The Best Revenge - Investment Outlook - March 2001

By Staff -- HOTELS Magazine, 3/1/2001

RF Hotels is Sir Rocco Forte's opportunity to step out from his father's giant shadow and do something neither Four Seasons, Regent, Ritz-Carlton, Rosewood nor any opportunity fund has been able to do: Create a pan-European, city center hotel group positioned at the top of the market.

The highly visible, 56-year-old son of legendary hotelier Lord Charles Forte is better equipped than most for the attempt. Unlike Four Seasons and Ritz-Carlton, he has no shareholders looking over his shoulder and no quarterly reports to constrain decisions.

Losing the bitter takeover battle for Forte Hotels to Granada in 1996 hardly enhances the public markets' attractions. Instead, Forte is counting on £60 million (US$88 million) from the family, including his retired father and sister, Olga Polizzi, who is RF Hotels' director of design. Another £50 million in debt comes from the Bank of Scotland (BOS) and £17 million in debt from Banco di Roma. About £300 million (US$441 million) in equity and debt for a larger joint venture between RF Hotels and is in an advanced stage of negotiations.

Forte also has the advantage of being a European insider, distancing him from the Asian-born Regent, now under the auspices of Radisson, and Rosewood, based in the United States.

It is precisely the head start represented by his pedigree and the availability of ready capital that has skeptics wondering how serious Forte is about growing his hotel collection. Industry insiders charge that the 1996 launch of RF Hotels was more about avoiding stiff tax penalties for failure to einvest capital gains than a driving desire to get back into the hotel industry. Some say he moved quickly, too quickly, in the early days to beat the deadline for reinvesting at least US$147 million (£100 million) and did whatever plausible deals came his way. Others castigate him for being "frustratingly slow" in deal making, inching along in Cardiff and St. Petersburg when he should have been shopping more aggressively in London and Paris.

STARTING FROM SCRATCH
Without the value of hindsight, the view in what was then an office of less than half a dozen people was different. "I knew that starting a group of luxury hotels would be difficult to do, but attractive, because no chain had a dominant position," says Forte. "The challenge was that I had to buy things at sensible prices. I couldn't just buy something with a 6% return and turn it around to get 8%--certainly not with one or two hotels. I had to show much higher results-a minimum of 15% return on investment."

At A Glance Company: RF Hotels Headquarters: London Founded: 1996 Founder and CEO: Sir Rocco Forte Key Partners: Lord Charles Forte; Olga Polizzi Hotels: Six Rooms: 980. The 172-room Lowry opens this spring in Manchester and a deal is expected to close for a hotel in Venice with 50 rooms, most of which will be suites Employees: 1,500, including hotel-level and corporate staff Turnover: US$73.5 million (£ 50 million) annually Occupancy: RF does not post systemwide occupancy. Each hotel is measured individually. Sir Rocco's estimates Balmoral, 80%; Hotel de Russie and Hotel Savoy, 70%; Cardiff, low 60s; St. Petersburg, upper 50s. "The Amigo is still being refurbished, so we can't really calculate occupancy," he says. Rate: Rate also reflects the market, ranging from US$150 per night in St. Petersburg to more than US$300 for the Italian hotels. Development philosophy: Refurbish and reposition "run-down" but well-located hotels. New construction is also an option. Services and amenities are standardized as much as possible. Each hotel features strong, individualized design. Most are under 200 rooms. Targets are European capitals, but Sir Rocco would not rule out a strategic resort. Investment philosophy: Though patient, RF Hotels requires each hotel to stand on its own financially. Minimum return on investment is a standard 15%.

Forte sat in his office for five months and looked at a lot of deals. "I could not get deals at the right numbers," he says. "Others fell through. At that stage, I was getting rather demoralized. I was sort of fed up. A lot of money was going out of the office during the set-up phase, and there was a limited time during which I was prepared to do that. Fortunately, it never came down to the final decision."

"Fortune" took the form of the Bank of Scotland, with its decision to sell the Balmoral Hotel. During Forte's tenure at the helm of Forte Hotels, the company had turned around the ailing hotel in less than a year. That, and his father's long-standing relationship with the bank, made him a logical contact as a potential buyer for the 186-room deluxe property. His meticulous approach to management, combined with strategic rejuvenation of the restaurant and a few other key areas by Polizzi got him back on the playing field.

"The Balmoral is a success story," says Arthur de Haast, managing director, Jones Lang LaSalle Hotels, London. "The deal in 1997 was well timed. Edinburgh was just starting to recover."

Although the Balmoral was a safe bet because it was a hotel and a style of operating Forte knew well, it was RF's Hotel de Russie in Rome and the Hotel Savoy in Florence, both of which opened last year, that put the young company on the international radar and galvanized its identity. Reviving two run-down, well-located properties gave Forte the opportunity to define the company's services and standards while providing Polizzi with the freedom to create strong, award-winning design programs virtually from scratch. The Italian hotels and the Balmoral embody RF Hotels' stock in trade: Finding diamonds in the rough and successfully repositioning them with new standards and an aesthetic edge.

Most consultants see this magic touch carrying over to the 185-room Amigo in Brussels, now undergoing renovation.

However, RF Hotels is not without its growing pains. When asked about the strengths and weaknesses of his small portfolio, Forte's assessment closely mirrors the diagnosis of the consulting world. Most sources cite the St. David's Hotel & Spa in Cardiff as the weak link.

"If I had to start over, I don't know that I would have gone to Cardiff," says Sir Rocco, a thoughtful but physically restless man who seems hemmed in by his London office's small, functional conference room. At start-up, though, the deal was too tempting to pass up. The real lure was a free site, thanks to a package of grants, in a market with a paucity of deluxe hotel accommodations and burgeoning prospects for various events and incentives that would have boosted travel to Cardiff-few of which ever materialized.

"I was very impressed with what was going on in Cardiff. Then, too, the grant made a big difference regarding the requirements for return on investment," Forte says. "In any case, this was a great learning experience for me. I had never personally developed a green field hotel. It taught me how to work with builders and contractors and how to get a hotel off the ground. This experience made us far more efficient, much better at getting costs right."

The Hotel Astoria in St. Petersburg also engenders questioning looks from the industry. "I slightly miscalculated in one way on the Astoria," says Forte, who had negotiated a Forte contract in Moscow while at "the old company." "The cost of entry was low compared to Western Europe and break-even was 22% occupancy," he says. "In the short term I saw the Astoria as a cash cow. What I didn't foresee was the crash of 1998. So, it hasn't been quite the cash cow I'd hoped. This hotel will prove itself a good long-term investment."

HOW CRITICAL IS CRITICAL MASS?
Distribution in Rome, Florence, Brussels, Edinburgh, Cardiff, St. Petersburg and, scheduled to open this spring, Manchester, has raised the hackles of those in more traditional development circles. Not only do they argue that RF Hotels should get a London and Paris presence without delay, they question whether the company can compete for future deals head-to-head.

Some contend all the projects RF Hotels has done so far have been through personal connections, existing relationships and the leverage of the Forte name. They are considered royalty in Italy. The Amigo in Brussels and the Astoria in St. Petersburg were both hotels Forte had pursued for years.

While these are the pervasive views, Charles Human, director, HVS International, London, suggests it is the end, not the means, that counts. "The Amigo had been on the market for years, and nobody could close on it. Rocco Forte did. His relationships are part of his deal-making ability," says Human. "He can't go about building a collection of hotels as he would a chain. His strategy is really not all that different from Orient-Express. Most of the other people who tried to do what he's doing didn't get very far. With seven properties (including Manchester) in five years, I'd say he's ahead of the game."

Michael Hirst, consultant to Insignia Hotel Partners, London, adds, "This is not a bad performance for a one-man band. Sir Rocco was starting from scratch; he was on his knees. He's not exactly a phoenix rising from his own ashes in that he did have substantial funds available to him after the Forte sale. But, he has gathered a collection of significant assets in just five years. He's done better than most of the people who tried to start luxury chains."

The worry about distribution in the short term, Hirst says, would center on a downturn. "People are a lot less likely to turn up at your door in Cardiff or St. Petersburg than they are in London and Paris," Hirst points out.

DOING THE DEALS
Seven hotels are just one-third of the way toward a goal of 20 properties. Despite many chains' problems in finding deals, Ilan Rudich, president, R&D Development Resources Intl., with offices in the UK and Hong Kong, says RF Hotels' aims are achievable. Deals will require patience, according to Rudich, but they are there to be done. London will be the hardest city in which to get an affordable deal; Paris has more opportunities, according to Rudich.

The competitive spirit that made Sir Rocco an avid athlete since his school days, and drives an already very fit man to train for triathlons, is evident in his quest for deals. He is not much worried about the competition. Boutique hoteliers such as U.S-based Schrager and the UK's Scotsman and Firmdale are not shopping for the same property type. He points out that U.S.-based Blackstone has yet to make any move to expand Savoy. "The funds can do what they want. I can't worry about what might be," says Forte. "As for Orient-Express, Four Seasons or Ritz-Carlton, I just have to be cleverer than they are. I think everyone is finding out that it (finding good projects) is not that easy."

His history, plus his independence, give him a deal-making edge. "A lot of private owners would rather deal with a private individual. It is more discreet," says Forte. "They know they don't have to wait for a decision while I go back to a board of directors. They get answers straight from the horse's mouth."

During this interview in his no-frills, open plan office just off Pall Mall, he is asked to review the latest version of a deal for a small property in Venice. He is "close" to a deal in Milan and is "looking hard" at Vienna, Geneva, Zurich, Madrid, Barcelona, Frankfurt, Paris and Prague. Europe is the immediate target. He says he may look at the United States, New York in particular, once he achieves critical mass in Europe but not before. Asia is an unlikely destination. It is too far away for someone who has become an enthusiastically hands-on executive and admits he does not have enough market knowledge.

Though some charge Sir Rocco "is good at spending a lot of money" and invests too much in his deals, he is quick to disagree. "At the old company (Forte Hotels), institutions used to offer us money when we didn't need it. Now, I have to show that each project can pay for itself. I won't do a project for the sake of having a hotel somewhere. I never believed in that. That's why I don't have a hotel in London," he says.

Forte's philosophy is expected to reap revenues of US$73.5 million (£50 million) this year. Sources expect profits around US$7.3 million (£5 million), a sum earmarked for reinvestment.

Leveraging is also an important component in growth. Recent deals have provided up to 75% debt financing with favorable terms and grace periods. Financing now in place will allow RF to grow slowly but steadily without seeking partners or resorting to public money. At this point, neither a chain acquisition nor an IPO looks likely. But, Sir Rocco will not rule out either.

"I wasn't interested in a deal such as the Rafael Group," Forte says. "If something like that would have come along in the beginning, it might have been a deal worth doing. We're past that now. I don't want to take someone else's hotels and remake them in our style."

The same thinking applies to going public. There is no need at the present even to consider it, says Forte. Excited about the challenge of direct involvement in a startup business that is purely his own, he would rather spend his time "aggressively pushing the business forward" than doing road shows and reassuring investors. He also argues young companies need the luxury of a longer-term view on the part of their owners. "It would have been much more difficult to get where we are if the company were public or if we had venture capital behind us. Then you have a board pushing for quick returns," he says. If time or available deals change his mind, he will carry forward one painful lesson: Retain a majority shareholding.

A STYLE OF HIS OWN
The competition Forte worries more about iscompetition for guests. As HVS' Human points out, "Sir Rocco is a true hotelier," and it shows in his goals for the company. Within 24 months, he has set himself the task of driving development along with his long-time colleague, Richard Power, refining operations and perfecting service standards.

Forte says he is in a better position to improve hotel performance now because of his close involvement with each hotel. No longer is he the corporate "face" who visits the hotel at its grand opening, does periodic inspections and moves on to the next operation. His ground-up knowledge ensures an in-depth understanding of both the physical and marketing problems faced by his general managers. This, he says, is vital in working with general managers to improve their numbers. Thorough and intense, Sir Rocco reportedly pores over each hotel's reports, making sure each property is maximizing its opportunities.

Operations already benefit from what consultants say is savvy hiring. It is the coups, such as hiring away a savvy sales manager from the competition for the St. David's, as well as good judgment that has built an operating staff that earns high marks. "He has the luxury of hiring individuals," says Christopher Rouse, director, Insignia Hotel Partners, London, a veteran of Forte Hotels' development team. "His hotels are perceived as quality offerings, and the staff can become a very important marketing feature. A lot of talented managers feel stifled within big brand standards. It's going to be a good thing for someone to have RF Hotels on his or her c.v."

Forte is building in more incentives to keep his 2,000 employees from sending out their resumes. He has changed the managers' bonus strategy, boosting it to as much as 40% of salary. Half of that bonus is based on measured performance standards. Having worked close to operations, Forte says he now realizes just how important financial incentives are-another benefit of leaving the corporate ivory tower for a smallish corner desk from which he can see the dozen or so staff in RF Hotels' headquarters. "You have to make sure that getting the bonus relies on holding standards, not on cutting costs. Controlling costs is important. You can't be extravagant or silly. But if you don't have the top line, you don't have profitability. Pushing sales and pushing room rates is the base of profitability," he contends.

So is delivering standards. Consistent delivery of standards is "crucial" for a luxury chain, in his view. "Customers complain, and with good reason, when they pay out all this money and don't get good service. Nagging staff about standards is part of managing. Certain aspects of service can be systematized, but not caring about the guest. That has to come from each staff member. I don't care if people don't like the way I run the company or how fast I grow. It's always easy to tell someone how to run their business. But I care very much if my customers are unhappy."

Substance Behind the Style
Olga Polizzi's dynamic design sense may be one of the most potent marketing tools the young RF Hotels has. Although Sir Rocco Forte's name carries a great deal of weight with the travel trade, it is Polizzi's intriguing design statements that have made chic FITs take notice. Recent design awards for the Hotel de Russie and Hotel Savoy are long-awaited plaudits for a talent many feel should have been recognized decades ago when she was doing renovations at her father's company.

"One of the smartest things I did was to hire my sister," says Forte. "When we started, I didn't see design as being important. Now, I do. The awards she has won really have made me think every hotel should be reflective of a sense of style. Her design has given us an edge."

Forte not only gave his sister a pivotal role in the company, but the freedom to develop strong design themes for each hotel. Despite his obvious aesthetic sensibilities, he ultimately looks at the hotel with the eye of an operator while Polizzi seeks aesthetic continuity. "I stand my ground when the issue is important. But, there are certain elements my brother feels must be there for the guest. Someone has to be the boss, and it's him," says Polizzi.

Like her brother, she is aware good design at the level of RF Hotels means mixing style, comfort and quality. She has become more aware as a result of the trials endured when she renovated and launched her own hotel, the 26-room Hotel Tresanton in the West Country, in 1997.

"I admire Ian Schrager and Philippe Stark, but I think they've gone too far for comfort. You have to have comfort and things that last. I hate going into a bedroom and seeing everything scratched and scruffy, and so would a guest," says Polizzi, who also draws on her experience working in her father's hotel at the front desk and other jobs.

Contrary to public opinion, Polizzi says her brother gives her "tough budgets." Initially, it was more difficult since not all of Forte Hotels' suppliers were willing to work with the new company. Gone were purveyors willing to let her work on account, and also volume savings no longer possible with a startup company and hotels of 150 rooms. "Fortunately we're gaining a reputation, which makes sourcing easier. And, too, the market has changed. Nearly everything is available in London," says Polizzi, who is as likely to haunt antique shops and flea markets as top-name manufacturers.

Polizzi splurges are on original art or a few important pieces of furniture. She is a stickler for comfort: well-placed lamps for reading in beds, fine linens and easy-to-use controls for the guestroom. "I'm not into high tech and multi-use. Nor I am into overspending," she says. "If you have a nice piece or art, you can get lamps at US$117 (£ 80). I also like simple cardboard lampshades. Now, there is synthetic fabric that looks like silk and has the right certification. It costs US$13 to US$16 (£ 9-11) per yard instead of US$66 (£ 45) per yard. Finally, we're starting be offered better prices."

Polizzi says establishing an identity for RF Hotels has been a huge learning curve. "I learned the hard way that I can't design these hotels as I would a home," she says. "I used to hate hearing that I couldn't use light colors or certain fabrics because housekeeping objected. Now I see that I can make a statement without compromising but still give the guest something that will hold up."

Polizzi's style is fresh and simple, with little pattern and lots of punch. She plans her designs to live three to four years before needing a soft goods refurbishment. Cap ex budgets of 2-3% are earmarked for repairs and replacement, and she sees her work as having staying power. "We don't pushed design so far that it looks ghastly in 10 years."

Debunking Rumors

Though his influence in the hotel industry has been scaled back from managing a company of more than 800 hotels and 1,000 restaurants to constructing a collection of six hotels, Sir Rocco Forte remains reliable grist for the industry's rumor mill. How much truth is there to the rumors?

The rumor: Sir Rocco is mulling buying back the Forte name as part of the Granada Compass sell-off.

The truth: "People have the idea I lost my name. I didn't; it's still mine," Forte says. "It is a name the travel trade knows and is comfortable with. My name is partially why I am successful and why I have had the goodwill I needed to build this company. What annoys me is that I see the Forte name on hotels that are not run by me and not run with the same philosophy I have." While he has not put in a bid to buy back the name from Granada, he has not closed the door on seeking to use the Forte name. The question is how much benefit it could offer at this point. The most likely scenario, in his view, is the Forte brand, which "was the glue that held together diverse groups of hotels," will fall into disuse as various buyers cherry pick pieces of "the old company."

The rumor: A recent article in the Sunday Times contends Sir Rocco is "a bitter man" following the loss of Forte Hotels to Granada in 1996.

The truth: "Bitter? No. I'd say, rather, sad," says Forte. "What's sad is Granada had not the slightest interest in running hotels. Granada wanted to be a media company, and it could have done that without buying a hotel company. Granada milked the hotels. It cut service standards for short-term profits and did not reinvest in the hotels (Granada has publicly disagreed, saying it has infused several hundred million pounds into Forte and won several industry service awards). If a company such as Marriott took over the old company, I wouldn't have been happy. But, at least they would have operated it professionally and kept up standards."

The rumor: Forte's primary motivation in launching RF Hotels was to avoid heavy tax penalties contingent on failure to reinvest the capital gains from the sale of Forte Hotels.

The truth: "Even after the taxes, one would have a comfortable existence," says Forte, appreciating the irony. "Or, I could have taken the money, put in the bank and gone to work for someone else. But, that's not my style. I would have been bored silly. I have lived in the hotel industry my whole life; this is the industry I like and luxury hotels are the area I like best."

The rumor: Sir Rocco Forte moves too slowly, one reason he lost his father's empire.

The truth: "Rocco Forte was just beginning to succeed at Forte and make it his company," says Trevor Ward, joint managing director, TRI Hospitality Consulting, London. "One suspects he is a good leader. It was the City that saw the change as too slow. Then, along came a predator the City regarded as more dynamic. There was a level of backlash against the old school of the family business."

Hit hard by recession, Forte Hotels was recovering better than most in 1995. Though some still disagree with the wisdom of selling off Gardner Merchant, the majority of industry watchers say Forte simply did not have time to test his vision. "The year 1996 was a boom year. If I'd been allowed to continue with the changes in operations, I would have been a hero," adds Forte. "Granada thought I would be an easy target. They were mistaken."

The rumor: Sir Rocco's sister, Olga Polizzi, was quoted in a Sunday Times magazine article as saying her brother lacks "a human chip." Much of the industry sees him as aristocratic and reserved-or, as one source put it, "Not someone you'd invite to the pub."

The truth: The mention of the "missing chip" is now a family in-joke. "What I meant is Rocco stays calm and self-possessed, even in the most trying circumstances," says Polizzi.

Her take, and that of those who have permeated his guardedness, reveals a striking dichotomy between the cool, polished public persona and the wickedly witty private individual who sneaked out of the house with his sister to go to pubs, who dances so well people clear the floor to watch and who is clearly delighted at having won all of his fencing matches in a recent "old boys" charity event pitting his alma mater, Oxford, against Cambridge.

Despite the elegant turnout and cultured accent, Forte turns self-deprecating in front of the camera and mugs with good humor between shots. Forte thinks nothing of calling to sister across the office, demonstrating with proper exaggeration the style of the "ancient" Italian fencing master who instructed him in saber fencing at his father's house or detailing the rigors of a morning training session (preparatory for a triathlon) "that left me in a pool of sweat."

Before his assistant straightens his desk for this story's photo shoot, it is piled high with reports and a small cache of books in English and Italian. A photo of Sir Rocco and Luciano Pavorotti shares space in his bookcase with the smiling faces of his three children.

"Rocco gets a bad rap. I suppose he is a little defensive, and that does him a disservice. He's really funny and certainly the life of any party," says his sister.