16.1
Operating income
This balance relates to the revenues from hotel services and management, as well as the activity as a travel sales intermediary undertaken by the Travel Division. The amount corresponding to the Travel Division for the years 2011 and 2010 is of 104.5 and 110.7 million euros, respectively. The amount corresponding to the Hotel Division is of 711.5 and 801.8 million euros, respectively.
In 2011, the operating income, by geographical market, is as follows: 404.2 million euros in Spain, 76.1 million euros in the USA, 198.5 million euros in Latin America, 97.1 million euros in the United Kingdom and 40.1 million euros in the remaining areas. In 2010, sales were as follows: 380.8 million euros in Spain, 212.2 million euros in the USA, 172.0 mil- lion euros in Latin America, 104.9 million euros in the United Kingdom and 42.06 million euros in the remaining areas.
The decrease in operating revenue in 2011 has arisen due to the lease and sub-lease contracts in the USA (see Note 21). These contracts have ended in the middle of 2011 and 2010, respectively. Operating revenue recognised in 2011, arising from lease contracts amounts to 25.8 million euros. In 2010, revenue from lease and sub-lease contracts in the USA amounted to 153.4 million euros. The comparative operating income for 2010 and 2011, excluding these transac- tions, amounts to 790.2 million euros and 759.2 million euros, respectively, representing a 4.1% increase.
16.2
Other operating and finance income
In 2011, The amount of finance income included under this heading amounts to 7.6 million euros, 3.5 million euros of which have been generated by bank deposits, 1.3 million euros are related to financial advisory services rendered to Playa Hotels & Resorts, S.L., 0.6 million euros arising from the valuation of the sale option of the participation in American Express Barceló Viajes, S.L, 0.8 million euros for the change in fair value of the derivatives which cannot be considered as hedges and 0.4 million euros for dividends received from American Express Barceló Viajes, S.L.
In 2011, extraordinary expenses include the sale of the Hotel Casablanca and of the company Actif Hotel, S.A., for an amount of 14.1 million euros, obtaining a profit of 5.5 million euros. At the date of sale, the balance sheet of the company Actif Hotel, S.A. included a cash balance of 3.2 million euros. Moreover, the balance sheet also includes the profit from the sales of a premises in Barcelona for an amount of 0.8 million euros.
In 2010, the amount of finance income included under this heading was 9.1 million euros, 5.4 million of which are generated by bank deposits, 2.5 million euros are related to financial advisory services rendered to Playa Hotels & Resorts, S.L. and 1.0 million euros arise from the valuation of the sale option of the participation in the company American Express Barceló Viajes, S.L.
In 2010, this heading included extraordinary income related to the profit generated by the sale of the Hotel Home- wood Suites DC in Washington, for an amount of 8.3 million euros and the sale of the company Viajes Verger, S.L. for an amount of 0.3 million euros.
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17
Personnel expenses
The breakdown of personnel expenses as of December 31, 2011 and 2010 is as follows:
31/12/2011 31/12/2010 Wages, salaries and similar expenses 214,326,674 246,033,940
Severance pays 5,662,584 4,369,155
Social Security 38,803,094 35,092,201
Other welfare expenses 12,445,608 17,270,331
271,237,960 302,765,626
The average number of employees in the Group, by categories, is as follows:
2011 2010
Engineers, graduates and managers 2,490 2,449
Clerks 6,769 6,524
Auxiliary staff 5,117 4,820
14,376 13,793
At December 31, 2011 and 2010, the distribution of employees by gender is as follows:
2011 2010
Male 7,709 7,669
Female 6,445 6,068
14,154 13,737
The information relating to the staff of the hotels managed in the USA, which are leased to Marriott International and Hospitality Properties Trust is not included.
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18
Other expenses
The breakdown of “Other operating expenses” is as follows:
2011 2010
Sundry rentals and fees 92,505,862 129,968,650 Repairs and maintenance 23,801,227 28,855,200 Independent professional services 12,111,861 9,130,471
Insurance 7,026,585 10,889,839
Advertising and promotion 29,383,946 29,098,494
Supplies 42,626,955 39,123,820
Commissions – Travel Division 11,401,617 10,131,065
Other 120,633,406 103,939,371
339,491,459 361,136,909
The “Others” caption includes applications net of provisions and the impairment of assets recognised for an amount of 11.8 million euros.
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19
Financial expenses
In 2011, this caption includes an amount of 1.6 million euros in concept of financial costs for the update of onerous contracts. In 2010 the amount recorded for this concept amounted to 0.5 million euros.
In 2011, an amount of 0.8 million euros was carried to results for Adjustments for Changes in Value for non-hedge derivatives (2.9 million euros in 2010).
In 2011, an amount of 7.2 million euros arising from the settlement of the hedge contracts contracted by the Group was charged to the finance expenses account.
The remaining finance expenses relate to financial instruments valued at amortised cost.
In 2010, an amount of 1.2 million euros was recognised as finance expenses for the update of the valuation of the Group’s participation in the company Punta Umbría Turística S.A. This update was detailed in Note 8.1 and meas- ured as a debt instrument.
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Transactions with related parties
The main transactions undertaken by the Parent Company or subsidiaries with related companies are as follows:
2011 2010
Playa Hotels & Resorts, SL 9,730,748 10,611,465 American Express Barceló Viajes 4,468,497 3,462,103
TOTAL 14,199,245 14,073,568
Within the total amount invoiced to Playa Hotels & Resorts, S.L. 5.4 million euros relate to hotel management contracts, 1.1 million euros to asset management contracts and 3.0 million euros to advisory services for obtaining financing.
All intercompany transactions are performed at market rate.
The breakdown, by company, of trade accounts receivable from associated companies included under “Other ac- counts receivable” in the balance sheet is as follows:
Balance at 31/12/2011 Balance at 31/12/2010 Playa Hotels & Resorts, SL 2,631,747 5,511,695 American Express Barceló Viajes 677,418 1,414,093
Mundosocial, AIE 913,234
Total 4,222,399 6,925,788
The balances relating to financial transactions are detailed in Notes 8 and 10.
An amount of 4.9 million euros has been transferred from the short-term balance of Playa Hotels & Resorts, S.L. to the long-term balance. See Note 8.1.
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21
Operating leases
The Group has operating leases through which it is committed to pay certain fixed instalments and, in some cases, variable instalments depending on invoicing or the operating margin. Most of these instalments are increased on a yearly basis linked to the CPI. The most relevant issues deriving from the different leases, according to type of contract or region, as well as their minimum future payments are detailed below.
Hotel Leases in Europe and Africa: The future payments for the next five years and until the termination date of the lease contracts of the accrued minimum instalments are as follows:
Spain Turkey Germany Egypt Total
2012 25,274,175 3,241,894 3,205,200 1,128,863 32,850,132 2013 - 2016 108,774,014 13,969,762 6,701,753 4,864,424 134,309,953 2017 onwards 295,658,980 6,138,849 - 11,637,059 313,434,888 TOTAL EUROS 429,707,169 23,350,505 9,906,953 17,630,346 480,594,973 United Kingdom 2012 33,048,818 2013 - 2016 130,632,101 2017 onwards 836,401,238
TOTAL POUNDS STERLING 1,000,082,157
In Spain the Group has 18 hotels leased under contracts maturing between 2016 and 2057 including all possible extensions contained in the contracts. The majority of rental expenses are reviewed on an annual basis depending on the CPI and certain hotels have variable rental clauses linked to the EBITDA generated by the hotels.
In Germany the Group has leased a hotel. The lease matures in 2027, although the contract can be unilaterally ter- minated as of December 31, 2014. The rent consists of a fixed minimum amount plus a percentage of the hotel’s EBITDA which varies depending on the year and the compliance of certain conditions.
The Group has lease contracts on 3 hotels in Turkey with maturity between 2016 and 2020. The rent is fixed and pre-established.
The Group has leased a hotel in Egypt with a contact which matures in 2024.
The Group has lease contracts on 20 hotel establishments in the UK. Said contracts mature in 2042, although the pos- sibility of terminating the contracts exists in 2017 under certain conditions. Barceló also has a call option on said assets.
At the end of 2011, the Group has begun negotiating with the owners of the hotels in the UK in order to improve the economic conditions of the lease contract. At the formulation date of these annual accounts, no definitive agreement has been reached, although the lessor has accepted a temporary reduction in the rent during the negotiation period.
Leases in the USA
Subleases with Host Marriot Corporation (“Host”): Host has subleased 71 limited service hotels under the brands Residence Inn and Courtyard by Marriott (Host-HTPs) to Hospitality Properties Trust, Inc (“HPT”). The “Host-HTP leases” were in effect until 2012, in the case of the Courtyard and until 2010 in the case of the Residence Inn. Barceló Crestline and subsidiaries, a Group subsidiary, established the sublease contracts with Host, effective as of January 1, 1999, for these limited service hotels (“the subleases”).
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On June 6, 2010, Host cancelled the sublease contract alleging that the Group had breached the equity commit- ment. In February 2011, Host sent a letter demanding the payment of the unpaid rent and other amounts related to the cancellation of the contract, alleging that the initial demand notes for 30 million USD are completely available in order to pay these amounts. Crestline maintained that its obligations are limited to the deposits and assets in the subleased companies. Following the cancellation of the contract, the subleased companies’ accounts held an amount of 0.4 million USD in cash and a rental guarantee for an amount of 2.6 million USD. Said amounts have been completely impaired. Moreover, a balance of 2.4 million USD was maintained under liabilities as a guarantee for future payments related to this contract.
During 2011, Crestline has made the payment to Host for the amount of 2.4 million USD provided for in 2009 as a guarantee of future payments, as well as a cash payment of 0.4 million USD held by the sub-lessees.
On December 30, 2011, an agreement has been reached by virtue of which the Host’s claim against Crestline is con- sidered to be settled. This agreement finalises the sublease contract and frees both parties from any further claims relating to this contract. This agreement establishes the payment of 6 million USD by Crestline in a two-year period and ensures the management of two hotels by Crestline.
The payment, to be made in 2013, amounts to 1 million USD with the present calculation hypothesis, although the variation in the hypothesis could result in a payment of between 1 and 3 million USD.
Limited service hotels subleases with HPT: On June 9, 2000, a subsidiary of Barceló Crestline subscribed a lease agreement with HPT for 19 limited service hotels under long-term lease agreements. HPT acquired the hotels from Marriott International, which is still managing the hotels under long-term management agreements held with Barceló Crestline. The hotels were operated under the brands Courtyard by Marriott, Residence Inn, Spring Hill Suites by Marriott and Towne Place Suites by Marriott. In 2011 HPT notified of the voluntary termination of the lease contract.
Georgia Tech and Barceló’s Headquarters in the USA
In October, 2001, Barceló Crestline signed an operating lease agreement for the Georgia Tech Hotel and the Conven- tion Center which opened in August, 2003. The initial lease period is 30 years, renewable for 10 years. By virtue of this agreement, Barceló Crestline has to pay a rent equivalent to: i) a minimum fixed rent plus ii) an additional rent based on a determined percentage of revenues as long as certain income thresholds are surpassed. Barceló Crestline also guarantees fixed revenues up to a total of 8.2 million USD.
In addition, the Company signed an operating lease agreement on its headquarters until April 2013 which estab- lishes monthly instalments with a tiered annual increase of 4%. The contract contains an option for the renewal of two 5-year periods. Penalties have been established in the case that these renewal options are not exercised. An operating lease contract has also been signed for the offices in the Hotel Virginia Beach until 2017.
The future obligations for minimum rental payments for these office contracts, the rental of the Georgia Tech Hotel and the Convention Center at December 31, 2011, are as follows:
USD
2012 5,434
2013 – 2016 22,416
2017 onwards 76,661
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Financial risk management policies and objectives
During the ordinary course of the business, the Company is exposed to the credit risk, interest rate risk, exchange rate risk and liquidity risk.
The main financial risks to which the Group is exposed are the interest rate risk and exchange rate risk. The Group management reviews and authorises the risk management policies, as explained below:
Credit risk:
Most of the financial instruments exposed to the credit risk relate to the balances receivable from clients. Such ac- counts receivable are generated by the sale of services to clients. The Group’s policies intend to mitigate this risk by establishing a credit limit based on the client’s volume and credit quality. The approval of the managers of each hotel and each travel agency is required in order to increase the initially established credit. Periodically, each hotel reviews the debt seniority and those balances which are doubtful. The Company maintains a provision for potential losses based on the assessment by the management of the client’s financial position, historical payment data and debt sen- iority. Historically, losses deriving from this risk are within the range expected by the managers, which is not relevant.
Moreover, in order to minimise a possible negative influence from the payment behaviour of our debtors, the Group has subscribed credit insurance policies which render prevention services. In order to grant such insurance, the insurance company performs a solvency study of the clients and if the cover is accepted, guarantees the collection of the insured credit if it is unpaid. The insurance company deals with the collection management and if the process is unsuccessful will pay the indemnity within the predetermined period.
Currently, there are no significant risk concentrations. The Company’s maximum exposure to risk is the carrying value.
With regard to the credit risk deriving from other financial assets, which include cash balances and short-term de- posits, such credit risk arises from the failure of a counterparty (financial entities) with a maximum risk equivalent to the carrying value of said instruments included under the headings of “Cash and cash equivalents” and “Other current financial assets”, for an amount of 367.4 million euros in 2010 (381.6 million euros in 2010).
The balance of the provision for insolvencies at December 31, 2011, amounted to 22.4 million euros. At December 31, 2010, the balance amounted to 16.3 million euros. Provisions from the accounts receivable balance charged in have amounted to 2.2 million euros.
The age of the debtor balances overdue at year end are as follows:
2011 2010
Less than 90 days 27,516 19,943
More than 90 days and less than 180 2,422 2,394
More than 180 and less than 360 723 603
More than 360 days 877 3,022
31,538 25,962
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Market risk
Interest rate risk:
The risk of changes in the market interest rates mainly have an effect on the debt contracted at variable interest rate.
At December 31, in the case that the existing interest rates in the period were 50 basic points lower, with all other variables held constant, profit before taxes for the year would have been increased by 3,062 thousand euros. On the contrary, in the case that the variable interest rate was 50 basic points over the existing ones, with all other variables held constant, profit before taxes would have been decreased by 3,062 thousand euros.
At December 31, 2010, in the case that the existing interest rates in the period were 50 basic points lower, with all other variables held constant, profit before taxes for the year would have been increased by 3,462 thousand euros. On the contrary, in the case that the variable interest rate was 50 basic points over the existing ones, with all other variables held constant, profit before taxes would have been decreased by 3,462 thousand euros.
The Group has signed interest rate hedge contracts to cover the fluctuation of the Libor and the Euribor. See Note 8.5.
Exchange rate risk:
As the Group has a great volume of investments in hotels located abroad, the consolidated results could be affected by the fluctuations in the exchange rates. The interest generated by the indebtedness is denominated in a currency which is similar to that generated by the cash flows from the hotel operations, basically the euro, in such way that it is considered a hedge for costs deriving from borrowings, sales and purchases.
The income statements of the hotels located in countries where the local currency is not the euro are affected by the exchange rates in respect of the USD and the euro. The analysis of sensitivity for the years 2011 and 2010 on the income statement is based on the results before taxes in the local currency of the most relevant countries by volume of business, calculating the net effect of a variation of 5% and 10% (both up and down) in respect of each currency.
The analysis of sensitivity for the year 2011 is as follows:
Variation % USA and Latin America United Kingdom Other
+10% 847,473 (1,591,568) (360,398)
+5% 401,434 (753,901) (170,715)
-5% (363,203) 682,101 154,456
-10% (693,387) 1,302,192 294,871
The analysis of sensitivity for the year 2010 is as follows:
Variation % USA and Latin America United Kingdom Other
+10% 2,306,228 (1,033,035) 83,963
+5% 1,092,424 (489,332) 39,772
-5% (988,384) 442,729 (35,984)
-10% (1,886,914) 845,210 (68,697)
Liquidity risk:
The Group manages its exposure to liquidity risk ensuring the permanent liquidity availability to meet its payment obligations under ordinary business activity, without incurring unacceptable losses which might deteriorate the Company’s reputation.
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The Group reviews its liquidity requirements according to the cash budgets, taking into account the maturity dates of the balances payable and receivable and the projected cash flows. In general, the Group has sufficient liquidity to cover the operational cost deriving from the clients’ hotel stays, including debt servicing; but excluding the impact caused by extreme circumstances which cannot be reasonably anticipated, such as natural disasters. At December 31, 2011, the Group’s consolidated balance sheet presents positive working capital amounting to 61.3 million euros (125.6 million euros at December 31, 2010).
Capital management
The Group manages its capital maintaining an adequate indebtedness ratio which ensures financial stability and looking for investments with optimal profitability rates with the aim of generating a greater stability and profitability for the Group.
As can be observed in the balance sheet, most of the debt is recorded in the long-term. These ratios show that capital management follows certain prudent valuation criteria since the cash flows expected for the forthcoming years and the Group’s equity situation will cover the debt service.
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Contingent assets and liabilities
The Group has granted a put option to the company Playa Hotels & Resorts, S.L. Playa Hotels & Resorts, S.L. (Playa) on the shares of three hotel properties. If Barceló or Playa do not find a buyer for these companies, Playa can exercise said put option on May 31, 2013 for an amount of 230 million USD plus the working capital of the three companies. In December 2011, the exercise term of this put option has been extended from October 2011 to May 2013 and Barceló guarantees that the operating result of these three hotels managed by the Group will reach a mini- mum amount which will allow the three owner companies to cover all of the expenses related to the ownership and operation of said hotels. Barceló also guarantees the bank debts of these three companies for an amount equal to the option’s exercise price.
The Group measures this option at its acquisition cost which is zero, since, due to its conditions and characteristics, the option is on non-financial assets and is not included in the scope of IAS 39 in order to be measured at fair value, although this value is also closet o zero.