IHI seeking to take advantage of economic downturn - September 11, 2008

International Hotel Investments plc (IHI) together with its strategic shareholders Nakheel Hotels of Dubai (formerly Istithmar Hotels FZE) and the Libyan Foreign Investment Company (LFICO), aim to take advantage of the current economic downturn and pursue further hotel acquisitions. These three parties successfully concluded the acquisition of The Metropole Hotel and 10 Whitehall Place in London. The financial market turmoil in the US, which has spread to the UK and other markets in Europe such as Spain, has resulted in various properties coming onto the market.

IHI's chairman Alfred Pisani claims that while this possible recessionary scenario could create short-term weakness for some of the group's current hotel operations, it presents an outstanding opportunity for companies like IHI with strong balance sheets and support from their strategic shareholders. Following the capital injection by Nakheel into IHI in May 2007, the IHI Group has significant liquidity to take advantage of potential "forced sellers" and acquire prime properties at very attractive prices. Mr Pisani views this downturn as being only temporary and should IHI manage to acquire further properties, the long-term benefits to its many shareholders could be significant. In recent meetings and also in the 2007 annual report, the chairman mentioned that various hotels are currently being considered for acquisition in some of the major cities including New York, Paris and Madrid, as well as in some emerging markets.

Earlier this year IHI also entered into a joint venture agreement with LFICO to develop a major hotel in central Benghazi, Libya's second largest city with a population of a million inhabitants. In recent years Benghazi has received considerable political attention, leading major infrastructural projects to improve life in the city including new and improved roads, traffic management systems and housing. The city and its region are also expected to contribute significantly to Libya's future economic growth through the development of tourism and other business sectors. A number of major projects are in an advanced stage of planning, including luxury hotels, tourist villages, a marina and a commercial port.

Moreover, last May, IHI announced a new strategic partnership with Intourist (the Russian tour operator and hotel company) to jointly create the largest hotel chain in Russia. In this respect, IHI and Intourist are seeking acquisitions in various cities across the Russian Federation.

IHI issued its interim financial report on August 28, revealing a jump in turnover to €64.3 million. The group generated a pre-tax profit of €6 million during the first half of this year compared to a loss of €1.6 million in the comparative period last year.

This turnaround was mainly as a result of the acquisition of the hotels in Tripoli and Prague while some of the other group properties, most notably Lisbon, performed above expectations.

The only negative note in the half-year report was the directors' statement that the current economic downturn arising from the international credit crunch as well as inflationary pressures has dampened the original outlook for 2008 and this may have an impact on the value of some of the group's properties at year-end. This could result in an impairment write-down on a property. On the other hand IHI's hotels in Tripoli and Lisbon are reportedly performing very positively this year. In 2006 IHI had taken an impairment of €7.15 million in respect of the Lisbon hotel and its strong performance this year could result in an uplift in the value of this property when this is reassessed in conjunction with the formulation of the 2008 full-year financial statements.

Meanwhile the development at the Nevskij Hotel in St Petersburg is moving ahead on schedule and the hotel should be fully operational by end of the first quarter of 2009. The St Petersburg project is expected to contribute a considerable stream of non-hotel-related earnings through the release of the retail and office component of the development. The hotel sector in St Petersburg continues to post encouraging gains and this market as well as Tripoli is not expected to be negatively impacted by the global economic uncertainties.

IHI is also placing a strong emphasis on its hotel management company, CHI Ltd. This company (70 per cent owned by IHI and the balance in the hands of Wyndham Hotel Group of the US), continues in its quest to sign management agreements with hotel owners in Europe, Africa and the Middle East. Apart from the future operations of IHI's hotels in London and Benghazi when these open for business in 2010 and 2011 respectively, in recent months CHI announced that it will shortly take over the management of hotels in Liverpool, Morocco, Dubai, Algiers, Abu Dhabi and Bucharest. Only a few days ago, CHI confirmed the signing of a long-term management agreement with Cyrene Tourism Investment Corporation of Egypt for the operation of two new upscale properties in the Egyptian resort of Sharm el Sheikh.

Both hotels will form part of a major resort destination to be known as the Corinthia Beach Resort. The management fees from these hotels are expected to boost the company's financial performance in future years and this will also have a positive effect on the IHI Group results.

IHI shareholders are likely to take comfort at the strong focus being placed by the company's forward-looking management team on identifying further high-profile acquisitions together with its strategic partners. The economic uncertainties and difficulties being faced by some property owners are presenting some outstanding opportunities for investors like IHI. Any further acquisitions should reinforce the value of the IHI Group at a time when it is also getting closer to a listing on the London Stock Exchange. Originally plans were for a secondary listing in the UK by the end of the year, but this has now been pushed into 2009 as a result of the global stockmarket turmoil. Mr Pisani remains of the view that the acquisitions conducted in recent years, the strong performances being achieved by the various properties as well as the important strategic initiatives of the past few months should enable the group to attract new investors at a value substantially higher than the current share price.

• Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Limited.

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