A Note from the CEO

2010 was a milestone year for Egyptian Resorts Company. The tremendous support from our board of directors ensured Management’s ability to deliver on its promise of building a sustainable organization by executing our 2010 strategic and operational initiatives.

On the strategic front, management focused on 4 main priorities (SP’s).

We started the year strong and in April 2010 signed a co-development agreement with Orascom Development and Management to develop and bring to market our first mega proprietary development (SP1), the Sawari Marina, a 2.5 million square meter luxury development on prime land at Sahl Hasheesh.  Simultaneously, Orascom Development Holding, through one of its investment companies, acquired a 4.5% equity stake in ERC, underlining its confidence in ERC’s long-term prospects.  As a book-end to the start of the year, we closed 2010 with a robust pre-sales soft launch of the Sawari Marina properties, in which we booked over USD 20 million in reservations, far exceeding our best-case-scenario estimates and a manifestation of sound strategy and timely decision making.

Our community management (SP2) model has been fully built and the company has already signed on all major sub-developers to its community management agreement.  As a consequence, roll-out will begin during 2011. Although this represents a new, yet small, revenue stream for ERC in the future, it is a critical step in reducing community cost burdens and expenditures incurred in running the resort by sharing it amongst ERC and its sub-developers.

Early in 2010, we partnered with WATG (Irvine) as lead master planner for Phase III (SP3) of the Sahl Hasheesh Resort Community.  Phase III at Sahl Hasheesh encompasses the resort’s remaining 28 million square meters (contractually 20 million m²) of land and will see Sahl Hasheesh transform from a young resort town into a thriving city, complete with schools, hospitals, office buildings, and an array of small- and medium-sized enterprises.  To complement WATG’s work and to set an unprecedented example for master planning in Egypt, ERC hired eight of the world’s most prominent consultants in their respective fields to verify and give their professional input to the master planning process.

ERC signed a major Corporate Social Responsibility (SP4) initiative with the Hurghada Environmental Protection and Conservation Association (HEPCA) to build a world class marine research center at Sahl Hasheesh in cooperation with the Italian government.  This center will include 16 professors in addition to 40-50 Egyptian and foreign volunteers.  ERC is particularly proud of this potential partnership that aims to protect the local marine environment and spread knowledge on sustainable conservation efforts throughout the Red Sea coast.

For ERC’s operational priorities, management focused on 3 main initiatives: human capital, resort infrastructure, and the launch of subsidiary assets.

ERC depends on a relatively small team of professionals (less than 200 people) and had to ensure that its HR investments were competitive and rewarding to optimize the company’s performance and maximize sustainable shareholder returns. We subsequently hired Hay Group and implemented a large scale restructuring plan. The work also included a review of our board of director’s governance framework, and implementation included reducing our board members from 13 to 11. During the course of the year, ERC also hired about 50 new professionals and executives for vacant positions and as replacement hires.

On the development and infrastructure front, the highly anticipated opening of the Arrival Piazza was one of the 2010 highlights that took visitors’ breath away and hosted multiple events with its 15,000-person capacity on an almost weekly basis during the resort’s peak season.

Meanwhile, ERC completed its state-of-the-art fiber optics network design for Phases I and II, which will be used as a communications network as well as a fully-automated utilities management cable. The first phase of its implementation was completed in February 2011 and sub-developers are now being connected to the network.

In addition, we made steady progress on expanding the resort’s infrastructure and utilities capacity, applying for an electricity distribution license as part of our strategy to build-out our recurring revenue streams. The license will clear the path for the construction of a 70 MVA (Megavolt Ampere) substation, on which the construction commencement has been postponed to 2012/2013 as part of our cash flow rationalization strategy. Once we begin, the substation will take 18-24 months to complete and is projected to meet the power requirements of Sahl Hasheesh for at least a decade.

Finally, ERC was committed to supporting Sahl Hasheesh Company (SHC), its 69.4% owned subsidiary, complete and launch the Old Town – the commercial core and entertainment hub of Phase I in Sahl Hasheesh.  SHC commissioned Jones Lang LaSalle (JLL), the leading global commercial real estate advisory firm, to deliver a complete feasibility and launch plan.  The Old Town started receiving tenants and the first store opened in January 2011.  ERC is also expected to sign with an international beach operator for the Old Town beach within 2011.

In the fourth quarter, we ramped up our marketing efforts in response to demand from our sub-developers, with a strategic campaign promoting Sahl Hasheesh in high-profile international travel magazines and quarterly Egypt tourism publications as the top choice for both national and global holiday makers and seekers of second homes.

In support of its sub-developers, ERC Management has decided to partially waive off community management fees in 2011 given recent events that have pushed all hotel properties into operational losses for the first six months of the year.  Starting in 2012 all sub-developers will be paying for community services, thereby relieving an average quarterly expense of EGP 3-5 million.

In my view, our achievements in 2010 are exactly what the company needed; to set up the structure that can handle multiple projects and multiple revenue streams, and an operating and commercial foundation that can ensure medium-to-long term sustainable revenue and income streams.

On the one hand, our operational performance in 2010 is definitely representative of the operational performance that can be expected from ERC into the future.  On the other hand, our commercial performance beyond 2011 will definitely receive a significant boost given the strategic alliances and ground work completed in 2010.

In 2011
The coming year will prove to be challenging.  The events of January 25 have undoubtedly caused a general slowdown affecting all sectors of the economy.  Tourism arrivals have been negatively affected and we have already witnessed almost a 46% decrease year-on-year in the first quarter of 2011.  Although we expect this phenomenon to be short-lived, lasting through the fall of this year, the pickup of tourist arrival figures will be the main leading indicator for tourism-based investment – our primary source of revenue.  As a result, ERC expects no more than one land plot sale, low-to-no new reservations in the coming months at the Sawari Marina development, and a significant reduction in the consumption of utilities, and hence utilities revenue, by existing operators.  Despite the slowdown, many sub-developers are pushing through with their development plans to complete their hospitality developments in anticipation of a strong recovery in 2012.

Our priority remains the protection of the investments of our shareholders and sub-developers, while our operational strategy is geared towards attaining the highest possible return on shareholder capital in the long run. Accordingly, our focus in 2011 will be on recovering our Phase 3 land bank, cash conservation, and the continued nurture and development of our base of strategic assets as we lay a foundation to support growth in anticipation of a 2012 that will probably be marked by a strong uptick in economic growth, a return of consumer confidence (boosting sales at our Sawari Marina as well as at key sub-developer projects), and a surge in the number of tourist arrivals.

With low levels of tourism projected throughout the first half of the year, we have trimmed our operating budget and that of our subsidiary Sahl Hasheesh Company accordingly, but not to the point that would constrict our ability to capitalize on a recovery in tourism early next year or earlier.
We realize that the January 25 revolution will have a negative short-term impact on sales and may result in more than the 6% cancellations recorded to date.  Despite this fact, the company is confident of a demand rebound and is hence committed to finalizing all its licenses and beginning light dredging works to stay ahead of the demand curve.

Although 2011 will pose a unique set of challenges for all companies operating in Egypt’s tourism sector, the management team remains highly committed to safely navigating the company through these tough economic conditions and by setting the company on both a short- and long-term path that will see it emerge in an even stronger position relative to competitors.

Mohamed Kamel
Chief Executive Officer