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Fairmont Southampton owners expect to make $32m profit

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Fairmont Southampton Resort
Gencom founder Karim Alibhai (Photo from www.gencomgrp.com)

The owners of the Fairmont Southampton expect to eventually make a trading profit of more than $32 million after the hotel is renovated, their agents have told potential investors.

Bermuda’s largest resort – which contains about a quarter of the island’s hotel bedrooms – was only breaking even, according to an e-mail sent to prospective lenders from New York-based Lotus Capital Partners, on behalf of investment firm Gencom.

But the email said that would change due to a plan to cut expenses, including by shedding jobs, increase revenue by repositioning the hotel, and because of “strong tourism trends in Bermuda”.

Lotus wrote that the combination of all three was “expected to result in net operating income expansion from breaking even to over $32 million”.

As reported by The Royal Gazette on Tuesday, the February 22 e-mail sought $260 million in funding for the hotel redevelopment.

Potential lenders were told the loan opportunity was in two parts – a traditional mortgage of $160 million and a $100 million credit-enhanced note “that is credit-enhanced by a $50 million guarantee from the Government of Bermuda”.

A Ministry of Finance spokeswoman said, in response to questions, that the Government was considering a request to provide a multimillion-dollar guarantee in support of the stalled redevelopment.

She said an earlier request was rejected after Gencom last year failed to meet a number of conditions contained in a letter of intent for a guarantee from the Government.

The Lotus e-mail said the $100 million credit-enhanced note would be paid off “by a stream of priority tax payments derived from government incentives” – understood to be a reference to tax and customs relief for tourism developments under the Hotel Concessions Act – and “further repaid by a portion of the hotel’s operating cashflow”.

It gave the loan to coverage ratio for the $160 million traditional mortgage as 46%, meaning Gencom believes the hotel will be worth close to $350 million once renovated.

It was reported in May, 2019 that the Fairmont Southampton, with its 593-rooms, ten restaurants, spa, 18-hole golf course, amphitheatre and more than 25,000 square feet of meeting space, was up for sale.

Gencom acquired it for $132 million that December [2019], with founder Karim Alibhai announcing an ambitious programme of renovations due to be completed by April next year.

Mr Alibhai said then: “With a planned restoration, we aim to create a wonderful, updated destination resort experience at Fairmont Southampton for leisure and group travellers from all over the world.”

The Lotus e-mail said Gencom began a “comprehensive $175 million redevelopment plan”, upgrading guest rooms, amenities and the physical plant “with a goal of cementing the property’s position as one of the premier resort hotels in Bermuda and throughout the Caribbean”.

The renovation was to include 12,700 square feet of new indoor meeting space, 14,000 square feet of new outdoor space and a new beach club.

“Even in the current state, the property generated approximately $100 million of revenue annually (2017-19) but essentially broke even,” said the email.

The email said Gencom expected “top-line growth” of about 40 per cent over five years to about $140 million after the renovation was complete, due to an increase in the average daily rate for rooms and a rise in guest numbers.

It said the investment firm’s immediate business plan was focused on reducing overall labour costs.

It said $4.6 million in expenses would be saved by reducing its workforce and moving to “more seasonal labour”, along with $2.9 million in savings from renegotiating its agreement with the Bermuda Industrial Union and $4.9 million in “additional efficiencies in undistributed expenses”.

The email added: “ …[Gencom] expects to achieve a total of $12.4 million in near-term expense savings with little associated cost.

“If the hotel was reopened today, these initiatives would flow directly to the bottom line, increasing the estimated net operating income to $12.3 million.

“Importantly, these cost savings are achievable outside of the $175 million renovation plan and are already in progress.”

Lotus described how the project was Gencom’s second such undertaking in Bermuda, revealing that it bought Rosewood Tucker’s Point, which was in receivership, for $60 million in 2017.

The email said: “Gencom took the Rosewood through a comprehensive $25 million renovation that saw net operating income increase from $1.6 million in 2016 to $6 million in 2019 and they intend to implement a similar, hands-on business plan at the Fairmont Southampton to mirror this success.”

The Covid-19 pandemic and closure of the airport meant the Fairmont Southampton was largely out of operation from March last year. More than 700 staff were laid off in October, when it shut its doors.

Workers did not get a promised $11 million in redundancy payments, prompting Government to step in and lend them the money. Gencom repaid Government at the end of January.

Gencom and Lotus have not responded to requests for comment.

There was no response yesterday to additional questions sent to the Minister of Finance.

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Published March 12, 2021 at 8:33 am (Updated March 12, 2021 at 8:33 am)

Fairmont Southampton owners expect to make $32m profit

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