Positioned for Growth. Action Hotels plc Annual Report & Accounts 2013

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1 Positioned for Growth Action Hotels plc Annual Report & Accounts

2 Established in 2005, Action Hotels is recognised as a leading developer, owner and asset manager of economy and midscale hotels in the Middle East and Australia. Our mission is to provide quality accommodation at exceptional value in the key markets of the Middle East, where the market is under supplied. Our strong partnerships with the leading international hotel brands allow us to access significant marketing capabilities and to deliver superior operating performance. To date we have six operational hotels with just over 1,000 rooms and a further 1,500 rooms currently in our fully funded pipeline. Our vision is to own and operate 5,000 hotel rooms by Contents Strategic Report 01 Highlights 02 Chairman s Statement 04 Our Business explained: Our Strategy Our Partnership Model Our Partnerships Our Customers and Locations 11 Corporate Social Responsibility 12 Chief Executive s Review 16 Finance Director s Review 18 Principle Risks and Uncertainties Corporate Governance 20 Board of Directors 22 Directors Report 23 Statement of Responsibilities 24 Remuneration Report 25 Independent Auditors Report Financial Statements 26 Consolidated Income Statement 27 Consolidated Statement of Comprehensive Income 28 Consolidated Statement of Financial Position 29 Consolidated Statement of Changes in Equity 30 Consolidated Statement of Cash Flows 31 Notes to the Consolidated Financial Statements 58 Corporate Directory

3 Financial Highlights Strong performance with growth across all our operational metrics Financial Year Ended Occupancy 77% +4.0% Revenue per available room (RevPAR) $ % Net Asset value $167.1m NAV per share $1.13 Average Daily Rate (ADR) $ % Revenue $29.8m +5.4% Adjusted EBITDA* $8.3m (Post exceptional costs) Strategic Report Corporate Governance Financial Statements Successful fundraising $50m Fully funds an additional 1,500 hotel rooms Break even occupancy 33% Across current portfolio *The adjusted EBITDA is reconciled to net loss on page 17. The statutory reported figures below include the impact of exceptional costs relating to restructuring pre IPO. These significant costs have all been included in the financials for the year ended and contributed to the net loss at a before and after tax level for the year. Such items are not expected in the financial year Annual Report & Accounts 01

4 Chairman s Statement It is my pleasure to announce our first set of results as a publicly traded company. For Action Hotels was a transformational year with the opening of our sixth hotel, our first hotel partnering with Intercontinental Hotels Group, and the successful admission of our shares to trading on the London Stock Exchange AIM market in December. During the IPO process we were very pleased to raise $50m before costs and secure a number of new institutional shareholders. 02 Action Hotels plc

5 Our vision of being the market leading developer, owner and manager of economy and midscale hotels primarily focused on the Middle East is well on-track. We anticipate growing our current portfolio of just over 1,000 hotel rooms to 5,000 hotel rooms by The Group will achieve this ambition by owning and leasing hotels, which will create a strong balance of asset-backing with an ability to scale in a timely manner. The funds raised at the time of IPO have enabled us to fully fund our current hotel pipeline which will increase our number of rooms by 1,500 by the end of 2016, taking the total to 2,500 rooms (150% growth). We are always looking for additional opportunities that meet the criteria of our strategy, and we hope to be able to update the market on this in due course. Our current portfolio of six hotels continues to perform well and our low cost base enables us to break-even at lows levels of occupancy. Our hands-on approach to working with our chosen hotel operators has ensured our portfolio of hotels maintain year-on-year growth in our key metrics of occupancy, ADR, RevPAR and revenue. Middle East The Middle East hotel market continues to be focused on upper scale and luxury creating further opportunities for us to work with in our core middle market segment with leading brands that have high growth aspirations for the region. The region s current announced pipeline of economy and midscale hotels represents less than 20% of the overall branded hotel supply. This dynamic is well below the levels seen in Europe and North America. We consider that our contrarian approach to the market, alongside our substantive expertise and regional know-how gives us our major point of differentiation to other hotel groups. Our strategy continues to prove successful as evidenced by the increasing demand for our hotel offering from GCC, Levant and other intra-regional travellers. Australia As a region Australia is a more mature hotel market; but for Action Hotels, Australia remains opportunistic and highly attractive. We have been working alongside Accor since 2006 and our ibis Glen Waverley in Melbourne has shown consistent performance year-on-year, as well as having the lowest break-even occupancy level in our current portfolio. Dividends The cash flow profile of our business enables us to pay an attractive dividend even during our aggressive growth phase. The declared dividend for of GBP 0.96p will be paid on 30 May In accordance with our AIM Admission document, Action Group Holdings, whose holding in Action Hotels represents 64.7% of the share capital, has waived its entitlement to this dividend. As per the Group s progressive dividend policy, we are expecting to pay a higher total dividend in 2014 to be paid as an interim and final dividend. Employees On behalf of the Board, I would like to thank all of our dedicated employees for their contribution to the business over the last year, especially with the demands required to get us to our successful AIM admission. We look forward to working with you all in this coming year. Outlook The financial year 2014 has started well. Occupancy levels continue to remain strong across the portfolio, and we have already seen encouraging growth in ADR, RevPAR and revenue on figures. Our latest hotel, Holiday Inn Seeb Muscat, has shown strong performance in its first three months since opening. For March 2014 occupancy rates averaged at 66% with an ADR of $137, and achieved 100% occupancy for the first time on 17 March We reported earlier this year that our ibis Amman, Jordan had been awarded the Innovative Award for Tourism prize by the Jordanian Society of Tourism and Travel and was also ranked first by number of guests in the three star category and fourth overall by all hotels in Jordan. This really does underpin our strategy and demonstrates that we are first movers filling in the gaps within the hotel market in the Middle East. I would like to take this opportunity to thank the Board for their guidance and all our employees and others involved with the business of Action Hotels plc for their loyalty and hard work during a very busy and challenging year. Sheikh Mubarak A M Al-Sabah Founder and Non-Executive Chairman Strategic Report Corporate Governance Financial Statements We have already started work on our next hotel in Australia, ibis Brisbane, a 368 room hotel situated in a prime central location. We believe this will be the largest midscale hotel in the region and will be an extremely attractive asset. We look forward to opening this by the end of Annual Report & Accounts 03

6 Our business explained Our Strategy Economy and midscale hotels Middle East and Australia Partnering with leading hotel brands Current supply of branded midscale hotels is less than 20% of all hotels in the Middle East Economy and midscale hotels Middle East and Australia Undersupplied branded market % 48% 64% Middle East Europe USA Source: Smiths Travel Group / Management Our strategy is to focus solely on the economy and midscale segment of the hotel sector. This is based on the attractiveness of their performance and returns on capital. -- Lower cost of development -- Quicker development -- Efficient use of real estate -- Lower cost design specification -- Low break-even levels -- Quicker maturity profile Middle East There is a very clear gap in the Middle East hotel market for economy and midscale branded hotels. The market has always been and continues to be focused on the luxury/five-star hotel sector. With robust GDP growth (average 5% p.a.), increasing urbanisation, population growth and a burgeoning middle-class we are seeing increasing demand for affordable quality hotel accommodation. Currently the supply of economy and midscale hotels accounts for less than 20% of the total hotel count and this is forecast to decline even further as the announced construction pipeline is predominantly five-star/luxury hotels. Along with the positive macro-economic conditions the region is seeing substantial increases in airport capacity and the introduction of regional budget airlines supporting the growing number of intra-regional travellers. Australia Originally opportunistic for us, this market was introduced to us as a result of our strong relationship with Accor in the Middle East. Our ibis Glen Waverley in Melbourne, which opened in 2007, continues to contribute positively and has the lowest break-even occupancy level in our hotel portfolio. We are currently developing our second hotel with Accor in Australia, a prime location in central Brisbane which we look forward to opening in Q present we have no further hotels planned for Australia. 03 Partnering with leading hotel brands We will only develop our hotels in partnership with recognised hotel brands. We work closely with a number of different hotel operators to ensure the product offering is appropriate for the location. Partnering with international operators provides: -- Operational expertise -- Brand recognition -- Expert marketing capabilities -- Advertising/loyalty programmes -- Innovative digital retailing We currently partner with Accor, IHG and Whitbread. 04 Action Hotels plc

7 Our Partnership Model We build, design and develop economy and midscale hotels in partnership with leading international hotel brands. We partner and appoint an operator before we commence the construction or conversion of our hotels. Post construction, we work alongside our hotel operators to manage the hotels on our behalf and to maximise performance under long term management agreements. Our partnership model is different to those typically seen in Europe and the USA. We pay our operators a fee based on the revenue and profitability of the hotel. Our partnership model explained 1. All revenue and operating costs of the hotel accrue to Action Hotels. 2. The operator is responsible for the management and operations of the hotel. 3. All key decisions are made jointly between Action Hotels and the Operator, for example: setting budgets, key hires (General Manager/Finance Manager). 4. Action Hotels pays the Operator a percentage based on revenue and profit, so interests are aligned and operators are incentivised to maximise operational performance. The key benefit to working with leading hotel brands is not only their operational expertise but also their marketing capabilities. The brands we work with are internationally recognised, have extensive web and booking channels and loyalty programmes. This drives faster occupancy levels and along with our low break-even levels allows the hotels to become profitable shortly after opening. ACTION HOTELS Planning Design Construction Procurement Pre-opening Operational (Asset management) Strategic Report Corporate Governance Financial Statements Licensing, tender process and sign up Agree design / product specification Agree mock up room - Budgets - Appoint GM - Hiring/training - Plug in to central networking systems Hotel Opens Revenue & expenses Fee based on performance OPERATOR Management agreement signed Technical Assistance Operational Management Central Reservations and Marketing Network Annual Report & Accounts 05

8 Our business explained Our Partnerships Our philosophy is to maintain and develop long-term strategic relationships with selected partners to deliver enhanced stakeholder returns by continuing to expand the hotel portfolio. We have strong relationships with leading global hotel brands in the economy and midscale sector and, due to our independence, we are able to objectively determine the most appropriate brand for each development opportunity. InterContinental Hotels Group PLC of the United Kingdom is the world s largest hotel group by number of rooms. IHG owns, manages, leases or franchises, through various subsidiaries, 4,696 hotels with 686,850 guest rooms in nearly 100 countries and territories around the world. Accor, the European leader and a major global group in hotels, the global leader in services to corporate clients and public institutions, operates in nearly 100 countries with 170,000 employees. It offers to its clients over 40 years of expertise in its two core businesses. Premier Inn has set an ambition to have 75,000 rooms by present they have over 650 hotels in the UK, 5 hotels in the Middle East and 3 in India, with many further developments under construction and a target for 50 hotels outside the UK by Action Hotels plc

9 Established in 1974, ibis is the European leader and one of the first economy hotel chains in the world, with nearly 90,000 rooms and 790 hotels in 39 countries. ibis, the worldwide economy hotels brand of the Accor group, offers consistent quality accommodation and services in all its hotels, for the best local value: a well-designed and fully-equipped en-suite bedroom, major hotel services available 24/7 and a wide choice of on-site food and beverage options. The quality of the ibis standard has been recognised by the International Organization for Standardization certification ISO 9001 since ibis is also the world s first hotel chain to demonstrate its environmental commitment through securing the ISO certification, which has already been awarded to nearly one third of its hotels. ibis and Action Hotels Five operational hotels ibis Sharq (Kuwait) ibis Salmiya (Kuwait) ibis Amman (Jordan) ibis Muscat (Oman) ibis Glen Waverley (Australia) Under construction ibis Seef (Bahrain) ibis Salmiya expansion (Kuwait) Strategic Report Corporate Governance Financial Statements Pipeline ibis Brisbane (Australia) ibis Sohar (Oman) Annual Report & Accounts 07

10 Since 1952 Holiday Inn Hotels and Resorts have provided the services business travellers need, while also offering leisure travellers a comfortable, casual atmosphere where they can relax and enjoy a variety of amenities. One of the world s most recognized hotel brands with a global reputation for service, comfort and value. A Holiday Inn offers today s business and leisure travelers dependability, friendly service and modern attractive facilities at excellent value. You ll find them throughout the world in small towns and major cities, along quiet roadways and near bustling airports because full-service Holiday Inn hotels are always conveniently located. Holiday Inn and Action Hotels Holiday Inn Seeb Muscat (Oman) Our first IHG branded hotel Opened December 185 rooms Staybridge Suites (Abu Dhabi) 112 longer stay suites 08 Action Hotels plc

11 Award-winning Premier Inn is the UK s biggest hotel brand, offering quality accommodation at affordable prices. Premier Inn is consistently rated the UK s Best Value Hotel Chain by YouGov. Premier Inn prides itself on comfort and quality, so whether you re staying for business or leisure, guests always enjoy a warm welcome from their friendly teams, as well as comfortable king-sized beds, ensuite bathrooms, a TV with Wi-Fi in every room. All their hotels have a bar (where appropriate) and a restaurant, offering a wide selection of meals and hearty eat-as-much-as-you-like full and continental breakfasts. Many also offer a Costa Coffee outlet. Premier Inn s and Action Hotel s Four Premier Inn hotels in pipeline Premier Inn Sharjah - Premier Inn s first management agreement Premier Inn Bahrain Premier Inn Zan Jeddah Modan Industrial City Premier Inn Dubai Healthcare City 590 rooms by 2016 Strategic Report Corporate Governance Financial Statements Annual Report & Accounts 09

12 Our customers and locations Middle East favourable and supportive markets (GDP Real growth rate, ) Our targeted customers are intra regional travellers both on business and leisure: Bahrain 4.8% Jordan Intra regional travel is over 50% of all airport arrivals Increasing business related travel Increasing affluence and freedom to travel 2.8% Kuwait 6.2% Oman 5.0% Saudi Arabia % Qatar 6.2% UAE 4.4% Action ActionHotels Hotels geographical geographicalpresence presence G7 Countries 1.7% Source: IMF World Economic Database, November Our customer base is predominantly business KUWAIT travellers, accounting for 2 KUWAIT 2 3 approximately 70%, and U.A.E U.A.E 3 3 leisure travellers at c.30%. This is reflected in the mix of amenities on offer. Most of our hotels offer gym and car parking facilities, free Wi-Fi, 24-hour restaurants, business centres and modern public spaces. Business Mix HOTELS IN OPERATI HOTELS IN OPERA KUWAIT KUWAIT OMAN 3 OMAN BAHRAIN BAHRAIN DUBAI MIDDLE EAST DUBAI M I D D L E E A S TABU DHABI JEDDAH JEDDAH ABU DHABI SHARJAH SHARJAH SOHAR SOHAR MUSCAT MUSCAT AUSTRALIA A U S T R A L BRISBANE IA HOTELS IN OPERATION* HOTELS IN OPERATION* HOTELS IN THE PIPELINE HOTELS IN THE PIPELINE Business Leisure 70% * including Holiday Inn, Muscat which is due to open in November * including Holiday Inn, Muscat which is due to open in November ** an additional 10 rooms to be added to Ibis Salmiya in 2014 ** an additional 10 rooms to be added to Ibis Salmiya in 2014 Action Hotels Action Hotels The mix of business and leisure customers provides a year round balance reducing seasonality. 10 Action Hotels plc 84 HOTELS IN THE PIPE HOTELS IN THE PIP Pipeline Operating 30% LOCATION HOTEL NAM LOCATION HOTEL NA MELBOURNE IBIS GLEN W MELBOURNE IBIS GLEN KUWAIT IBIS SALMIY KUWAIT IBIS SALM OMAN IBIS MUSCA OMAN IBIS MUSC JORDAN IBIS AMMAN JORDAN IBIS AMMA KUWAIT IBIS SHARQ KUWAIT IBIS SHAR OMAN HOLIDAY INN OMAN HOLIDAY I SUB-TOTAL SUB-TOTAL AMMAN AMMAN BRISBANE MELBOURNE MELBOURNE LOCATION HOTEL NAM LOCATION HOTEL NA UAE PREMIER IN UAE PREMIER BAHRAIN IBIS SEEF BAHRAIN IBIS SEEF BAHRAIN PREMIER IN BAHRAIN PREMIER KSA PREMIER IN KSA PREMIER AUSTRALIA IBIS BRISBA AUSTRALIA IBIS BRISB OMAN IBIS SOHAR OMAN IBIS SOHA UAE PREMIER IN UAE PREMIER UAE STAYBRIDGE UAE STAYBRID SUB-TOTAL SUB-TOTAL

13 Corporate Social Responsibility The Board takes account of the significance of social, environmental and ethical matters affecting the business of Action Hotels. The Board has adopted an approach to Corporate Social Responsibility that seeks to protect the interests of the Group s stakeholders through individual policies and through ethical and transparent actions. The Board has adopted an Anti-corruption Policy and a Whistle Blowing Policy. consideration to applications for employment received regardless of age, gender, colour, ethnicity, disability, nationality, religious beliefs, transgender status or sexual orientation. The Group takes account of employees interests when making decisions and suggestions from employees aimed at improving the performance of the business. The Group currently operates throughout the Middle East and Australia. It complies with the various employment rules where applicable in the various countries and employs as many locals as possible. Strategic Report Shareholders The Group values its dialogue with both institutional and private investors. Effective two-way communication with fund managers, institutional investors and analysts is actively pursued and this encompasses issues such as performance, policy and strategy. We have appointed a dedicated Director of Communications, Katie Shelton based in London, to manage all such communications and report to the Board where appropriate. Private investors are encouraged to participate in the Annual General Meeting at which the Chairman presents a review of the results. The Remuneration Committee will be available at the Annual General Meeting to answer any shareholder questions. The Annual General Meeting will be held on 29th May Environment The Group complies with local regulatory requirements in regards to environmental compliance. Employees The Board encourages a transparent approach to dealing with its employees and seeks to remunerate its employees fairly, being flexible where practicable. The Group gives full and fair Suppliers and Contractors The Group recognises that the goodwill of its contractors, consultants and suppliers is important to its business success and seeks to build and maintain this goodwill through fair dealings. The Group has a prompt payment policy and seeks to settle all agreed liabilities within the terms agreed. Health and Safety The Board recognises it has a responsibility to provide strategic leadership and direction in the development of the Group s health and safety strategy in order to protect all of its stakeholders. This Strategic Report was approved by the Board of Directors on 22 April Alain Debare Chief Executive Officer Corporate Governance Financial Statements Annual Report & Accounts 11

14 Chief Executive s Review I m delighted to report on a year of growth for Action Hotels in its maiden year as an AIM traded company. Our recent admission to AIM is already adding increased recognition to the business and access to capital markets has provided the platform for accelerated growth. 12 Action Hotels plc

15 Action Hotels specialises in providing high quality branded economy and midscale accommodation in the key markets of the Middle East. Throughout, our combined portfolio of hotels continued to show growth in our key hotel metrics of ADR, occupancy and RevPAR, and we report solid operating financial results for the Group. We remain focused on our simple strategy: to own, develop and operate branded three and four star hotels, in partnership with leading hotel operators in the key markets of the Middle East. Our business is underpinned by strong macroeconomic dynamics, as well as a growing population that is driving demand for high quality, economy and midscale hotel rooms in the Middle East. Our Australian hotel, originally opportunistic has proved highly successful with the ibis Glen Waverley generating the highest ADR in the portfolio. Building on this success the Group is now engaged on a new development in the centre of Brisbane, due to open by the end of Our operational focus has been on building on our first mover advantage and improving the performance of operating hotels. This is being achieved through revenue growth, working with our selected branded hotel operators to maximize performance, optimising commercial opportunities, driving increases in average room rates and reducing operating costs. Our performance has been strong. Occupancy levels increased, especially in the Middle East where it averaged 80.5% during the year (: 76.2%). Across our portfolio we have seen strong RevPAR growth of 9% year on year, resulting from a combination of increases in occupancy (+3%) and daily rate (6%). Kuwait Our two hotels in Kuwait, ibis Salmiya and ibis Sharq delivered solid performances. RevPAR grew by 13% and 22% respectively. Along with our revenue growth strategies, operational costs continued to be well managed with the hotels achieving good Adjusted GOP margins of 63.3% and 60.3% respectively. These hotels demonstrate strong financial and operational performance in a market with high demand and very limited supply in branded economy and midscale sector. Oman ibis Muscat enjoyed another strong twelve months with RevPAR growth of 16% in its fourth full year of operation. Occupancy grew 11% to 77.4%, and produced a steady increase of 4.3% in ADR following increased demand from corporates and infrastructure project related companies. Revenue continues to grow into 2014, and along with a well-managed cost base, the hotel has stabilised its GOP margin above 50%. During December, we also opened our first Holiday Inn, a great addition to our portfolio and the only Holiday Inn in Oman, which contains 185 rooms. This property includes 11 apartments that will become operational in Q and will service those travellers requiring a longer stay. The hotel has received very good feedback and has been trading well; Year to March 2014 occupancy was 58.9%. The hotel achieved a breakeven performance in the first full month of operation. It has already enjoyed good ratings on the online travel review platforms and is leading the ratings in the midscale hotel sector in Muscat. Strategic Report Corporate Governance Financial Statements Action Hotels number of rooms Pipeline Under Construction Operational Hotels Annual Report & Accounts 13

16 Chief Executive s Review (continued) Jordan The ibis Amman traded well during with occupancy above 80% and RevPAR growth of 1.8%. The hotel successfully implemented a strategy to build its corporate customers and secure longerterm business. Evidence of success in this strategy is tangible as the hotel enjoys high volumes of business from NGO and international organisations. Australia ibis Glen Waverley continued to trade well, producing the highest ADR in the Group hotel portfolio. This hotel, in its fourth full operational year, saw a small contraction in total revenue in. This was mainly driven by a $70k decline in food and beverage revenues, which was partially compensated by room revenue growth of 0.6%. Whilst occupancy dropped by 2.7%, the hotel achieved a 0.8% RevPAR growth following an increase of 3.7% in the average room rate. Whilst performance was stable in Australian dollars, our consolidated results were reduced by the weakening of the Australian dollar against the US dollar. Partnerships We only develop and operate hotels with global hotel brands and our strong partnership with selected leading hotel operators is key to our strategy. The hotels are managed by hotel operators under long term management agreements. We enjoy very close relations with Accor s ibis, Intercontinental Hotel Group s Holiday Inn and Whitbread s Premier Inn brands all of which understand the favourable market dynamics and have announced sizeable growth targets in the Middle East. The high barriers to entry, with local ownership restrictions and access to local markets, make Action Hotels an attractive partner for these global operators. Our hotel partners provide us with powerful brand equity, operational excellence and very strong marketing capabilities that drive a superior guest experience with superior returns. We work alongside them and maintain an active role on both an operational and strategic level on all our hotels, as all revenue and expenses accrue to Action Hotels. It is proving a very powerful combination and the hotel operators are keen to be associated with a specialist and focused hotel owner in the region. We are delighted that our partners have also received continued recognition through industry accolades. Accor s ibis brand was awarded Best Budget Hotel Brand at the Business Travellers Awards, demonstrating the strong recognition of the brand by the business travel community. During, our ibis Amman received the Innovative Award for Tourism and ibis Kuwait was awarded Best Budget Accommodation by Business Destinations. The Board has exciting plans for Action Hotels and we remain committed to becoming the leading hotel owner, operator and asset manager of economy and midscale hotels in the Middle East region. Whilst the social and macroeconomics of the Middle East are very supportive with high GDP growth, we have a contrarian investment style in a region where the hotel landscape is mainly focused on upper upscale and luxury hotels, thus creating a very limited supply of hotels in the economy and midscale sector. In line with our strategy, a key priority for the Group is to drive revenue growth through the successful execution of the development pipeline, and in the process establishing a presence in all key markets of the Middle East. We remain strongly committed to delivering on the 8 hotels in the pipeline to 2016, and creating 1,500 more rooms on time and on budget bringing the total room count to over 2,500. During we progressed well on our hotels currently under construction and are excited at the prospect of opening three new hotels in ibis Seef, Bahrain, Premier Inn Sharjah, UAE and Premier Inn, Bahrain, as well as a 10-room extension to the ibis Salmiya, Kuwait. These projects will add 600 new rooms to the portfolio during Our future development plans will continue to capitalise on our reputation and our recognised experience in developing mid-market hotels. 14 Action Hotels plc

17 Whilst we have a strong balance sheet with a Net Asset Value (NAV) of $167.1m, we will accelerate our growth through a balance of owned and leased properties, enabling us to rapidly enter target markets with reduced capital commitment, and capitalising on the first mover advantage. We strive to deliver high growth and high returns for our shareholders. We expect to substantially grow our operating income from the growth in our room count. We also expect to continue benefiting from the development uplift on our freeholds. The social and macroeconomics of the Middle East are conducive to high GDP growth across all sectors of the region s economy we believe that our focus on the under supplied economy and mid-scale hotels will generate superior returns and higher growth in the medium term. As we continue to explore further opportunities, I hope to announce additions to the pipeline during the course of the Current trading The wider economic outlook remains positive and we aim to deliver continued growth. Our performance in the first few months of this year remains positive, which sets a solid platform for a successful The recent opening of our new hotel in Muscat will strongly contribute to our expected revenue growth in 2014, and we remain focused on maximising the performance of our operating hotel portfolio. We will continue to pursue our development pipeline and identify new opportunities for future growth. Hotel pipeline Hotel Country Rooms Expected completion date Premier Inn Sharjah UAE ibis Seef Bahrain ibis Salmiya (expansion) Kuwait Premier Inn Bahrain Bahrain Premier Inn Zan Jeddah Modan Industrial City KSA ibis Brisbane Australia Premier Inn Dubai Healthcare City UAE ibis Sohar Oman Staybridge Suites Abu Dhabi UAE Strategic Report Corporate Governance Financial Statements Alain Debare Chief Executive Officer Annual Report & Accounts 15

18 Finance Director s Review Our five operational hotels performed well during the financial year. We saw improvement in our key performance metrics: occupancy, revenue, RevPAR and ADR. Our sixth hotel opened in December and I look forward to reporting on its performance in On the Balance Sheet, our NAV as at the year-end was $167.1m (: $41.4m) enhanced by revaluations of hotel assets, the IPO fundraising and conversion of related party debt into equity at IPO. Occupancy Occupancy levels for the year grew by 4% to 77% across our portfolio of hotels. Our four hotels operating in the Middle East in enjoyed occupancy levels above 80% (: 76%). ibis Glen Waverley, our Australian hotel had a slight reduction in occupancy levels to 66% (: 68%), which was partly offset by a higher ADR. ibis Glen Waverley is located close to a business park giving it high weekday occupancy and lower occupancy at weekends but maintains the lowest break-even occupancy level of all the hotels in our portfolio. Average daily rate (ADR) We saw positive growth in room rates across the portfolio. Our occupancy levels are such that we have been actively working with our hotel operators to push up room rates and hence we saw ADR increase by 5.8% passing the $100 per night rate to $105 (: $99). ibis Glen Waverley had an ADR of $ a 3.7% uplift on last year ($141.10) and continues to provide our highest rate per night in the current portfolio. Revenue management remains a key priority for us in Action Hotels plc

19 77% occupancy across portfolio Revenue per available room (RevPAR) Following on from the strong performances in occupancy and ADR, our RevPAR for the year, on a like for like basis, increased to $82, an 8.9% increase on the previous year. ibis Sharq in Kuwait, in its third full year of operation, was the top performer in RevPAR growth in the portfolio with an increase of 22.2%. Revenue Reported revenue for the period grew 5.4% to $29.8m (: $28.2m). The Middle East operating hotels contributed 76% of the total revenue for the year, up from 73% of the portfolio in. With the opening of Holiday Inn Seeb Muscat we expect this percentage to increase in Adjusted EBITDA Adjusted EBITDA fell marginally by 2.4% to $8.3m (: $8.8). Reconciliation of Net loss to Adjusted EBITDA Net loss $(9.1)m $(0.2)m Restructuring and listing costs $3.5m Finance income $(0.4)m Finance cost $5.2m $5.7m Currency translation loss/(gain) $3.1m $ (0.8)m Taxation $2.1m Operating Profit $ 4.4m $ 4.7m Depreciation $ 3.3m $ 3.3m Amortisation $ 0.6m $ 0.6m Asset disposal losses $ 0.2m Adjusted EBITDA $ 8.3m $ 8.8m Adjusted EBITDA in was adversely impacted by $0.5m of additional costs primarily relating to the company s new status as an AIM listed company. Loss before tax As with most hotel development companies in their growth phase, the operating profit/loss figure is impacted by depreciation and finance cost charges whilst revenue ramps up over a three-year period. Dividend As set out in the Company s admission document dated 17 December, the Board intends to propose a final dividend in respect of the year ended of GBP 0.96p per share which is expected to be paid on 30 May 2014, subject to approval of the dividend at the Company s annual general meeting which is expected to occur on 29 May It is expected that the Company s ordinary shares will be marked ex-entitlement to such dividend on 7 May 2014 and the dividend will be payable to all shareholders on the Company s share register at the close of business on 9 May Except that, as announced at the time of the Company s admission to trading on AIM, the major shareholder, Action Group Holdings, has waived its entitlement to this dividend. Financial position Net bank debt as at was $64.7m (: $98.4m). Cash and cash equivalents were $43.6m (: $2.0m). Loan tenors range from 3 7 years. Debt Analysis USD$ 31 Dec 31 Dec Bank Debt (Long term + Current) ($108,316) ($100,348) Cash & Cash equivalents $43,626 $1,989 Net bank debt ($64,690) ($98,359) Total Equity* $167,094 $120,892 Gearing ratio (Net Debt/Equity) 38.7% 81.4% *Total equity (plus partner current account as at ) Property revaluations The Board follows an annual revaluation policy and as at 31 December, the carrying value of the hotel assets was $240.7m (: $233.5m). Looking ahead We are excited about our growth prospects following our admission to AIM. The funds raised fully fund the equity for our current pipeline of eight additional hotels which, due to the nature of our operations and our low and early break even points, will contribute to earnings soon after opening. Holiday Inn Seeb Muscat has made an extremely good start with strong occupancy and ADR. Strategic Report Corporate Governance Financial Statements The loss before tax of $7.0m (: $0.3m loss) is stated after charging $3.5m (: nil) of exceptional items relating to restructuring prior to the IPO and a foreign exchange loss of $3.2m (; gain of $0.8m), primarily arising on accounting for the translation of intra-group loans to the Australian properties. We do not anticipate such exceptional items to recur in financial year Taxation In as a result of the restructuring of the Group and its different tax status the Group recognised a deferred tax charge of $2.0m in relation to Kuwait deferred tax liabilities. Alaister Murray Finance Director Annual Report & Accounts 17

20 Principal Risks & Uncertainties The Board regularly reviews the risks to which the Group is exposed and actively ensures that these risks are minimised as far as possible. Risks relating to the Middle East Instability and uncertainties relating to the legal and regulatory environment in the countries in which the Group operates or may operate in the future could have a material adverse effect on the Group s business, financial condition and results of operations. Governmental authorities in some countries in which the Group operates or may operate in the future may have a high degree of discretion and, at times, act selectively or arbitrarily, and sometimes in a manner that is contrary to law or influenced by political or commercial considerations which may include, among other things, the expropriation of property without adequate compensation or limitations on repatriation of profits and/or dividends. Conducting business in international markets brings with it inherent risks associated with security of staff or property, enforcement of obligations, fraud, bribery and corruption. In certain jurisdictions, fraud, bribery and corruption are more common than in others. Action Hotels has adopted an anticorruption and fraud policy with which it requires its employees to comply and will comply with that policy and the Group also intends to implement other safeguards and programs across its business, designed to promote the highest standard of business practices and prevent the occurrence of fraud, bribery and corruption. Instability and unrest in the MENA region may significantly impact the economies in which the Group does business, including both the financial markets and the real economy. Such impacts could occur through a lower flow of foreign direct investment into the region, capital outflows or increased volatility in the global and regional financial markets. Although the GCC (in which the Group generally operates) has not been directly impacted by the unrest in the broader region to date, it is unclear what impact this unrest may have on the GCC or any of the countries in which the Group does business in the future. The Group operates predominantly in the GCC, which is generally viewed as an area with developing economies. Some countries in which the Group does business do not have firmly established legal and regulatory systems, and some of them, from time to time, have experienced economic, social or political instability. Some of these countries are in the process of transitioning to a market economy and, as a result, are experiencing changes in their economies and their government policies that can affect the Group s business in these countries. GCC jurisdictions have local ownership requirements stating that only nationals of the relevant jurisdiction or of the GCC may hold interests in real property. Although each of the Group s real properties is held by a GCC entity, ultimately the Company, which is incorporated in Jersey, has an indirect economic interest in the relevant real property interests. Having taken appropriate legal advice, the Group has sought to address this issue by implementing a corporate structure, as a result of which 100% of the voting rights of the intermediate holding company resident in the GCC is owned directly by Action Group Holdings (the principal shareholder). Risks relating to Action Hotels business The rapid development and establishment of hotels in the markets in which the Group intends to operate may raise unanticipated operational or control risks. The Group has experienced substantial growth and development in a relatively short period of time and the Directors believe that the Group will continue to grow its business at a relatively rapid rate for the foreseeable future. Management of growth will require, among other things: continued development of financial and management controls and information technology systems and their implementation in newly established or acquired assets; integration of business culture and adoption of policies and best practices; increased marketing activities; and identifying, hiring and training new qualified personnel. Majority shareholder risk Action Group Holdings (AGH) holds 64.7% of the issued share capital and voting rights in the Company. Whilst the Company has entered into the Relationship Agreement with AGH to govern the relationship between them, AGH will own a significant proportion of the Ordinary Shares and will control a large proportion of the voting rights in the Group. The interests of AGH could conflict with the interests of other holders of Ordinary Shares, and AGH could make decisions that could have a material adverse effect on the Group s business, revenues, financial condition, results of operations or prospects or trading price of the Ordinary Shares. Key employee risk The Group believes that its growth is largely attributable to the efforts and abilities of the members of its senior management team and in part on its relationship with Sheikh Mubarak who has played and continues to play an important role in the business. If one or more of the member of this team, indeed Sheikh Mubarak, were unable or unwilling to continue in their present position, the Group might not be able to replace them easily, which could have a material adverse effect on the Group s business, financial condition and results of operations. Risks relating to Action Hotels properties and operations Property investments are subject to varying degrees of risks. Values are affected (among other things) by changing demand, changes in general economic conditions, changing supply within a particular area of competing space and attractiveness of real estate relative to other investment choices. The value of the Group s property portfolio may also fluctuate as a result of other factors outside the Group s control, such as changes in regulatory requirements and applicable laws (including in relation to taxation and planning), political conditions, the condition of financial markets, potentially adverse tax consequences, interest and inflation rate fluctuations and higher accounting and control expenses. The Group s operating performance could be adversely affected by a downturn in the property market in terms of capital values. Construction and capital expenditure requirements Some of the Group s new hotels are under construction or in the initial stages of development. These and the pipeline hotels have significant capital expenditure requirements. The Group s operating hotels will need renovations and other capital improvements, including replacements, from time to time, of FF&E. Some of these capital improvements are mandated by health, safety or other regulations or by the standards of the hotel operators. Construction of new hotels and capital improvements of operating hotels may give rise to a variety of risks: inability to obtain construction financing or, if the Group finances development projects through construction loans, permanent financing, in any case, at all or on favourable terms; requirement to make significant current capital expenditures for certain hotels without receiving revenue from these hotels until future periods; inability to complete development projects on schedule or within budgeted amounts; 18 Action Hotels plc

21 delays or refusals in obtaining all necessary zoning, land use, building, occupancy and other required governmental permits and authorisations; and fluctuations in occupancy rates and ADR at newly developed or renovated properties due to a number of factors, including market and economic conditions, that may result in the Group s investments not being profitable. Risks relating to the hotel industry a downturn in international market conditions or the national, regional and/or local political, economic and market conditions in the countries in which the Group operates, may diminish the demand for leisure and business travel and meeting/ conference space; the impact of acts of war or increased tensions between countries, increased threats of terrorism or actual terrorist events, impediments to means of transportation (including airline strikes, road closures and border closures), extreme weather conditions, natural disasters, travel-related accidents, outbreaks of diseases and health concerns, rising fuel costs or other factors that may affect travel patterns and reduce the number of business and leisure travellers; increased competition and periodic local oversupply of guest accommodation in the cities in which the Group has hotels; changes in travel patterns or in the structure of the travel industry, including any increase in, or the imposition of new taxes on, air travel; increases in operating expenses as a result of inflation, increased personnel costs and health-care related costs, higher utility costs (including energy costs), increased taxes and insurance costs, as well as unanticipated costs as a result of acts of nature and their consequences and other factors that may not be offset by increased room rates; seasonality, in that the Group s hotels are located in the Middle East and Australia where they may experience varying levels of occupancy during different seasons; and changes in governmental laws and regulations, including those relating to employment, the preparation and sale of food and beverages, smoking, health and alcohol licensing laws and environmental concerns, fiscal policies and zoning ordinances and the related costs of compliance. The impact of any of these factors (or a combination of them) may adversely affect room rates and occupancy levels in the Group s hotels, or otherwise cause a reduction in the Group s income. Such factors (or a combination of them) may also adversely affect the value of the Group s hotels and in either such case would have a material adverse effect on the Group s business, financial condition and results of operations. Risks relating to Action Hotels borrowing The Group funds and will continue to fund its hotel projects partially through borrowings. The debt to equity ratio is likely to differ in respect of each project and increases in interest rates could affect the Group s ability to fund future developments on favourable terms. The extent of borrowings and their terms will depend on the Group s ability to obtain credit facilities, the lender s estimate of the stability of each project s cash flow and the Middle East and Australian debt markets at any time. Any delay or failure in obtaining suitable and adequate financing from time to time may impair the Group s ability to develop the hotel projects within the anticipated timeframe or at all and this would have a material adverse effect on the Group s ability to achieve its investment performance and increase in value for its Shareholders. Risks relating to taxation The Group has historically enjoyed low or nil tax rates in most of the countries in which it has operated reflecting the low tax regimes in the jurisdictions in which they operate. The change in the Group s structure resulting from the recent restructuring and admission to AIM resulted in some of the Group s entities losing their tax exempt status, such that future profits arising in those entities could be subject to tax, reducing the Group s net profits. In particular, current profits arising (or deemed to arise) in Kuwait will be subject to corporate income tax at a rate of 15% in Kuwait as a result of the changes to the structure. The quantum of tax levied on the Group s profits is subject to change in the event that applicable tax rates or laws alter in the future. There are inherent uncertainties regarding tax authority practice in Kuwait and some of the other countries in which the Group operates which could affect the Group s future tax position. Financial Instruments The Group did not use any financial instruments in the year to. Insurance Coverage The Group has various insurance policies in place suitable for a hotel developer and operator. These are arranged via an insurance broker and coverage includes a. Operational (public liability, travel and medical coverage and assistance), b. Buildings and Property insurance. This is reviewed at least annually and adapted as required. Internal Controls and Risk Management The Directors are responsible for the Group s system of internal financial control. Although no system of internal financial control can provide absolute assurance against material misstatement or loss, the Group s system is designed to provide reasonable assurance that problems are identified on a timely basis and dealt with appropriately. In carrying out their responsibilities the Directors have put in place a framework of controls to ensure as far as possible that ongoing financial performance is monitored in a timely manner, that corrective action is taken and that risk is identified as early as practically possible, and they have reviewed the effectiveness of internal financial control. The Board, subject to delegated authority, reviews capital investment, property sales and purchases, additional borrowing facilities, guarantees and insurance arrangements. Forward Looking Statements This Annual Report contains certain forward-looking statements that have been made by the Directors in good faith based on the information available at the time of the approval of the Annual Report. By their nature, such forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future. Actual results may differ from those expressed in such statements. Strategic Report Corporate Governance Financial Statements Annual Report & Accounts 19

22 Board of Directors Sheikh Mubarak A M Al-Sabah Founder and Non-Executive Chairman Sheikh Mubarak Al Abdullah Al-Mubarak Al-Sabah (Founder and Non-Executive Chairman), aged 37, is the founder and Vice Chairman of Action Group Holdings (AGH). As Vice Chairman of AGH, Sheikh Mubarak oversees its investment activities, with a particular emphasis on real estate development and acquisitions in the GCC, Europe and Australia. He is a Graduate of The Royal Military Academy Sandhurst in the United Kingdom and holds an M Phil in International Relations from University of Cambridge and a BA (Hons.) in Political Science with Economics from the University of Buckingham, UK. Alain Debare Chief Executive Officer Alain Debare (Chief Executive Officer), aged 41, has spent his entire career in the hospitality industry and, in particular management of hotels and has extensive experience of hotel operations as well as hotel development. He joined Action Hotels in February 2008 shortly after its inception and has been key to its growth. Alain focuses on real estate development, oversees hotel projects from initiation to completion and has a supervisory role to ensure the Group s investment objectives are achieved. Driven by his sector knowledge and hands-on expertise, Alain is closely involved with the operators to increase profitability and performance of the operating hotels John Johnston Non-Executive Director John Johnston (Non-Executive Director), aged 55, has spent his entire career in the field of investment. For the first 26 years he was in fund management before moving into investment banking for a 5 year spell. He began his career as a trainee fund manager in The Royal Bank of Scotland, subsequently working at General Accident, Ivory & Sime, Murray Johnson and Legg Mason. In 2003 he established Revera Asset Management and was its CEO until Stefan Allesch-Taylor CBE Non-Executive Deputy Chairman Stefan Allesch-Taylor CBE (Non-Executive Deputy Chairman), aged 44, has served as either Chairman or CEO of firms in the property, retail, medical, industrial and financial services sectors in the UK, US and Europe in both public and private companies. He is the co-founder and supervisory board member of Global Evolution, a hedge fund and long only fund specialising in emerging markets and serves as supervisory board member of Nordfinanz Bank AG, a German commercial bank. He is Non-Executive Director of Clearbrook Capital Private Equity, ISG, a sports management company, and co-founder and Chairman of The Coffeesmiths Collective. 20 Action Hotels plc

23 Strategic Report Alaister Murray Finance Director Alaister Murray (Finance Director), aged 47, is a British national, an honours graduate in Accounting and an Irish Chartered Accountant. He spent ten years with PWC in Ireland and then in Dubai in its audit and corporate finance departments. For the past sixteen years he has worked in industry, initially in the oil and gas sector (Emirates National Oil Company Limited, a substantial integrated oil business and then in the hotels sector where, from 2002 until he was Chief Financial Officer of the Jumeirah Hotel Group and Jumeirah Hotels and Resorts, a $1 billion revenue business. Corporate Governance Financial Statements Raymond Chigot Non-Executive Director Raymond Chigot (Non-Executive Director), aged 68, is a veteran hotelier with over 40 years experience in hospitality after a successful career in hotel operations and development with Holiday Inn and Hilton Hotels. He was involved in the early development of Holiday Inn in Europe, moving to development of Holiday Inn in MENA. He then joined Hilton International as Senior Vice President, driving the company s growth in EMEA and was involved in the opening of 50 new Hilton Hotels in 31 countries during his tenure. Annual Report & Accounts 21