Greek Hospitality Industry

www.pwc.com/gr Greek Hospitality Industry Ripe for innovation July 2014 Dr. Costas S. Mitropoulos, Executive Director

Tourism in Greece Greece is a global tourist destination... Greece ranks 17 th as a world destination and 11 th in Europe. Tourism receipts for around 7% of the Greek GDP (2013) In 2013, around 18m tourists visited the country Germany and UK account in total for 22.5% of the tourists in 2012 and 26% in 2011 About 85% of the total visits are between May and October There are 9,670 hotels with ca 400,000 rooms and 771,000 beds Capacity and tourist flows are unevenly distributed around the country. Three regions account for 53% of the total and 5 regions for 77% of the total 90% 80% 70% 60% 50% 40% 30% 20% Occupancy Rates per Month Average 10% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Region # of Hotels # of Beds % of Beds Central Greece 1,279 92,651 12% Peloponnese 825 52,391 7% Ionian Islands 915 89,012 12% Epirus 373 15,163 2% Aegean Islands 395 22,252 3% Crete 1,529 165,375 21% Dodecanese 1,040 142,242 18% Cyclades 1,029 48,574 6% Thessaly 582 28,589 4% Macedonia 1,595 107,955 14% Thrace 108 7,067 1% Total 9,670 771,271 Seasonality arrivals for 2012 Q4 13,1% Q3 55,8% Q1 6,3% Q2 24,8% Source: Eurostat 2011 2010 2009 Average Source: SETE Page 2

Tourism in Greece but travel expenditure by non-residents in Greece is low Travel Expenditures by non-residents in Greece 2013 2012 2011 2010 Expenditures/journey 661 616 640 640 Expenditures/overnight stay 73 73 70 69 Average duration of stay (# of days) 9 8 9 9 Source: SETE Travel Receipts by purpose of visit (2012) The average trip expenditure has dropped in 2012, recapping in 2013 The average daily spending by foreign travelers has increased over the years, remained stable the last two years 2% 4% 6% 5% The average stay is about 9 days 83% Leisure Studies Visit to family Other reasons Business Purposes Source: ITEP, based on The Bank of Greece Page 3

Tourism in Greece Hotel capacity is concentrated in few regions 25% 22% Rooms capacity Units capacity 20% 18% 16% 16% 15% 10% 11% 13% 12% 11% 14% 12% 9% 9% 6% 6% 7% 5% 2% 4% 4% 1% 1% 3% 4% 0% Dodecanese Epirus Thessaly Thrace Central Greece Crete Cyclades Macedonia Aegean Islands Ionian Islands Peloponese Source: SETE, based on data provided by the Hellenic Chamber of Hotels, 2012 About 52% of all hotels are concentrated in Crete, Dodecanese, Macedonia and the Ionian islands, roughly in line with the bulk of arrivals Thrace, Epirus and Aegean Islands had the lowest unit capacity concentration, totaling 9%, in 2012 In Crete and Dodecanese there are mostly larger hotels compared to other regions. In Macedonia and Cyclades there is a high concentration of smaller hotels Page 4

Tourism in Greece Only 16% of the hotels are 5* and 4* 1.600 1.400 Hotel unit capacity 5* 4* 3* 2* 1* Hotel units 3,6% 1.200 1.000 15,6% 12,9% 5* 800 4* 600 3* 400 200 43,8% 24,1% 2* 1* - Source: SETE, based on data provided by the Hellenic Chamber of Hotels Source: SETE, based on data provided by the Hellenic Chamber of Hotels Greek hospitality is mostly based on its 2* hotels (4,234 hotels), with 4* and 5* hotels accounting for 16% of the total number. In all regions there is a significant concentration of 2* hotels, except Thrace, where 3* hotels have major presence. The majority of 4* and 5* hotels are situated in Crete, Dodecanese and Cyclades. Page 5

# of Rooms (In 000) Tourism in Greece About 39% of 400 thousand rooms are in 5* & 4* hotels Room capacity 90 80 5* 4* 3* 2* 1* 70 60 50 40 30% 30 20 10 - Hotel Rooms 7% 14% 25% 24% 5* 4* 3* 2* 1* Source: SETE, based on data provided by the Hellenic Chamber of Hotels Source: SETE, based on data provided by the Hellenic Chamber of Hotels Despite the fact that 5* hotels represent only the 3.6% of hotel units in Greece, they provide 14% of total hotel rooms; while 4* hotels account for another 25% of hotel rooms. Crete, Dodecanese, Macedonia and the Ionian islands account for the majority of 4* and 5* capacity 2* and 3* hotels represent almost 55% of country s rooms capacity, with significant presence in Dodecanese, Crete and the Ionian islands Page 6

Total 4* & 5* Beds (in '000s) Total Beds (in '000s) Tourism in Greece Tourist arrivals and bed capacity 90 180 80 70 Over capacity Dodecanese Crete 160 140 Over capacity Crete Dodecanese 60 120 50 40 Under capacity 100 80 Macedonia Ionian Islands Central Greece 30 20 10 0 Macedonia Peloponese Ionian Islands Cyclades Thessaly Aegean Islands 0 500 1.000 1.500 2.000 2.500 3.000 60 40 20 0 Peloponese Cyclades Thessaly Aegean Islands Under capacity 0 500 1.000 1.500 2.000 2.500 3.000 Tourist Arrivals (in '000s) Tourist Arrivals (in '000s) There appears to be excess 4* & 5* capacity in Peloponese, Crete and the Dodecanese Macedonia, Ionian islands and Aegean Islands could do with more 4* & 5* hotels Slide 7

Methodology and Sample Analysis Our approach to understand the dynamics of Greek hospitality There were 717 hotel companies in Greece with Revenue higher than 1mn per annum between 2008 and 2012 For our survey we used 702 hotel companies which had had a full set of data for the period, and a total number of beds in 2012 of 310.000 (40% of total beds capacity) We defined three key variables: Growth: Revenue CAGR 2008-2012 Profitability: RoCE in 2012 Debt Sustainability: Net Debt / EBITDA Criteria Star Grey Zombie CAGR Revenue (2008-2012) Greater than 5% ROCE Greater than 15% Net debt/ EBITDA Less than 1.5 or Net Debt <0 Between -5% and 5% Between 0% and 15% Between 1.5 and 5 We categorised hotels according to the value ranges of these three variables, and all hotels of the similar combined grades are bundled together to form 10 groups. No Groups Classes Designation Groupings Less than -5% Less than 0% or Capital Employed <0 Greater than 5 or EBITDA <0 1 Group 5* SSS Stars Stars 2 Group 4* SSG+SGS+GSS Almost Stars 3 Group 3* SGG+GSG+GGS Aspiring Stars Almost Stars 4 Group 2* SSZ+SZS+ZSS Stars with Zombie aspects 5 Group 1* GGG Good 6 Group -1* GSZ+SGZ+ZGS+GZS+SZG+ZS Grey Mixed Bags G 7 Group -2* ZGG+GZG+GGZ Departing Good 8 Group -3* ZZS+ZSZ+SZZ Zombies with Star aspects Almost Zombies 9 Group -4* ZZG+ZGZ+GZZ Almost Zombies 10 Group -5* ZZZ Zombies Zombies Page 8

Revenues (in bln) EBT (in bln) Fixed Assets (in bln) Gross Debt (in bln) Methodology and Sample Analysis The big picture Sample revenues amounted to 2.5bn in 2012, The sample revenues dropped 7.2% between 2008 and 2012, with fixed assets going up by 15% to 10bn EBITDA went down 44%, with margins shrinking from 30% to 18%; profitability collapsed into losses Total debt stood at 4.7bn in 2012, 11% higher than 2008; equity rose by 13.5% within the period Average Net Debt/EBITDA, as a measure of debt sustainability, increased from 4.9x in 2008 to 9.6x in 2012 Net Debt to Capital Employed remained constant at about 40% throughout the period Grants at 650mn, represent 6% of total capital employed 2,7 2,6 2,6 2,5 2,5 2,4 2,4 2,3 2,3 2,2 2008 2009 2010 2011 2012 1,0 0,8 0,6 0,4 0,2 0,0-0,2-0,4-0,6 11,0 10,5 10,0 9,5 9,0 8,5 8,0 2008 2009 2010 2011 2012 0,4% 0,2% 0,0% -0,2% -0,4% -0,6% -0,8% -1,0% -1,2% -1,4% 5,0 4,9 4,8 4,7 4,6 4,5 4,4 4,3 4,2 4,1 4,0 3,9 2008 2009 2010 2011 2012 14 12 10 8 6 4 2 0 Revenues EBT EBTDA Fixed Assets ROCE Gross Debt Net Debt / EBITDA Page 9

Zombies Grey Stars Methodology and Sample Analysis The majority of the hotel companies fall into the Zombie categories CAGR 2012 # of # of No Group Companies Employees Revenue* Rev. 08-12 EBITDA* EBITDA Margin ROCE Fixed Assets* Gross Debt* Capital Employed* Grants Net Debt / EBITDA 1 5 6 100 14 18% 5,1 35% 22% 19 1,6 20 0 N/A 4,4 1.607 8 201 2 4 35 402 147 10% 45,1 31% 8% 319 53,1 296 21 0,2 3,9 13.543 58 234 3 3 90 623 313 4% 104,3 33% 5% 773 234,4 882 70 1,2 3,9 34.953 145 241 4 2 17 171 46 16% 8,3 18% -4% 157 5,5 114 14 N/A 3,8 4.611 24 192 5 1 60 375 174 0% 56,0 32% 4% 488 211,4 565 25 3,1 3,8 24.567 98 251 6-1 95 1.937 343 4% 85,0 25% 1% 1328 531,8 1.374 89 5,4 4,1 36.870 134 275 7-2 66 901 247-2% 65,2 26% 2% 1017 636,7 1.142 78 9,2 4,1 31.210 112 279 8-3 89 1.668 324 20% 3,3 1% -5% 2199 842,0 2.343 159 223,3 4,2 40.396 135 299 9-4 99 2.537 467-4% 74,8 16% -1% 1825 1137,2 2.004 123 14,4 4,3 57.853 160 362 10-5 113 4.745 337-13% -11,6-3% -4% 2185 1040,9 2.210 62 N/A 4,2 46.617 157 297 Weight. Av. Stars Beds No of Hotels Beds / Hotel Total 670 13.459 2.411 0% 435,4 18% -1% 10.310 4.695 10.951 640 9,6 4,1 292.227 1.031 283 * mn There are three statistically distinct groupings: Groups 2/3/4/5 (Stars), Groups -1/1 (Grey), Groups -2/-3/-4/-5 (Zombies) About 55% of the hotel companies (367) are classified in Zombie Groups versus 22% (148) classified in Star Groups in 2012. Zombies represent, 55% of the hotels, 60% of bed capacity, 57% of revenue, 70% of fixed assets 70% of capital employed and hold 82% of the net debt of the sample EBITDA margin and ROCE go significantly down from Group 5 to Group -5 The average star ratings of hotels belonging to Zombie companies is higher than the average star rating of Star companies' hotels. Also the average hotel in Star categories has about 70% of the size of average Zombie category It would appear statistically that higher star and bigger hotels tend to be rest Zombie companies Page 10

Methodology and Sample Analysis The typical hotel firm tends to be small with annual revenues between 3mn to 4mn * mn Typical Company 5 4 3 2 1-1 -2-3 -4-5 Revenue ( in mn) 2,4 4,2 3,5 2,7 2,9 3,6 3,7 3,6 4,7 3,0 Cagr 08-12 18% 10% 4% 16% 0% 4% -2% 20% -4% -13% EBITDA ( in mn) 0,9 1,3 1,2 0,5 0,9 0,9 1,0 0,0 0,8-0,1 EBITDA margin 35% 31% 33% 18% 32% 25% 26% 1% 16% -3% EBT ( in mn) 0,5 0,5 0,3-0,4 0,2-0,3-0,2-1,8-0,8-1,1 Fixed Assets ( in mn) 3,1 9,1 8,6 9,3 8,1 14,0 15,4 24,7 18,4 19,3 Grants 0,0 0,6 0,8 0,8 0,4 0,9 1,2 1,8 1,2 0,5 ROCE 22% 8% 5% N/A 4% 1% 2% N/A N/A N/A Net Debt ( in mn) N/A 0,2 1,4 N/A 2,9 4,8 9,1 8,3 10,9 8,9 Net Debt/EBITDA N/A 0,2 1,2 N/A 3,1 5,4 9,2 223,3 14,4 N/A Capital Employed ( in mn) 3,4 8,5 9,8 6,7 9,4 14,5 17,3 26,3 20,2 19,6 # of Employees 17 11 7 10 6 20 14 19 26 42 # of Hotels 1,3 1,7 1,6 1,4 1,6 1,4 1,7 1,5 1,6 1,4 # of Beds 268 387 388 271 409 388 473 454 584 413 Revenue/Fixed Assets 0,8 0,5 0,4 0,3 0,4 0,3 0,2 0,1 0,3 0,2 As we move from Group 5 to Group -5, for a typical hotel company: - EBITDA on average drops - revenue is slightly higher - profitability declines to below zero levels - significantly more capital is employed - more staff is employed - net debt increases disproportionately, downstream of Group 2 - grants increase from an average of 1.3mn to 2.4mn - number of beds increases by 30% In summary, Star hotel companies use less fixed assets and employ capital significantly more productively than Zombie companies Stars Grey Zombies 1,2% 1,0% 0,8% 0,6% 0,4% 0,2% 0,0% 5 4 3 2 1-1 -2-3 -4-5 Revenue/Bed Revenue/Fixed Assets 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Slide 11

Methodology and Sample Analysis Companies moved between Groups from 2009 to 2012, but with no overall significant shifts 254 hotel companies (38% of total ) moved downwards 173 hotel companies (26% of total) remained in the same Group 245 Hotel companies (36% of total) moved upwards 2009/2012 5 4 3 2 1-1 -2-3 -4-5 Total 2012 5 0 3 0 0 0 1 0 1 1 0 6 4 2 10 3 4 2 6 2 3 0 1 33 3 0 11 11 3 5 27 6 9 8 10 90 2 1 2 1 4 0 1 1 6 0 0 16 1 0 3 5 0 15 7 11 2 6 11 60-1 0 2 9 5 0 31 3 22 9 8 89-2 0 1 2 0 4 15 13 2 18 11 66-3 0 4 7 2 1 19 5 28 2 6 74-4 0 4 6 0 2 12 14 7 30 24 99-5 2 4 15 2 5 28 15 9 28 31 139 Total 2009 5 44 59 20 34 147 70 89 102 102 672 % Change 20% -25% 53% -20% 76% -39% -6% -17% -3% 36% Around the same number of companies moved from a higher to a lower category and vice versa. All in all, the structure of the sample did not change dramatically in the period From 2009, 108 hotel companies turned to Zombies (-5) to 2012, and only 6 companies turned to Stars (5), whilst 26% remained in the same Group Since the distribution of hotel companies did not move significantly between 2008 and 2012, it would appear that it reflects a permanent structure in the hospitality industry with a predisposition for Zombie hotel companies Page 12

Methodology and Sample Analysis Operational Characteristics per Star Category Beds/Star Category Revenue/Bed EBITDA/Bed Fixed Assets/Bed 1.600 1.400 1.200 1.000 800 600 400 200 0 5* 4* 3* 2* 12.000 10.000 8.000 6.000 4.000 2.000 0 5* 4* 3* 2* 2.000 1.800 1.600 1.400 1.200 1.000 800 600 400 200 0 5* 4* 3* 2* 70.000 60.000 50.000 40.000 30.000 20.000 10.000 0 5* 4* 3* 2* Weighted Average of Stars 5* 4* 3* 2* # of Beds 92.982 150.559 40.868 7.818 Revenue/Bed 10.440 7.611 5.811 7.322 EBITDA/Bed 1.588 1.472 1.278 1.773 EBT/Bed -2.563-634 -348-154 Fixed Assets/Bed 60.986 25.520 16.454 16.001 Capital Employed/Bed 63.998 27.358 18.449 16.235 Grants/ Bed 4.093 1.480 805 477 Total Debt/Bed 28.511 11.383 6.856 6.318 Revenue/Fixed Assets 0,2 0,3 0,4 0,5 Slide 13

no of companies Methodology and Sample Analysis Size is related to the financial standing of hotel companies 400 350 300 18% Zombies (-5 to -3) Greys (-2 to 2) Stars (3 to 5) 250 34% 200 150 100 50 0 22% 48% 36% 17% 42% 39% 21% 18% 44% 42% 9% 38% 73% 0-2.5 2.5-5 5-10 10-20 20+ Revenue Ranges The percentage of Star companies are uniform (18%- 22%) across size groups Large companies with annual turnover in excess of 20mn p.a. are predominantly (>70%) Zombie For companies with revenues less than 10mn p.a. the proportion of Zombie companies decreases and the proportion of Grey companies increases with their size Largest concentration of Grey companies is evident in mid size companies ( 10mn- 20mn) Small companies with less than 2.5m p.a. revenue are 48% Zombie Slide 14

Geographical Distribution Hotels Concentration of Stars & Zombies Periphery % Zombies % Grey % Stars Aegean Islands 83% 4% 13% Central Greece 75% 16% 9% Crete 47% 26% 27% Cyclades 38% 22% 40% Dodecanese 51% 26% 24% Epirus 75% 8% 17% Ionian Islands 48% 18% 34% Macedonia 62% 25% 13% Peloponnese 88% 12% 0% Thessaly 65% 10% 26% Thrace 80% 20% 0% Total 56% 22% 22% Slide 15

Debt levels are inconsistent with the revenue generation capacity of the hotels and about 0.4bn of debt should be restructured and 1.2 bn refinanced mn Trapped Debt Refinanceable Debt Grand Total Group Debt Level Number of companies Debt Level Number of companies Debt Level Number of companies Initial Debt Level Post Restructuring % of Restructuring -5 307,03 32 149,18 29 456,20 61 1040,94 584,74 44% -4 15,31 4 526,47 52 541,77 56 1137,21 595,44 48% -3 15,45 1 153,16 11 168,61 12 841,97 673,37 20% -2 3,34 3 272,88 33 276,22 36 636,67 360,45 43% -1 0,00 0 118,91 16 118,91 16 531,78 412,87 22% 1 0,00 0 2,25 6 2,25 6 211,44 209,18 1% 2 0,00 0 0,00 0 0,00 0 5,50 5,50 0% 3 0,00 0 1,85 2 1,85 2 234,36 232,50 1% 4 0,00 0 0,00 0 0,00 0 53,10 53,10 0% 5 0,00 0 0,00 0 0,00 0 1,55 1,55 0% Grand Total Restructuring the Debt 341,12 40 1.224,69 149 1.565,82 189 4.694,51 3.128,70 33% The 670 hotel company sample for 2012 carries around 4.7bn of debt, of which 3.7bn is with Groups -2 to -5 Despite the fact that this debt is supported with 10.3bn of fixed assets, it cannot be serviced through the cash flow of the companies The debt that should be refinanced reach 1.2 bn and is allocated among 149 companies. Respectively the debt that seems to be trapped is close to 340mn spread over 40 companies Almost exclusively, refinanceable debt lies across all Zombie Groups and all trapped debt in Groups -5 to -2 Zombie hotel companies take up 1.5bn out of the total 1.6bn of debt to be written of or restructured About 33% reduction of total debt is required to reset debt sustainability in the sample companies Page 16

Restructuring the industry The value pyramid of the Greek Hospitality industry 6 Stars % Revenue 2012 % EBITDA 2012 % Total Debt 2012 % Personnel 2012 1% 1% 0% 1% 142 21% 36% Almost Stars 6% 9% 409 Grey 72% 65% 72% 55% 113 14% -3% 22% 35% Zombies May 2014 Slide 17

Restructuring the industry The challenge From a sample of 702 hotel companies with annual revenue in excess of 1mn per annum in any of the last 5 years, Greek hotels appear under stress with limited growth, low profitability and debt in excess of their servicing capability Despite the fact that tourism accounts for 6-7% of GDP, Greek hotel companies are small with typical revenues of 3-4 mn. The small scale of hotel companies, and of hotel units hinders growth and profitability The cohabitation of real estate with hotel management appears to lead initially overinvestment and subsequently to over indebtedness as the revenue generation trails capacity The problems the Greek hotel industry needs to address are structural and not the result of the crisis: management: product quality, scale, funding marketing: pricing, occupancy funding: debt restructuring, fresh equity The key issue is weak management, which manifests itself in: Pricing Product Quality Operating Practices/Occupancies Non room revenues Marketing Funding Page 18

Restructuring the industry The challenge (cont.) Increasing the average size of hotel companies will facilitate marketing, and thus revenue generation and will improve overall productivity The strategy for the hotel sector relies on the premises of redirecting the market forces towards large hotel companies by: Releasing assets from Zombie companies to be acquired by Stars and Greys Restructuring debt and facilitate mergers with Star and Grey companies Bundling hotel assets into REICs and facilitating the creation of large hotel operators By creating large hotel marketing and operating companies, both the repricing and the quality of the product will go up and the funding will become easier. Page 19

Restructuring the industry A few ideas for the future of the industry Expand summer period: thematic conference Increase demand / Improve capacity utilisation Create new destination Concentrate beds Disintermediation / direct booking / depackaging Enrich travelling experience Increase revenue / Improve pricing Higher and more sophisticated offerings Roving tourism Page 20

Restructuring the industry Fighting commoditisation From media marketing to service based guest experience Marketing from inspiration to research to booking Experience sharing /recommendations through social media Linking personal satisfaction with revenue Page 21

Restructuring the industry Technology serving the hospitality industry Page 22

Restructuring the industry An illustrative example of a second digital wave guest experience Page 23

Restructuring the industry Digital technology can transform the end-t0-end guest experience The augmented customer/guest Page 24

Final thoughts Οι καιροί ού μενετοί της ημετέρας βραδύτητος Θουκυδίδης 25

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