Hotel margins shrink as Sagicor X Fund adds Orlando operations
Sagicor Real Estate X Fund's newly acquired hotel in Florida contributed $140 million to the company's revenue during the three months to September 30.
Even though the income generated at the 742-room Doubletree Universal in Orlando represented just shy of three weeks of sales - X Fund took over the property on September 30 - revenue from the US-based hotel paled in comparison to that of the real estate investment company's other directly owned hotel - the 489-room Hilton Rose Hall.
The Montego Bay property generated $1.1 billion in revenue in its weakest quarter for 2015, following $1.2 billion in sales in each of the first and second quarters of the year, whereas the Florida hotel might have generated just over half that, by Wednesday Business' calculations.
Furthermore, hotel expenses for X Fund appear to be climbing. In the first quarter, the hotel holding (just Hilton at the time) recorded a hefty 44 per cent operating margin when not accounting for interest, tax, depreciation and amortisation. Put another way, EBITDA was 44 per cent of sales. Even when deducting finance cost and depreciation, the hotel would have seen $290 million in pretax profit, which represented 24 per cent of revenue during the three months to March.
The following quarter, the hotel's EBITDA to sales fell to 26 per cent, and its pretax margin fell to just over five per cent.
In the review quarter, when X Fund took on its second directly owned hotel, the segment's EBITDA to sales fell further to 21 per cent. Pretax profit totalling $69 million for the quarter represented 5.5 per cent of sales.
The higher operating expenses, or smaller operating margins, reflect additional financing costs resulting from $16.2 billion in long-term borrowings used to finance the purchase of the two hotels - US$85 million for Hilton and US$75 million for Doubletree. A $5.2-billion rights issue in September was also used to finance the latest acquisition.
Other income for X Fund, which primarily reflects financial gains on its holdings in Sigma Unit Trust, rose from $271 million in the three months to September 30, 2014, to $285 million in the quarter under review.
Before buying either of the two hotels, X Fund did not carry any expenses, and as such, all of its income made from gains on its units in Sigma Unit Trust would go to the bottom line - and still does.
For the three months to September, the company posted $349 million to its bottom line, up from $271 million in the comparative quarter in 2014.
Still, X Fund has demonstrated a shift in its business model towards directly owning and operating its hotel assets rather than just owning units in Sigma's unit trust, which holds commercial property and three Jewels hotels.
X Fund also has plans this year to break ground on a US$10-million, 50,000-square-foot property that will be rented to business process outsourcing companies.