• Whitbread puts case for property

Whitbread yesterday mounted a spirited defence for an operator retaining a property portfolio as it unveiled plans to securitise its portfolio of hotel and restaurant units.

The UK’s largest budget hotel operator said it planned to raise its debt by £400m to about five times current EBITDAR from the current four times as part of the process.

The company said the move would leave it free to either return the extra cash raised to shareholders or to make acquisitions. The change is expected to be implemented in the first half of the current financial year which started at the beginning of March.

The key argument in favour of retaining property rather than other mooted options such as spinning-off the assets into a REIT or conducting a sale-and-leaseback was to retain flexibility for the company going forward.

“We are here to run this business for the medium-term for our shareholders, not next week,” said finance director Chris Rogers, during the presentation for Whitbread’s preliminaries for the year to March 1.

A valuation has been undertaken by Gerald Eve putting a figure on the property assets of £3.6bn. This valuation is based on the sale of the property as a portfolio on a maintainable trade basis.

Rogers commented that in an opco-propco split, the valuation of the property would probably be less, depending on the underlying assumptions made in such a model. The value would also be 15% to 20% less if the 576 properties were considered on an asset-by-asset basis.

The book value of the properties was £1.5bn and if nothing else, the revaluation will give shareholders a clearer understanding of what is inside Whitbread. Not included in the values was the David Lloyd portfolio.

Currently linked to a £1bn move on this leisure club chain is R20, the investment vehicle of Robert Tchenguiz; London & Regional Properties; and Simon Halabi, the Syrian-born tycoon who owns the Esporta chain and is building a so-called six-star hotel on London’s Piccadilly.

Whitbread’s CEO Alan Parker confirmed that the company had received expressions of interest in DLL but said that no decision to sell had been taken. A disposal is, however, widely seen as inevitable and likely to be soon.

The cash from this sale, together with the proceeds from its re-leveraging gives Whitbread significant firepower with which to mount a bid. It has been linked to the race for Jurys Inns, the 20-strong budget chain owned by Jurys Doyle which is likely to fetch something north of Eu1bn.

Parker also confirmed that the group was in talks to take its Premier Travel Inn further overseas, specifically to two emerging market economies – widely tipped as India and China. He added that such a move would be done in similar joint venture deal as PTI’s current Dubai expansion.

In the meantime, Parker said that PTI had secured sites to meet its pipeline for the next two years, a period which will see it add 3,000 rooms a year.

Half of these new rooms are on existing owned property. “Property assets are a real advantage when you are maximising growth,” said Parker.

A key advantage of owning both the restaurant and PTI on the same site is the way restaurant revenues can be enhanced. Whitbread said that, compared to standalone restaurants, those that were located next to a PTI enjoyed a 20% uplift in sales, a 50% increase in profit and a 40% better return on capital employed.

Like-for-like sales at PTI were up 8.2% with occupancy at 79.5%, the highest for any branded chain in the UK, claimed Parker. Sales were up 16.7% to £458.5m with operating profit up 20.3% to £156.2m thanks to a 1.1 percentage point improvement in margin.

Profit per room at PTI exceeded £5,000 for the first time helped by a 4.8% rise in revpar to £37.68.

Total revenue for continuing Whitbread was up 10.3% to £1.3045bn. Profit before tax and exceptionals for the continuing business was up 24.5% to £213.0m.

The numbers contrasted with those from Travelodge put out a day earlier. These showed revenues up 17% to £203.5m and EBITDA up 19% to £46.2m for 2006. Room occupancy was up four percentage points to 78%.

Travelodge opened 2,548 rooms in 2006, just ahead of the 2,500 PTI opened in its year 2006/07. Travelodge reiterated its target of reaching its 32,000 room target by 2010. It also wants to overtake Thistle as the brand with the most rooms in London by the time of the Olympics in 2012.

With one in three hotel rooms being opened in the UK bearing a Travelodge badge, the company claims to be the fastest growing in the country. It is still firmly second placed behind PTI, however, in terms of overall size. PTI is targeting 45,000 rooms by 2010/11, it stood at 32,603 rooms at the start of March.

The share of online bookings at Travelodge is now 83% compared to 50% at PTI. And Travelodge is hoping to cash-in on its strength online by selling travel insurance. Through a tie-up with insurer AIG it has launched Travelodge Travel Insurance and claims it will undercut most major brands.

But other brands may also soon be taking a slice out of the hotel market. Ryanair is set to team-up with an existing hotel group to promote a new chain of hotels under its own branding.

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