Federal Hotels’ 2012/13 financials confirm its cash-flow struggles highlighted the previous year have continued and will only be resolved by a selloff of most of the regional tourist assets.
Revenue fell by $23 million to $497 million. An estimated 50% comes from gamblers.
In inflation-adjusted terms revenue has shown little or no growth since 2006…… This is despite the additions of the 9/11 chain, Henry Jones Art Hotel, Freycinet, Cradle Mountain, Saffire and the recent two poker machine pubs on the NW coast, conservatively estimated to have cost in total $140 million.
The story is a little better when profits are considered.
For seven years shareholders extracted the bulk of after-tax profits, between $15 and $18 million. In 2012 nothing was retained, in fact retained earnings took a hit as dividends in excess of profits were drained from the Group.
In the latest year the six shareholders had to make do with $7 million between them as reality and austerity found common ground.
Nothing spent on new businesses, capex all but dried up and dividends declining. Payments to the banks have been the big winner. Not only interest payments but principal payments of $9 million in 2012 and $16 million in 2013 have hit the cash flow. Bank borrowings are now $175 million.
Having to curtail capex and divert funds to reduce borrowings is not a sign of robust health. This in turn has led to the abandonment of the West Coast Wilderness railway lease and negotiations to sell assets.
Initial reports suggested Freycinet and Cradle Mountain properties were to be offered for sale but there has been recent confirmation that Strahan assets will also go with the purchaser to be a RACV/RACT consortium set to take over in January 2014 ( TT here ).
However, given the disastrous off season just experienced by Strahan ……. it could be a case of buy two properties and get one free.
A RACT/RACV consortium, in which RACT has a 10% interest, has recently acquired the Grand Mercure Hobart Central Apartments located in Collins Street Hobart, a total of 125 rooms for $24.9 million.
It is likely RACT’s share of assets jointly acquired from Federal Hotels will be a similar proportion.
The sale price for the three properties will be interesting. ……….. $40 million may pull off the deal.
Industry insiders claim the Henry Jones Art Hotel in Hobart has in recent times achieved the same turnover as the combined total for the three regional complexes mooted for sale with only 20% as many rooms. This is a reflection of occupancy levels and room yields and the drawing power of the capital city and is one persuasive reason why Federal Hotels’ regional tourism strategy has been ditched.
How much the banks grab is the next point of interest. Nervousness as to the value of the gambling assets will undoubtedly see the banks place themselves in the queue ahead of shareholders. Holding security over stranded assets when the music stops is something most banks try to avoid.
Federal Hotels’ public pronouncements always emphasise the tourism aspect of the group. It is true that the 180 odd rooms in Launceston plus the 370 rooms in Hobart at various properties, not to mention a few rooms at Saffire, contribute to the bottom line. But it’s difficult to escape the conclusion that the bulk of EBIT comes from 3,500 poker machines, a chain of bottleshops plus eleven pokie pubs strategically located in suitable areas, each crammed with the maximum permissible number of machines and structured to legally pickpocket plebs under the guise of providing leisure activities.
When we look now at what will be left after the abandonment of the West Coast Wilderness Railway and the sale of regional tourism businesses, apart from the mandated Saffire property and a few improvements at Henry Jones, we see a group that has preferred bottleshops and pokie pubs, has wound back capex and severely pruned its advertising budget as it freeloads on the success of David Walsh who arguably has lifted Hobart occupancy rates by 10% to 15%.
If there ever was a social contract to use the exclusive license for the benefit of the Tasmanian tourism industry, there surely must be a breach.
What exactly will be the rationale for extending the exclusive pokie license? A license that exploits the disadvantaged and gives an unfair competitive advantage over its competitors?
For too long we have been forced to accept the notion that what’s good for Federal Hotels is good for Tasmania. The industry has been cowered. Criticisms are made in private but rarely in public. The major parties have been coerced, Rene Hidding effectively gagged. Where is Brenton Best when he is most needed? Surely the tourism industry can’t continue to turn a blind eye to the breach of the implied social contract that has been the cornerstone of the State’s tourism strategy, whilst continuing to beg for more?
As Ross Garnaut has recently observed, after the salad days come the dog days. He further refers to the ”business as usual” and ”public interest” approaches to public policy.
For a no brainer what odds we will once again make the wrong choice?
• Greg James, in Comments: Nice work John. The gambling industry is mature and competitive. The local talented staff are plundered continually for the new start ups around the mainland of which there are now over a dozen casinos, competing against Federal Hotels. The only truly profitable tourist enterprise the IXL was not their creation but a purchase. The spin being put on these property sales looks unlikely and improbable to finance. … The question about breaching their social contract is a good one to ask, they clearly are burdened with the casinos, they are not set up to attract tourists and their marketing effect is minimal. The death of an industry certainly is not the death of government stupidity, I shudder at the subsidies they will extract from the government as they descend into the graveyard of all picked winners. I fail to see the Hidding or Best calls to action as probable as both voted to extend the poker machine licence and against poker machine reform. Indeed Hidding was so confused it was his support that sold out the state by failing to recognise the $3.25 billion given to Federal Hotels over the life of the licence had a sale value.