Marina Byblos Hotel Loan Application Report

Sponsor: BUSSRA ALSHAM CONSTRUCTION & MAINTENANCE

ContentsProject Overview.........................................................................................................................................3

SWOT analysis.............................................................................................................................................4

Project Strengths.................................................................................................................................4

Project Weaknesses.............................................................................................................................4

Project Opportunities..........................................................................................................................4

Dubai Macroeconomic and Tourism Industry Analysis................................................................................5

Project Sponsor...........................................................................................................................................6

Project Valuation.........................................................................................................................................7

Conclusion...................................................................................................................................................8

Project Overview

The project consists of the purchase of an established 4 star hotel in the prime Dubai Marina area. The

hotel is called Marina Byblos Hotel and is managed by Byblos Hospitality. The hotel has started

operations in June 2011. The hotel facilities comprise of 212,260 sq ft which include the following:

184 bedrooms including 16 suites (112,494 sq ft).

5 managed F&B outlets (16,364 sq ft).

3 rented outlets (6,565 sq ft – Korean Bar, Salon, Bookstore)

Circa 4,000 sq ft of retail space to be developed or rented.

The client, Bussra Alsham Construction and General Maintenance, has requested financing from EG for

the purchase of the hotel, for the amount of USD70mn to be paid in 12 years with no grace period.

Sponsor Strength

Revenue Strength

Cost Risk

Competitive Market Exposure Risk

Expert Reports Quality

Information Quality

Technology, Construction and Operation Risk

Business And legal risk

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Marina Byblos Project Risks and Strengths Rating

Possible sources of project risk are red, possible sources of strength are green. Ratings are applied to both categeroies respec-tively

SWOT analysis

Project Strengths

The Hotel is located in Dubai Marina, a prime residential area and a major destination for

tourists.

Since inception, the hotel has had annualized occupancy rates of 80% and ADR of AED325.

A distinguishing feature of the hotel is the presence of 5 managed F&B outlets generating

revenues equaling that provided by the rooms.

Project Weaknesses

Compared to most hotels in the Marina Area, the hotel does not have a sea view.

The project sponsor plans to manage the hotel by himself, and has provided no evidence of

experience with regards to managing a hotel of this size.

Project Opportunities

Only 9 hotels are in the marina within walking distance of the beach and JBR/Marina Amenities.

Of these 9, only 2 fall in the 4 star segment, the others all being 5 star with average prices

ranging up to 1,500 per night.

The hotel is priced below all hotels within it’s immediate catchment whilst offering quality

service and a range of facilities. Hotel management is planning on raising ADR to AED425 whilst

maintaining occupancy.

Positive growth drivers in Dubai due to proximity to major tourist and business markets,

continued airline rote expansion and government led tourism initiatives throughout the year.

Dubai Macroeconomic and Tourism Industry Analysis

Dubai has a positive economic outlook with consistent GDP growth recovering steadily since the

2007/2008 financial crisis. The government has shown commitment to spending on hospitality related

infrastructure and development, allocating 41% of total public expenditure to improvements.

Accordingly, Dubai’s hospitality sector is currently witnessing impressive growth levels. Travel to Dubai

remains attractive to tourists with an expected 8.8 million visitors estimated to spend USD8.8bn in 2012,

growth in the hospitality sector has stayed strong and supply of rooms continues to increase while room

rates rise. Hospitality market data is showing very positive trends, suggesting confidence is returning to

the industry. After bottoming at approximately 70% in 2009, average hotel occupancy has increase to

86% in the first half of 2012, returning to similar levels seen prior to the 2007/2008 world financial crisis.

This improving level of occupancy has also increased RevPAR. According to the BMI UAE tourism

forecasts till 2015, the number of hotel guests is expected to grow by 9% p. a. against growth of just

7.7% in hotel rooms. Assuming similar ratios as in 2011, this is expected to push occupancy rates to 83%

in 2015.

2011 E2015

Current Supply 53,828

Future Supply 18,649

Projected Dubai Hotel Guests Source: BMI Tourism Report

53,828

2011 E2012 E2013 E2014 E2015

Projected Hotel Guests to Dubai (Millions)Source: BMI Tourism Report

Project Sponsor

The client owns and operates a small construction company. According to the client, business has almost

reached a halt during the last three years ever since the real estate crisis hit. Supporting documents

provided by the client show that he neither he or his company have significant outstanding liabilities,

however the client does not own any assets that could serve as collateral for the loan, other than the

value of the hotel itself. Most worrying however is that the client has stated that he plans on managing

the hotel by himself and as per the request of EG, he has provided a description of his management

objectives and his plans as to how he will run the hotel. I believe this increases the project’s operational

risk significantly as the client has no previous experience in managing a hotel and there remains

significant risk that the revenues from the F&B, which constitute almost 50% of total revenues, will be

reduced due to possible mismanagement. It is advisable that the hotel management be retained Byblos

Hospitality which has 33 years’ experience in this field, or by another experienced hotel management

entity.

Marina Byblos Valuation

Currently the hotel owner has offered a selling price of USD70mn for the hotel. In my many

communications with the client and with representatives of the hotel owner, I have constantly

requested an independent third party valuation of the hotel to lend support to the selling price. At first I

was provided by an outdated feasibility report which was prepared by CBRE on the 20 th November of

2011. The valuation on that report amounted to USD54mn. The hotel owner has informed me that he

has developed a new valuation by a relatively newcomer into the market called Full circle Investments.

Their valuation was prepared on July 2012 and the hotel was valued at around USD71mn. The hotel

owner has accordingly based the selling price on this newer valuation. Even though the valuations were

prepared under different circumstances and time frames, the relative wide disparity between the two

valuations was a sign of concern for me. Most significantly was the change in valuation provider. CBRE is

a top 10 real estate consultancy firm with worldwide offices and with extensive knowledge of the local

UAE and GCC real estate markets. It seemed odd to me that the hotel owner would switch to a relatively

newcomer in the market for their new valuation. Another twist in the story occurred when I contacted

the hotel owner directly and he informed me that a newer valuation was being carried out by CBRE.

Accordingly the valuation in that report amounted to USD63mn, which was more aligned with internal

valuations done in EG. It seems as though the client and the representative of the hotel owner were

either unaware of this new valuation or they were trying to conceal it since it is significantly lower than

the selling price

Due diligence to verify the value of the project consisted of the following:

An in-depth review of the financial models for all the provided valuations.

Communications with the valuation providers to discuss some of the key assumptions used.

In-house EG project valuations.

Marina Byblos valuations and the methodologies used

Prepared By

Full Circle

Investments CBRE EG Engineering EG Finance

Methodolog

y Used Income Capitalization

50% Income Capitalization, 50%

Discounted Cashflow

Opportunity cost (cost build up

plus three years expected net

profits)

Comparables

Method

Valuation

(USD) 71,118,678 62,698,802 62,377,451 62,673,968

The table below summarizes all the different valuations prepared for the Marina Byblos. Accordingly, I

believe a fair value for the project to be approximately USD62.5mn. This valuation is considered less

than the amount requested by the client and the hotel is considered overvalued by USD7.5mn.

In addition, if we assume that the financing rate is the minimal 2.8% rates and a 36% ROI on exiting the investment after 12 years, then the project IRR is expected to be 11%. This IRR however is highly dependent on the forecasted exit value which quite frankly is very hard to predict given the volatile nature of real estate markets. Another thing to consider is that the client is expected to pay AED25.5mn yearly installments while the average EBITDA during the period is forecasted to be 23.6mn, thus there is a high risk that the sponsor will default on a future loan payment. It should also be noted however that the project financing decision should take into careful consideration the inherent riskiness of future payments. Longer loan periods command higher interest rates due to added premiums to compensate for the riskiness in future payments.

Conclusion

Overall the hotel is expected to generate good returns and a positive exit value of approximately 5 to 7% within the next two years. The loan application for this hotel however is suffering from the following weaknesses:

1. Project valuation of USD62.5mn as compared to a loan amount request of USD70mn.

2. Lack of sponsor experience in hotel management, to support the revenue generation of the F&B

facilities, which comprise 50% of revenues.

3. Loan repayments are entirely dependent on the revenues from the hotel. There is a lack of

additional sources of income to cover the loan repayments.

4. Assuming a minimal 2.8% financing rate, 12 year loan term and loan principal of USD70mn, the

client is then expected to pay AED25.5mn yearly installments while the average EBITDA during

the period is forecasted to be 23.6mn, thus there is a high risk that the sponsor will default on a

future loan payment.

Disclaimer: Although this review has been prepared in good faith and with professional care, EG research cannot make a representation on the warranty or representation of the accuracy of the analysis. Substantial volatility in the capital markets coupled with a lack of transparency in the local UAE real estate market make it difficult to predict what may happen to real property values over time. Inferences made on this review are also subject to the limitations of the available information and the time frame for preparation.