Magic kingdom

After being recruited by Prince Alwaleed Bin Talal ten years ago, Sarmad Zok has helped expand the prince’s hotel empire to almost 30 properties. He tells Massoud Derhally the next year won’t see a slowdown in the company’s growth.

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By  Massoud A. Derhally Published  June 11, 2006

|~|28_DSC6673-200.jpg|~|Living the dream: Zok was handpicked by Prince Alwaleed after working for a leading hotel consulting firm in London.|~|After being recruited by Prince Alwaleed Bin Talal ten years ago, Sarmad Zok has helped expand the prince’s hotel empire to almost 30 properties. He tells Massoud Derhally the next year won’t see a slowdown in the company’s growth. Working for Prince Alwaleed bin Talal, the world’s fifth richest man, isn’t exactly a walk in the park. But for Sarmad Zok, who has worked with the prince since 1995 and now heads Kingdom Hotel Investments as its chief executive, serving a demanding boss like Alwaleed is itself a big part of the attraction. The two met in the fall of 1995, a time when Alwaleed was on the move. The Prince had just been featured on the cover of Business Week magazine after making a high profile investment in Citigroup and spending US$160 million on 50% of New York’s Plaza Hotel. A year earlier he had bailed out the Euro Disney theme park. Zok, who had already worked for HVS International, a leading hotel consulting and valuation firm in London covering European markets, was heading Forte’s development efforts in the Middle East, Africa and India when he received a phone call from Alwaleed. “I was one of the few Arab speaking hotel investment executives in London at the time. I walked into the meeting with the prince and it was an intense adrenalin rush for at least two hours,” says the 37-year-old Zok. He says the Prince was very thirsty for development and acquisitions and Zok was equally eager to work for someone exceptional in the hospitality industry. It was his dream job. “Ever since I was at university I wanted to do what I am doing now. I wanted to be investing and buying hotels for a very strong, capable, global organisation,” says the blonde haired and blue eyed Zok, who hails from Tripoli, Lebanon. Much has changed since Zok started to work for the Prince. In the last eleven years, Zok, who started out in his mid twenties, has been instrumental in seeing the real estate portfolio of Prince Alwaleed grow to 28 properties (7057 rooms) in 14 countries. And these aren’t any old properties. They include the cream of the crop, such as the George V in Paris and resorts in Mauritius and Thailand. The properties are managed an operated by the Four Seasons Hotels, Fairmont Hotels and Movenpick Hotels. Listening to Zok speak is entertaining as much as it is insightful. The young executive clearly enjoys what he’s doing and credits the Prince for allowing him to spread his wings and lay out the strategic imperatives of growing the business. “The Prince has a sense of empowerment that very few leaders have and I was able at a very young age to live up to my own potential," he says. “This helped me to develop,” he adds. Kingdom Hotel Investments (KHI), which is headquartered in Dubai, and chaired and majority-owned by the prince, has ostensibly become a leading hotel and resort acquisition and development company focused on the first class and luxury market segments; and what Zok likes to define as international high growth markets. The matrix of success of KHI is a result of several variables. The strategy of acquiring under-performing assets, which has been the core of Prince Alwaleed’s line of attack, has carried over to KHI, although Zok says it's not the only driving force behind all of its deals. “We don’t only acquire exclusively under performing assets," he says. “We rather focus on each investment opportunity and appraise it on the merits of its financial returns. Obviously under-performing assets that have unrealised potential rank top, and yes KHI and Kingdom Holding have a well-established track record in identifying and acquiring under performing assets with a view to turning them around. He continues: “Because of our focus and our expertise and our medium to long-term range we are able to work out these assets more effectively than other owners and as a result derive from them premium returns compared to the average hotel owner.” “An attractive investment opportunity is one whereby you are able to buy an asset, make some modifications to that asset, either by re-branding it or repositioning it, or actively asset managing it, and as a result of your actions you turn around the asset. Over time, the asset’s profitability will reflect the measures that you have put into place. As the profitability reflects the measures that you have put into place, the capital value of that asset appreciates over time and this is how you capture the value creation that you have generated as a result of your initiatives,” adds Zok. An example of where KHI bought a property and turned its fortunes around is the former Holiday Inn Hotel in Dubai. Prince Alwaleed and Zok took over the property in 2003 and re-branded it as a Movenpick Hotel, while spending as little as possible in the process. “It was a new hotel and it did not benefit from a brand that was allowing it to generate the rate that it needed to generate,” says Zok. “On the back-end of a very strong market we were able to significantly increase the profitability of the hotel. “As a result of this enhanced profitability, we refinanced the hotel to capture the value enhancements of the hotel and were able within two and half years to return approximately 100% of the capital that we invested into the hotel.” He adds: “We are driven by returns and as long as we are able to see that there is a significant way to generate returns, then we will pursue an investment opportunity. We have been very successful in different markets in achieving this.” As a company, KHI is not as concerned with brand equity as it is with the returns on its investment. It essentially views itself as a real estate investor, and shuns opportunities to delve into operational aspects of the hospitality business. “We are not brand builders,” says Zok. “If you notice today, a lot of the hotel operators that traditionally invested in real estate have been severely penalised by the investment community and analysts and have divested out of the real estate sector.” That is why KHI’s investment decisions are purely financial, whereas, as Zok puts it, hotel operators make their decisions on the strategic fit of a particular investment, and its impact on the growth of the brand. The company’s targeted internal rates of returns for their investments are between 10% and 20% and Zok doesn’t like to invest in projects that have less than 15% seeking a higher return on the capital employed. Zok has no inhibitions about success carrying over to markets that otherwise may be considered inopportune for business. “An under-performing market constitutes a good opportunity as long as a recovery is anticipated within the investment holding period. Most of the markets in which we invest are ‘exotic’ and we thoroughly assess the risk – rewards relationship in any market. Risk is not necessarily limited to geo-political risk. Most people have a tendency to focus exclusively on geopolitical risks, but guess what, if a country contains some geopolitical risk and has a very limited supply of hotel rooms, then rest assured that demand levels may be sustainable notwithstanding the risk. We adopt a macroeconomic perspective on all investment opportunities,” he adds. The ideal scenario for KHI would be the purchase of a group of existing assets that are under performing and repositioning them through re-branding and renovation. This, coupled with market recovery, then provides significant growth; as the company realised through its acquisition of the Lonhro portfolio of five hotels in Kenya. But under-performing assets are not the only factor behind acquisitions or how the company has performed to date. Zok points to the strong performance of the existing properties in KHI’s stable. “Those hotels are currently going through a ramp up period. They will continue to ramp up their business, build their demand and drive rates upwardly which will ultimately translate in significant growth,” he says. Another factor is related to hotels that have started come online. Out of the company’s portfolio, eleven hotels are currently under construction but some opened in 2005 and consequently contributed to the growth of the business. The location of properties has also been a factor. “We are located in high growth areas. From the outset, we have focused strategically on high growth, emerging markets. These markets started to take off after 9/11 and we continue to see significant growth going forward, but 2005 was a remarkable year. We were able to outperform the region,” explains Zok. Last year, the Middle East market grew by 21% in terms of revenue per room. The company reported an increase of 179% in net yearly income to U$12.3 million, up from the previous year’s figure of US$4.4 million. It realised revenue of US$58.8 million, an increase of 53% from US$38.4 million in 2004. KHI registered a gross profit of US$17.9 million in the year ending 2005, up 41% in comparison to the US$12.7 million reported in 2004. There was a 133% increase in earnings per share to US$0.07 in 2005, up from the US$0.03 in 2004. Revenue per available room was reported at US$81 for the year 2005, increasing by 23% from the 2004 figure of US$66. The company is aggressively expanding after floating 25% of its equity on the Dubai International Financial Exchange (DIFX) and the London Stock Exchange last march. The listing raised US$397 million and was 14 times oversubscribed. Going public, says Zok, was part of a plan to help the company grow at a faster pace in emerging markets. The proceeds are being used for new acquisitions, not the financing of existing assets that are under construction. KHI, for example, has increased its stake in the Four Seasons Hotel in Damascus, acquired a 100% equity stake in a hotel in Mauritius and acquired 100% of the Karon beach hotel in Phuket, which it is re-branding as a Movenpick. Zok’s investment target is to acquire six hotels per annum, of which four would be existing operating hotels. He says South East Asia, China and Africa will witness new acquisitions and investments by KHI. The company has significantly expanded its acquisition and development team, with offices in Johannesburg and Singapore. “South East Asia and Asia are markets that are prone to superior growth, compared to mature parts of Europe or North America in the forthcoming decade and we will look to capture a share of that,” says Zok. “Traditionally, our markets have been Middle Eastern markets. This is really where we started, but the dynamics of the Middle Eastern market are no different from the dynamics from other emerging markets in the world. “As a company, we have an established track record, a platform and a well-recognised, diversified portfolio of high quality assets in those markets. Our focus is on global emerging markets,” adds Zok. Today, 50% of the company’s invested capital is in the Middle East, 27% in Africa, 13% in Europe and 10% in Asia. When this interview took place, Prince Alwaleed was travelling across 15 African countries scouting different nations. As Arabian Business went to press, KHI announced it had concluded a MoU in Kampala, Uganda for the development of a hotel there. “We try to leverage to the extent we can our relationship with the Prince as given his international stature and networks, he represents a great source of deal flow origination,” explains Zok. But KHI's major undertakings in the coming months will be in the Chinese market. “We have two projects there; one in the Shanghai area and the other in the Shenzhen area. “Both are existing assets and we hope that before the year’s end we will be closing in on a transaction,” Zok reveals. “We are in addition to that looking at a small existing hotel in Dubai. It will marry well with our existing Movenpick in Bur Dubai as serviced executive apartments. We will be closing that transaction in July.” “The diversification that we have is pan-continental and the aim is to be the largest, global, emerging market hotel investment company in the world providing superior returns to our shareholders.” Zok concedes investing in emerging markets also means high risks, but he also points out it also means high returns. “If you look at GDP growth rates in these emerging markets they are higher than Western Europe. The compound annual growth rate in Libya, for example, from 2000 to 2006 was approximately 7%, whereas Western Europe was 1.6%. “There is a strong correlation between GDP growth rates and hotel demand. Inevitably, these emerging markets are starting from a lower base as well so their growth rates will be higher,” Zok points out. Zok also argues that the growing number of tourist arrivals in such markets augurs well for the investments they make. “The highest growth areas in the world going forward for the next 15 years will be Asia Pacific, the Middle East and Africa. “The Middle East will receive twice as many tourists than Europe in terms of growth rates. When you combine the GDP trends of these markets with tourist arrivals growth rates, then hotel demand is going to pick up and therefore will need to be matched with hotel supply,” he explains. Zok believes the Middle East hotelier market still has plenty of room to grow, even in a market like Dubai that has outperformed other markets regionally and has higher occupancy rates than hotels in New York. “If you look at the demand and supply curves for Dubai for the last ten years they are linearly parallel. If you look at all the forthcoming development projects being undertaken in Dubai there is nothing to suggest that when those things come online that the current hotel supply will be sufficient,” explains Zok. “Inevitably the current performance of the hotels in terms of occupancies cannot be sustained in the aggregate long term because as long as it is healthy as it is, people will continue building hotels until the market will stabilize,” says Zok. “At some point in time the market will stabilise. It will not crash but it may soften and then there will be a recovery. Like any other market Dubai is not immune from going through its own cyclicality.” There is no one single challenge for Zok in this business. The landscape is continuously evolving and he simply adapts. “Challenges change all the time depending on the capital markets cycle, the hotel investment cycle, or operating and investment cycles. Challenges evolve over time but each challenge must be addressed. If a challenge is recurring then it’s a bad thing because it means it has not been addressed.”||**||

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