income stream from each owned hotel should rise by close to inflation with limited volatility.