Q&A with Mr Stephen Burt, Managing Director of Hotel Capital Partners

1 November 2019

Mr Stephen Burt (SB) is the Managing Director of Hotel Capital Partners – our operational partner for ZACD Australia Hospitality Fund. He has worked in the hotel industry for over 30 years in the fields of hotel agency, hotel investment and hotel management. He holds a Bachelor of Financial Administration from New England University.

Hotel Agency Experience

  • Co-founder of JLL Hotels & Hospitality Group
  • CEO of Colliers Hotels for Asia Pacific

Hotel Management Company Experience

  • CEO of Radisson Asia Pacific which operate hotels throughout Australia, Malaysia and Indonesia
  • CEO of Mirvac Hotels & Resorts –a chain of 45 hotels operating in Australia and New Zealand
  • Chairman of Travelodge Hotels Asia, a start-up commencing in 2016 which now manage a portfolio of 20 existing and pipeline hotels throughout Hong Kong, Thailand, Indonesia, Malaysia, Korea and Vietnam comprising more than 4,000 rooms

Hotel Investment Experience

  • Established and developed Mirvac Group, Australia’s largest dedicated hotel funds management platform involving both listed and whole sale funds. The funds collectively comprised 27 hotels with a gross value in excess of A$1billion
  • Stephen directs his privately held company, Hotel Capital Partners, to co-invest with third party equity in hotel investments from limited service to luxury rooms

Q1: If we were to execute the strategy according to plan, what do you think the projected yield will be like (the current blended yield 6.5%)?

SB: We will get close to 9%. We are dealing on a 5-year strategy here, so all of that model is based on selling the portfolio in 5 years. We need to get the portfolio profit up to about $2mil in a 1 year, and a bit over a mil thereafter, so we get close to 9%.

Q2: If we were to sell some of the hotels, what’s the yield hotel investors or buyers are looking at currently?

SB: The first 3 hotels that we will sell, we will actually be selling them on very low yields simply because the amount of overheads for an operator like Accor, or Marriott and the likes is very high, especially with regional properties. The way they run hotels involves a lot of costs in getting the revenue. Therefore, we will be selling them on a yield that is quite low, at around 4%.

Now, the reason why it will sell on a 4% yield is because the people who will buy are the mom-and-dad operations who will run the property in a different way than it is being run right now. Will they necessarily get the same revenue as it is now? Maybe not, but the cost structure will be a lot lower.  There is a lot of demand at the moment for this style of hotels, around 65 rooms, in the region for the reasons I mentioned.

Q3: If we sell the hotels at a lower yield, does that mean we will generate higher profits?

SB: On the price we have paid them for, even though we have acquisition costs, they will be sold at a profit, for sure.

Q4: Will investors be paid annual dividends?

SB: Yes, of course. I think that what we have to do in the first place is to get the whole operation up and running at where it should be. Even in the1st year, we will need to make some sort of contribution back to our investors, but it will take us a year to really be able to get the profit at where it should be. Thereafter, we will be able to make more valuable distributions.

Q5: What happens if Land Tax increases?

SB: Well, for a start, what we need to do is to ensure that we appeal on the land value. This has not been happening (when Accor owned the properties). Land Tax in Australia is different in all states, but they are all calculated in the same way; the government will charge you a percentage according to the land value. Unfortunately, a lot of the appeals should have been done before and we would have missed that opportunity, but the main thing for us, is to go through every single property to see which ones can still be appealed. We would have a feel of what the property is worth on a psf basis and on the basis of GFA, we will then appoint companies like Colliers, CBRE, or JLL and they will run the appeal for us.

As your investment manager, it is our job to look closely at what your land is worth, and not simply accept what the government says it is worth, and that is what we do all the time.

Q7: Are we considered Foreign Investors or Local Investors?

SB: We are considered foreign investors and had to get the Foreign Investor Review Board approval. The only reason for that is because there are certain hotels that are sitting on land that are sub-divided. Parts of the property sits on raw land and because of that peculiarity, we had to get the approval.

Q8: The fund strategy is a 3-step process, to acquire low, enhance and sell high, with an estimate of 15% IRR. We have achieved the 1st step and you are confident of executing the 2nd step which is to enhance. The last step will be the determining factor for a 15% IRR and if we fail to do so, can we assume that investors will be able to receive at least a 7% yield annually?

SB: I’d rather under-promise and over-deliver, but I think it will take us 8 months to get to 7% yield, and we will go pretty hard from day 1, so 7% is achievable. The portfolio is modeled realistically, so 15% returns are reasonable. We have also had a lot of interested parties come to us and telling us that they’d like to buy from us, and they are not so much interested in the yield, they just want the particular property. We have also got adjoining owners who are interested, so that is also creating some opportunities. On the basis on the level of enquiries and interests we are getting; it gives us a certain level of confidence.

Q9: What are some of the strategies on increasing revenue of the hotels?

SB: The priority is always to grow revenue and not just cutting the expense. We will start with 2 main areas. Firstly, as the hotels have suffered by not being properly refurbish, the refurbishment will play quite an important part in getting the revenue up. Secondly, the revenue management portion of these hotels have not been positive. We will give them a direction in terms of revenue management of our portfolio. If we do it properly, it will give us a lot more upside.

Q10: How many percent will we loan from the bank?

SB: We will take a 65% bank loan. We want to put a mass debt on the portfolio because it is the very sensible thing to do here.

Q11: There are many enquiries from investors on wanting to buy the hotels, is there a strategy to selling them?

SB: On one hand, I do not really want people to think that we bought this portfolio mainly to sell everything off, because the big value play for investors is to actually implement the strategy and sell it in a couple of years’ time. It might not take 5 years, it might be a lesser time. But completing a sale takes some time, so I do not want to say that by selling a particular hotel, it will add “X” amount of returns to investors. It is true, however, that we are getting a lot of enquiries.

Thank you.

Click here for more information on ZACD Australia Hospitality Fund.