In an exclusive interview with ET, Ankur Gupta, managing partner and head of real estate for the APAC region at Brookfield AssManagement spoke about additional investments in The Leela Palaces Hotels & Resorts business, the company’s ‘record’ performance and ‘robust’ margins and the expansion plans going forward. Edited excerpts:
Q: How has Brookfield’s $558 million investment in Leela fared?
A: When we invested in the Leela business, our engagement with them lasted throughout 2018-19. This was prior to the global pandemic, Covid-19. Institutional capital hadn’t yet entered the market. The hotel industry had its challenges, with only a few instances of major global investors taking stakes in operating properties or large platforms. Moreover, there were issues such as low Average Daily Rates (ADRs). In several markets you had occasional supply shocks. Sometimes supply took longer and sometimes there were extended development cycles.
The pre-pandemic hotel industry in India faced ongoing difficulties. Leela, for instance, grappled with debt issues and had undergone debt restructuring, including an NCLT filing. Despite these challenges, there existed significant potential when considering the macro perspective. Factors like urbanisation, a growing middle class, and the hotel industry’s role as a proxy for infrastructure like returns on the back of a consumer story, which is very difficult for people to underwrite.
Our investment approach focuses on micro-level investment. While the macro factors such as GDP growth, real GDP, and inflation favored the hotel industry, certain essential elements were lacking. Leela, despite being a world-class brand known for exceptional service and high-quality properties, faced under-management and a complex capital structure. The solution lay in injecting substantial capital to stabilise the financial structure, enabling liquidity for growth, and implementing a professionally led management strategy. Fast forward to a quarter after our investment, the outbreak of Covid-19 occurred.
Surprisingly, the elements we had previously focused on – a stable capital structure and access to liquidity – worked in our favor. Despite reduced business activity, our hotels played a critical role in vaccine distribution and offered accommodation to those affected by travel disruptions. We managed to retain most of our associates and even provided bonuses as per their contracts, setting us apart in the industry. Remarkably, we continued to expand our business during this challenging period, including the addition of a new Leela palace in Jaipur. From having four palaces, we now operate five. Our efforts to bring in professional management for turnaround paid off when the market rebounded, with tourism and travel gradually resuming. This period also saw minimal supply growth over three years but demand levels had risen. Traditionally, hotels experienced a distinct pattern of volatility. They would have four strong days followed by three slower days.
This pattern depended on the type of establishment – be it a resort that saw high activity on weekends or city properties that thrived on weekdays, and vice versa. However, the pandemic introduced a shift in this volatility. Resorts, which previously encountered weakened demand on Sundays due to checkouts, now witness extended stays from guests who choose to prolong their visits. This shift has notably transformed the fundamental volatility of the global hospitality industry. As a result, all types of hotels are benefiting from this changed pattern. This shift positively impacts properties like Leela, which offer luxurious experiences and top-tier service. As guests extend their stays by even just one additional night, the appeal of indulging in the extra comfort and experience that these premium hotels provide becomes more appealing than ever before.
Q: How has the Leela business grown in the last two years?
A: So when we acquired the business it was eight properties. Today we are looking at 12 hotels plus one more on the anvil. So it’s been fantastic in terms of growth of the overall franchise. We’ve added one more Leela Palace. Leela palaces is what separates the brand from everything else. Now the business spans 3400 rooms. We have put a capital backed growth programme not just a brand led growth.
So we are differentiated from the rest of the crowd in the way that asset light is a good buzzword. We have an investment led growth programme for Leela.
Q: How much investment has gone into Leela?
A: The initial deal that we made, you know, was around Rs 4,500 crores. We’ve since then committed more than Rs 1500 crore. This is the largest ever foreign investment in the Indian hospitality sector. It’s well known that Brookfield is one of the largest investors globally in the real estate space. Our India business is very large in real estate. We can easily commit more capital as required in large transactions and we have done so.
We’re looking at adding more than 300 rooms in CBD and other districts in Mumbai itself. So we will be bringing in the Leela Palace brand to CBD Mumbai. We are also looking at managed residences as well in core business districts in Mumbai.
Besides that, we have signed up a transaction in Maldives. People always asked us when is Leela going global? With our investment in Leela, the company became global overnight. We have investments in 30 countries. Our investors are from various parts of the world, from Asia to the Middle East to the US to Europe, Australia, etc. So all of our reports go to those investors so Leela truly became global under our ownership. For two years, Leela was ranked globally number one, by Travel and Leisure magazine as the best hotel brand in the world. This year we are ranked number three as the best hotel brand in the world. So Leela has truly become global. But as far as Leela’s hotel operations are concerned, between now and over the next couple of years, we will see Leela going into the Maldives. We are looking at some interesting situations in the Middle East and London.
As the Indian diaspora gains prominence on the global stage, authentic Indian brands like Leela have a promising trajectory.
Q: How has the business done in terms of topline and bottomline?
A: In the current year, we are poised to achieve a remarkable milestone: the best performance in the last three decades, coupled with strong profit margins. In the hospitality industry, achieving robust margins is a significant achievement, and this success can be attributed to the alignment of incentives between the business owner and the management, which is very much the case with Leela.
At Leela, our objectives are twofold: to increase both revenue and margins. Regarding our top-line performance, we are poised to achieve significant revenue this year, reaching the four-digit mark. And most of it is from our own hotels. With the quality and appeal of our properties, there’s every reason to expect that our hotels can surpass this double-digit growth rate on a year-over-year basis. This trajectory aligns with the broader economic context of India’s growth story, making it entirely plausible for properties of Leela’s caliber to consistently outpace this robust growth rate.
Leela’s continued success in delivering strong returns is indeed promising. In terms of margins, it’s noteworthy that the service levels across all Leela properties have not only been restored to pre-Covid levels but have actually surpassed them. We have introduced innovative programmes and experiences that resonate with guests. We did not have any reduction in staff numbers due to the pandemic.
Margins in the hospitality industry are driven by a combination of factors, including effective management practices, efficient sourcing and procurement, and initiatives to reduce energy and operating costs. These efforts contribute to operating leverage, ultimately leading to improved margins.
Brookfield is one of the largest investors in the global hospitality industry and that depth of knowledge and insights contribute to Leela’s success. With a focus on quality management, strategic sourcing, and prudent cost management, Leela is well positioned to continue its growth trajectory while maintaining impressive margins. EBIDTA margins are higher than ever in history of Leela.
Q: Are you looking at saturating the metros with new properties, a strategy that many competitors have followed?
A: Leela’s brand essence revolves around a carefully crafted investment-led growth programme that ensures its properties stand out in the market. The distinction between Leela’s individual properties, like Leela Palace Chanakyapuri in New Delhi, and other hotel brands is vital, considering the unique characteristics of each establishment. Comparing a hotel like Leela Palace Chanakyapuri, with its unparalleled location, superior build quality, exceptional service, spacious rooms, and remarkable dining experiences, to a larger chain of hotels wouldn’t be a fair comparison due to the varying nature of these businesses.
However, Leela’s focus remains consistent across every market it operates in or plans to enter, with a robust pipeline of projects. In Mumbai we already have two hotels on the anvil. In Delhi-NCR, we have The Leela Palace Chanakyapuri, and two Leela hotels in Gurgaon and East Delhi. In Bangalore, a new hotel was recently commissioned in the Bhartiya City Complex in North Bangalore, alongside Leela Palace, Bengaluru.
Wherever we are present, we are consolidating our position. In Rajasthan we had one hotel, Leela Palace Udaipur, then we opened a Leela Palace Jaipur. We recently had two management contracts signed in Kerala. Its a very deliberate growth by keeping brand standards very high.
Q: Right now you have 12 operational hotels. What kind of pipeline are you looking at?
A: We are looking at around 1000 rooms in a couple of years. We are looking at more resorts. We are on the verge of operationalizing a property in the Northeast of India. We’re actively exploring opportunities in Jammu and Kashmir, as well as within the tourism circuit of Uttar Pradesh.
All these new properties will contribute to the expansion of the Leela brand. By establishing a well-connected network, we are creating a strong foundation for subsequent growth to naturally follow.
Currently, our emphasis is on refining input metrics, recognizing that the right actions lead to desired outcomes. It’s integral for our hotels, whether owned or managed, to consistently generate satisfactory returns on capital. This principle holds true, enabling smoother development for our next properties.
Q: You have prime assets across India. Are you also looking at leveraging those?
A: We are currently designing a mixed use property in CBD Mumbai, a combination of office and a Leela palace. We’re looking at similar concepts in Bangalore right now, where hotels will be created in CBD districts. Mixed use is the way to go for commercial real estate. It works very well for the end user being able to walk to work from your hotel room.
It’s not just luxury, it’s something that creates value for our capital because of the right user experience. We are known in the world by these market leading districts that we establish. If you look at our entire portfolio right now, it’s around these large, urban, mixed use clusters where there is an element of shopping, there is an element of office. Of course, hospitality will be a critical element as well.
Q: So, all different parts of your businesses are coming together and that will be a different kind of a leverage?
A: We are quite fortunate in Brookfield that we are not a single asset investor. In a business such as ours, and you add the emerging markets volatility, patience is something that is required. So, you have to be patient in not doing a deal too soon. And most importantly, after you have invested, there will be ups and downs. We talked about the Covid 19 pandemic hitting the Leela business in the first quarter of our investment. But if you fundamentally believe that the building blocks of your business are strong, it will come back.
Q: One of the ways the hospitality companies are growing in India is basically getting into new categories. Do you have a play there?
A: Our business in India has a very large real asset component where we can play in multiple categories as Brookfield Asset Management. If I wear my Brookfield hat, we can invest in any type of hospitality play. We can invest in select service, we can invest in mid scale, we can invest in upper upscale besides luxury. We can invest in resorts, we can invest in city hotels, services, and we are evaluating all of these concepts on a regular basis.
As far as the Leela business is concerned, it’s a real play on luxury, and that will remain the core of that business. Brookfield is fortunate that we are involved in the business today. It is a celebration of Indian culture. We have $25 billion worth of capital invested in the country. Our business wouldn’t be complete if we didn’t have something like this in the portfolio, which is truly Indian but run by global standards.
Q: Globally, you have a lot of focus on ESG. So will that also translate into the India business?
A: ESG is core to our DNA. We are the largest investors in renewable power assets in the world. Most of our buildings today in India and across the world are green certified. We have a massive programme going on in India and across the world on powering our properties through renewable power. In India we have taken a pledge to be net zero by 2040. So, ESG is core to our business and it requires capital investment.
And we are prepared to do that because today there is a return on that capital. Over 35% of the Leela portfolio is powered by renewable sources of energy, which were commissioned by us. And you have to make significant diverse efforts to do it. It’s not just power, but recycling food, making sure your energy consumption is lower, making sure your equipment is modern. A lot of things go into ESG management.
Q: Are you also looking at the Leela investment from an exit point of view? What is the timeframe?
A: As we discussed, we are patient to get into a business and then run it patiently as well. As I look at any business that we have today in the country, or anywhere else, we run businesses for fundamentals that are required for the businesses, a recapitalization or a public market event is just a natural course on the capital side of the business. The fundamental operations of business are about making your hotels better, more ESG compliant, growing the business, entering into new sectors such as resorts, wildlife or global expansion. So we run a business for perpetuity. That’s the way I see it.
Q: But there would be a timeframe.
A: We own this business for three and a half years right now, out of which more than two years were impacted by Covid. So I would say we’re just getting started.
Q: How has the business been in the first six months of this year?
A: Since the global markets opened up, India did a fantastic job in managing the pandemic. As I said this year, we are on track to have the best year ever, in terms of revenue. Margins are solid. Our new hotels are doing very well. Our existing hotels have had record room rates.
Q: What’s the outlook for the festive year end quarter?
A: Besides the festivals, there’s G20, and we are talking about the World Cup coming in. Across the country, you see the palpable vibe. So people are looking forward to the next three, four months. So, we are very excited about it.
Q: What’s your take on the government policies around the sector? Can the government do more?
A: There are too many questions asked to the government. I think the government is doing a fantastic job. We should also ask ourselves, what are we doing? We are very excited about the divestment programmes coming up in various states. Some of our economic growth initiatives will be around the government divestment programmes. Wildlife could be a very interesting segment where lots of government initiatives are required to really promote wildlife.
Divestments are talked about in Delhi and Jammu and Kashmir and there are some great properties. We are one of the few brands that are in the business of investing our own capital so we are truly unique in that perspective. We now have high speed rail connectivity and improving access to what used to be the remote areas in India. India is modernizing existing airports besides adding several new airports. So, the government is playing its part. It’s up to us to do our bit now.
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