Accor’s Sébastien Bazin told his financial background and experience in hotel investment will benefit the company as it fine tunes its approach to owning real estate.

　　Accor’s decision to split into separate divisions doesn’t necessarily mean the Paris-based company will aggressively seek to acquire hotels, nor will it be shy about dumping non-performing properties from its system, according to Sébastien Bazin, the company’s chairman and CEO.

　　Bazin, who stepped into his role last August, said during an interview conducted during a break at the International Hotel Investment Forum that Accor’s modus operandi is to clean up its portfolio of nearly 1,400 hotels to maximize corporate performance.

　　Bazin said he doesn’t expect the company’s asset-light strategy to dramatically change, but it won’t shy away from buying assets when the right situation arises. The company currently owns about 15% of its portfolio.

　　Bazin’s first major step after being hired was to split the company into two divisions—HotelServices and HotelInvest—to separate its operating and franchising business from its real estate-ownership activity.

　　The HotelServices division encompasses the 3,576 hotels, comprising 461,719 rooms, operating under 12 brands: Sofitel, Pullman, MGallery, Grand Mercure, Novotel, Suite Novotel, Mercure, Adagio, Ibis, Ibis Styles, Ibis budget and HotelF1. Its goal is to maximize fees, speed up customer-relationship management and loyalty-building drives, shift the group deeper into the digital realm and roll out a strategy in each segment to bolster the brands.

　　The HotelInvest division comprises the 1,387 hotels Accor owns or manages via leases. The 278 hotels owned by Accor generate 54% of the company’s net operating income. The division’s mission is to streamline and manage the existing asset portfolio through disposals and acquisitions based on three criteria: margin, cash generation and location, and support Accor’s development by investing selectively in properties.

　　Bazin, who spent 20 years leading Colony Capital’s investment strategy—a strategy that included becoming a major investor in Accor—said he plans to continue using the same formula that made him successful as an investor.

　　"I am indeed a financial person in terms of education, but I’ve been dealing with hotels for the last 20 years and probably investing over $15 billion in different brands,” Bazin said. “I’m a bottom-up approach guy.”

　　Bazin said that before announcing the reorganization plan, the company looked at each of its 1,387 hotels as individual subsidiaries to determine how each one was performing.

　　"(287) are a bit easier; we own them free and clear,” he said. “But 1,100—we lease them, some are variable leases, some are fixed leases, some have minimum guarantees, some we have to pay the (capital expenditures), some the owners have to pay the CapEx. It’s a bit of a mess.”

　　The company looked at each asset in three ways to help it structure its strategy:

　　Gross operating profit margin: “What are those hotels above 40% GOP margin? What are those below 40%?” Bazin said. “I know, and I won’t tell you, how many of the 1,400 are below 40% GOP margin.”

　　Net operating profit after rent and 5% normative CapEx: “What are those making money? What are those losing money?” he said. “Unfortunately, I do have some hotels losing money after rent and after normative CapEx.”

　　Location: “Unfortunately, we have too many hotels belonging to the three worst categories, and if they are, then you have a problem, and I need to fix the problem with no emotion,” Bazin said. “If basically we have to close a hotel, deflag a hotel, then let’s do it. If you have to actually sell the hotel because it will be better run under somebody else’s hand, let’s do it.”

　　It will take some time

　　The process is not a short-term task; Bazin said it might take two years to fix. The job includes sitting with investors and telling them Accor’s intention.

　　"We have the ability to renew hotel by hotel on each of the portfolios,” Bazin said. “So either I renew it because I’m a happy owner and I’m fine; either I renew it but I want the rent to be lower; either I terminate the lease and I don’t want to renew it; or either I basically make an offer and buy the bricks back. That is what we’re going through.”

　　During a general session at IHIF, Bazin said he didn’t want to enter into any more leases for the time being. He said during a follow-up interview that it’s not a difficult decision to make because most of Accor’s recent business has been through management and franchising contracts.

　　"It’s not that hard because my predecessors have done a very good job in terms of the development pipeline of Accor—85% is asset-light,” Bazin said. “Are we depending on ownership and leasing on the development of Accor? The answer is no, and a firm no. Leasing is less than 10% of the pipeline, so the cost of terminating and not entering new leases is fine; it’s affordable.”

　　However, he said there is no such thing as a bad lease.

　　"You can conduct good development through leases, and that’s fine,” he said. “My only problem with leases—it has nothing to do with the structure; it has to do with financial markets of lease to securities don’t know how to evaluate a lease.”

　　Bazin said the financial markets understand management-fee streams, franchise-fee streams and ownership, but putting a multiplier on the lease income after-rent payment makes them uncomfortable.

　　"So I have to listen to basically what’s being demanded by the market,” Bazin said.

　　An easy conversation with investors

　　Bazin’s history with Colony Capital makes it easier for him to have conversations about property improvement plans and CapEx.

　　"Well, it’s easy because obviously I know them well and I understand exactly what they’re looking at,” he said. “Let’s be very clear: An investor demands a return on the risk he’s taking with his own money and providing you basically with your management skill and allowing you to put your brand on it. So it’s a very straightforward, what I call ‘adult conversation.’”

　　The process begins with listening to what an investor wants: traffic, operating margin and yield. In other words, a return on investment.

　　"The minute you understand basically what he wants, then you’re going to be able to tell him whether you could or you just cannot fulfill his expectations,” Bazin said.

　　"What I’ve been telling the people: education, be a good listener, tell the guy that you unfortunately just cannot deliver the service, or if you do tell him you’re going to deliver, then be accountable for it,” Bazin said. “Don’t use anybody else’s mistake on not being able to perform. That’s what I want to implement.”