Strategy

On the Record: Jumeirah Group’s CFO

Claiming that Jumeirah is now financially independent from its deep-pocketed parent, Alaister Murray maps out the hotel chain’s future.
Abe De RamosNovember 21, 2006

You know you’re in Dubai when you walk into the lobby of the world’s tallest hotel and you’re bathed in the glow of its gold-leaf interior. The sail-shaped, all-suite Burj al Arab is an icon of the booming Gulf city and the crown in the portfolio of Jumeirah Group. A part of Dubai Holding, the investment arm of the ruling family of Dubai, Jumeirah now wants to bring its expertise in opulence overseas. So far, its three hotels in London and New York had been bankrolled by its sister companies. Last September, it proved it can hold its own against established players by winning a contract to manage the US$1.2 bn, 261-room Beetham Tower in London, following a smaller contract to manage a luxury hotel in Shanghai’s Xin Tian Di district. The company aims to bring its portfolio from 12 to 40 hotels by 2010, a goal CFO Alaister Murray says is easily achievable. The chartered accountant from Northern Ireland has been in Dubai for 13 years, starting off at PwC and later becoming CFO of oil explorer ENOC. He joined Jumeirah in 2002. Claiming that Jumeirah is now financially independent from its deep-pocketed parent, Murray maps out the hotel chain’s future.

Dubai is booming. Do you see the tourism sector sustaining its growth?

Our outlook is very positive. Most hotels are very busy. In the five-star end of the market, there is a great demand for rooms, and in many respects, demand continues to outstrip supply. We see a lot of development going on, but we expect this situation to continue at least for the next couple of years. The supply-and-demand curve will cross over in 2009, assuming that projects we understand are coming on by that time are completed.

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Dubai’s neighbors have begun aggressive tourism-development plans of their own. Will they take away Dubai’s market share?

Dubai has led the way in tourism development in this region for the last ten years, and we believe it will continue to do so for the foreseeable future. There are developments going on in Abu Dhabi, Oman, and Qatar as they diversify away from their very rich gas base, but these will only contribute to the overall tourism offering of the region. We’re very positive about Dubai because some of the finest leisure and tourism developments in the world are being created here.

How diverse is your customer base?

We track very closely the countries of origin of our business. Our feeder markets have come from Europe, in particular Britain, Germany, and Switzerland. We’re starting to see a diversification away from our traditional base, and that is something that we’re actively working on. We see increasing numbers from our new feeder markets. More and more visitors are coming from Asia now, in particular China, and as the Emirates (Airlines) network continues to grow, Dubai is seeing an increase in visitor numbers, in particular the US. In the summer months and at certain points of the year, the Gulf business and Russian demand can be very high indeed.

How do you further diversify it?

We’re expanding our global network from a sales perspective. We have representation in the Americas and recently, Asia. We have our own people on the ground in Europe. But in addition to creating the sales structure, we’re also putting the Jumeirah brand in front of people as we open some of our overseas developments. We already have three properties in London, and just this year we’ve taken over the management of the Jumeirah Essex House in New York. We have the Shanghai project going on in Xin Tian Di. We’re looking to grow our exposure in Europe, including Moscow and Paris, and maybe some German cities like Berlin and Munich. In the US, we’re looking at Chicago, Boston, Washington DC, and LA, and in Asia Pacific, the east coast of Australia. We’ve won a significant contract in China and we expect more from there. We are also looking for opportunities in India. We now have 12 operating properties in total—including three overseas—and our goal is to be managing 40 luxury hotel properties by the end of 2010.

Is that achievable?

We believe so, given the development pipeline that we have and the interest that owners are expressing in Jumeirah as a management company. Interesting projects are coming to us from both within and outside the Dubai Holding structure. Companies within the group such as Dubai International Properties are well placed to invest in the tangibles and are stepping out across the world. On the other hand, our network of senior vice presidents is also trying to secure third-party management contracts in Europe, the Americas, the Gulf region, and Asia Pacific. Our newest London and Shanghai projects, for example, are from developers completely unrelated to Dubai Holding. In the future, we see a balance in the number of management contracts from Dubai Holding and third-party developers.

You also own some properties like those you are running in Dubai now. How much of your target will be owned and managed by 2010?

Going forward, we don’t see ourselves as the vehicle for making the investment in the property itself. Our model is to build on our management capability, and where possible, secure management contracts if we can get them, or contracts with minority equity stakes if it’s appropriate and if it says so in securing the contract. But we will not be a vehicle for investing in a new hotel property in Hong Kong, for example.

How much of your current revenues are coming from the properties that you own?

Taking our consolidated numbers, in excess of 90% of our revenues still come from what I describe as our owned activity. Management-fee revenues are what we’ll clearly try to drive forward over the course of our five-year plan. Most of what we talked about in terms of the 40 properties—we hope they will contribute to the Jumeirah Group in a management-fee sense.

Do you envision management fees equaling “owned activity” revenues?

That would be a good target, but I think we need to go beyond 40 properties to be able to do that. Given the revenue-generating capability of what we have in Dubai today—these resorts aren’t small; we have 1,619 rooms in Jumeirah Beach Hotel and nearly 900 rooms in Madinat Jumeirah—I don’t really see a matching of our revenues today with the revenues from management.

What are now the largest, and fastest growing, revenue and profit drivers of Jumeirah?

Jumeirah Beach Hotel, which gave birth to the brand in 1997, and Burj al Arab, the world’s most luxurious hotel, are really the core of what we’ve done. They have fueled our growth to date. But we’ve seen very rapid growth in revenues with the opening of this resort, Madinat Jumeirah, in 2004. This is probably the fastest maturing in our portfolio; it’s exceeded our expectations in terms of financial returns.

You operate in only one customer segment, which is the luxury market. Isn’t that risky?

We’re diversifying our revenue stream by capitalizing on some of our restaurant concepts. We have over 120 restaurants in Dubai and our food-and-beverage sales are a significant proportion of our overall revenues. We see growth from our restaurants and we plan to take them internationally, either in an owned manner or by franchise. We’re also developing an expertise in managing serviced apartments. We’ll start in Dubai and grow that potentially worldwide as well. The other big thing is the possibility for a second brand of hotels, appealing to a younger, more aspirational age group.

What are your investment criteria?

For us, the most important criteria for investing in a project is, not surprisingly, financial return. We want projects that have a deliverable marketing and operational plan, and that the customer will pay for and come back to again and again.

What are your current revenues like?

I can’t give you specifics on numbers. We’re fortunate enough to be able to move forward and grow as a hotel-management company from a substantial asset base. Over time, quite significant funds have been invested in what you see here in Dubai, and that’s the asset base from which we will grow as a management vehicle. In terms of revenues, next year, which is the first year of our next five-year plan, we expect to grow 15% from our 2006 forecast. The move is obviously towards creating a greater proportion of our income from the management-fee flow as opposed to the owned activity.

But is the group profitable?

Yes. It’s fair to say that we see very positive levels of returns coming from the facilities that you see here in Dubai. We’re busy—Burj al Arab is projected to have an occupancy rate of 82% for the 2006 financial year, which is significant. London is having its best year ever—we have record numbers coming through there. We’re very cash generative. We don’t need support from the parent company for our requirements. In many respects, the flow is the other way; a significant amount of cash goes back to repaying the initial investment. Our profits are fueling the growth.

What’s your funding strategy?

To date we’ve been funded by a mix of equity, shareholder funds, and commercial debt from banks operating in this region. As we grow and as we enter new phases of our own portfolio, we’re starting to diversify the lending base into more international banks.

You say that there is going to be a shortage of rooms in the luxury segment in the next two years. What are the major risks to your business?

The obvious financial risks in our business come from interest-rate exposure, potential economic downturns from our feeder markets such as Germany and the UK, and changes in exchange rates. We’ve definitely seen a decline in our business in recent years as the German economy has struggled to some extent. But the relative strength of the euro to the dollar over time gives a positive impact because it makes it less expensive for Europeans to come to Dubai. The downside is that it’s also become more expensive for us to source products from the Euro zone. The way around that is to procure more from dollar-based economies like Asian markets and the US. Our logistics group is focused on familiarizing ourselves with buying from China and the Asian market.

How do interest-rate movements affect you?

All our bonds and borrowings are dollar-based. We’re seeing a sustained rise in dollar rates over a period of time. We work closely with treasury at the Dubai Holding level to successfully hedge our exposure to rising interest rates. There is a central treasury function at the group level—planning, recommending, and executing hedge transactions of that nature. We’ve also managed to pay down some of our debt whenever we have cash surpluses, thereby limiting our exposure to rising rates.

As you seek management contracts overseas, what gives you an edge over established rivals such as the Four Seasons and Ritz Carlton?

We’re confident in our ability to compete with those sets, which is why you see us winning contracts overseas. And once we get in to other cities, we will still be competing with the same faces. Ultimately our key competitive advantages are our hallmarks, our financial strength as part of the Dubai Holding structure, the iconic nature of some of the facilities we have been running, and our “stay different” approach to branding. Our hotels are different, but there is a consistently high level of service and facilities.