Forecast of Revenue

8.1.1 Projection of Future Business Model

As we described in Section 5.3.5, hotel companies generate very different levels of revenues, depending on their business model. To illustrate this, let’s take the example of the French hotel company Accor, which is known to be operating most of its hotels under lease contracts. The company reported in 2015 revenues worth EUR 5.58bn. In contrast, the revenues of IHG, with a majority of its hotels under franchise contracts, amounted in the same year to EUR 1.66bn, although its hotel portfolio is almost 50% larger than Accor’s. (Statista, 2015) Thus, we can conclude that our anticipated business plan for Rezidor, where we intend to focus on managed and franchised hotels, will have big implications on our future revenue growth. We will therefore start our forecast of revenues by describing our plans for Rezidor’s future business model.

As we outlined in the business plan in Section 7.2, we intend to accelerate Rezidor’s pursuit of an asset light strategy, through an expansion in primarily managed and secondary franchised.

12 The upside scenario will be displayed in Appendix I and J.

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We will not actively look for opening new hotels under leasing contracts, but we will still keep those who are profitable and renegotiate or terminate those who are not profitable. We will in other words accelerate the path already chosen by Rezidor.

For the purpose of predicting Rezidor’s future hotel portfolio, we have considered Rezidor’s current pipeline, which amounts to 102 hotels according to the 2015 annual report. For a new hotel to be constructed and ready for use, it takes approximately four years. However, during 2011, 2012 and 2013, 30% of Rezidor’s hotel pipeline contained hotels that would be converted from other hotel operators. To get the exact estimates as possible, we are therefore distributing the current pipeline in equal proportions for the next three years, which gives us the following table for the next three years.

Exhibit 40. Estimated Business Model

Source: Rezidor (2015a), Own creation

As can be seen in exhibit 40, we have also included estimates for 2019 and 2020. In line with our strategy described in the business plan of section 7.2, our ambition is to accelerate the rebalancing of Rezidor’s strategy, by intensifying growth in managed hotels.

8.1.2 Nordics

Rezidor’s home market, the Nordics, has been its greatest problem child in the last three years, where Rezidor’s RevPAR has dropped by 6.7%, partly influenced by unfavourable exchange rates. Rezidor is the market leader in the upper upscale segment, a segment that relies heavily on the overall business confidence which in turn is driven by the health of the economy. Nordic economic activity has been growing slowly in the past years, with large national differences. For instance, is Sweden on the one hand growing above 3% per year and on the other hand is Finland a country that has been experiencing stagnation since 2012. IMF expects however accelerated growth rates in all Nordic countries in 2016 and stable annual growth above 2%

Forecasted Business Model by Number of Hotels

Contract Type 2015 Pipeline 2016E 2017E 2018E 2019E 2020E

Franchised 95 14 100 104 109 120 135

Growth 8% - 5% 5% 4% 10% 13%

Managed 189 88 222 253 283 320 355

Growth 4% - 18% 14% 12% 13% 11%

Leased 71 0 71 71 71 71 71

Growth 1% - 0% 0% 0% 0% 0%

Total 355 102 393 428 463 511 561

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until 2020. UNWTO predicts at the same time tourism to grow 2.2% annually. (Tourism Highlights 2015)

As displayed in exhibit 13, the Nordic region is only represented by 2% of the current pipeline of new hotels, meaning that we will have about the same number of hotels in the next years.

Under our ownership, we intend to keep the current hotel portfolio as it stands and decide to expand in other markets with higher growth potential. We can therefore calculate our sales growth on the current hotel portfolio and pipeline and we expect that our hotels will reverse the negative trend in RevPAR, thanks to a healthier regional business climate, a growing number of tourists and a moderate industry supply in new hotels. Having reached rock bottom RevPAR rates in 2015, we believe that Rezidor in an upside scenario would be able to achieve a strong growth in 2016 and 2017 of 3.0% per annum and reasonable growth rates of 2.5% for the rest of the estimation period. In our base case, we are expecting economic activity to remain at rather low levels in the Nordics, influenced by continuous stagnation in Finland and low growth in Norway. Dampening RevPAR growth in the upper upscale segment, we expect revenues in such a conservative forecast to grow by 2.5% per year in 2016 and 2017. Since we do not intend to open more hotels in this region, it is reasonable to expect revenue growth rates to be lower in the long run, hence we calculate with a 2% growth in 2018 and 1.5% annual growth in 2019 and 2020.

8.1.3 Rest of Western Europe

The Rest of Western Europe, which is the Eurozone, excluding Finland but including the UK and Switzerland, will according to IMF’s forecasts grow annually between 1.7% and 1.8% until 2020. Tourism is expected to grow hand in hand with the economic activity, UNWTO predicts an annual growth rate of 2.3% in the next 5 years. Supply of new hotels has for several years lagged behind demand and this imbalance will according to PWC persist, even though pipelines are picking up in 2016. Comparing the pipeline of hotels in January 2015 to January 2016, there is a 15.8% increase in hotels and 6.3% increase in rooms. (PWC, 2016)

Solid demand growth and a moderate increase in supply will therefore imply a positive development for RevPAR in the near future. Considering that we will phase out a few leased hotels located in the Rest of Western Europe Region, we are counting with a lower growth in revenues, than if we would keep the hotel count constant. We believe therefore that Rezidor in an upside scenario would be able to grow its sales by 2.0% per annum. As for the base case, we estimate an annual sales growth of 1.0%.

88 8.1.4 Eastern Europe

Development in Eastern Europe is particularly vulnerable for Rezidor, due to the aggressive expansion that the company has undertaken in the past 5 years. The region has in the past showed to have a fairly volatile development, both as measured in GDP growth as well as measured in the number of tourist arrivals. Regarding the economic activity in Eastern Europe, the IMF expects the stagnating year of 2015 to be an exemption, and predicts annual growth rates to be 2.4% on average until 2020. UNWTO expects the number of tourists to grow by an annual average of 3.7%.

Although being a very heterogeneous region, the hotel industry of Eastern Europe is highly dependent on political stability in order to reach its full growth potential. As described in section 5.1.3, the hotel industry in many Eastern European countries has in the past years been negatively affected by the events following the situation in Ukraine. Rezidor, being the largest operator of upper upscale hotels in Eastern Europe, with a particularly strong presence in Russia is of course highly dependent on the situation to stabilize. We are therefore in our upside scenario expecting improved relationships between Russia and the EU by 2017, which will have a significant impact on the region’s growth, both in terms of economic activity and tourism. As a result, we can expect high growth in both business and leisure travel. Thus, we believe that Rezidor’s revenues in 2016 will grow in line with the GDP and tourism, which is 3%. As for 2017 and 2018 we calculate with growth rates of 4%, whereas revenues in 2019 and 2020 will grow at 5% due to increased business activity. In contrast we predict in the base case scenario that the political situation will remain tense, which will have the biggest effect on Russia, where Rezidor has most hotels in the region. We therefore forecast a base case of a cautious 2% per annum until 2020.

8.1.5 Middle East and Africa

Middle East and Africa is another region, in which Rezidor in the last years has been very active.

The region will become increasingly important, since 60% of Rezidor’s pipeline of new hotel openings will take place there. GDP growth in the region has in the past years been high, showing a CAGR of 3.7%. IMF anticipates the high growth to continue until 2020, averaging 4.3% per year. The development of tourism has on the other hand been quite volatile, mainly due to the political instability following the Arab spring, which has had serious effects on tourist demand in countries such as Egypt, Libya and Tunisia. Looking forward, the UNWTO predicts annual growth rates in the region to be 5.3% until 2020.

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Similar to Eastern Europe, development of this region is to a high extent reliant on political stability. Rezidor has in the past years been fortunate on having only a few hotels in Northern Africa, where most of the political unrest has taken place. Instead, the large part of the MEA hotel portfolio is situated in either the Middle East or in the countries south of Sahara. Growth is in many of these economies correlating with commodity prices, of which oil is the most important. However, economic development has been positive in the last two years, despite declining commodity prices, which is due to the fact that these economies have become more diversified. We believe that Rezidor is thanks to its excellent network in the region very well prepared to expand to meet the high hotel demand. In an upside scenario, we expect conflicts to be absent as well as growing economies due to higher commodity prices and greater diversification. Rezidor will be successful at opening many new hotels on short notice, taking advantage of the increase in demand. Our expectations in such a scenario are growing revenues of 5% in 2016 and 2017, while revenues grow at a slightly lower pace at 4% due to increased competition. In our base case scenario, we adjust for continued political unrest in North Africa, but also in other countries such as Syria, Nigeria, South Sudan and Western Sahara. We believe that conflicts and declining commodity prices will deter tourists and business travellers from visiting parts of the region, but that other parts of the region continue to grow. In such a scenario, we believe that adequate annual growth rates are 2.5% per year until 2020.

In exhibit 41, a summary of the base case revenue projections is provided.¹³

Exhibit 41. Forecast of Revenues

Source: Rezidor (2015a), Own creation

13 The upside forecast scenario can be found in Appendix I.

Revenue Forecast by Region Forecast Period

EURm 2016E 2017E 2018E 2019E 2020E

Nordics 452 464 473 480 487

Growth 2.5% 2.5% 2.0% 1.5% 1.5%

Rest of Western Europe 494 499 504 509 514

Growth 1.0% 1.0% 1.0% 1.0% 1.0%

Eastern Europe 36 36 37 38 39

Growth 2.0% 2.0% 2.0% 2.0% 2.0%

Middle East, Africa & Others 33 33 34 35 36

Growth 2.5% 2.5% 2.5% 2.5% 2.5%

Total Revenue 1,014 1,032 1,048 1,062 1,076

Total Revenue Growth 1.7% 1.8% 1.5% 1.3% 1.3%

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