Vector Hospitality, the new REIT that is expected to blaze a trail for hotel ownership in the UK, has suffered some criticism during the past week for its management structure.
But the weight of demand for hotel property, even among retail investors, is such that the concerns are unlikely to impact the proposed listing.
What has caused a few mutterings is the complex and interwoven nature of the management at Vector. And in particular, it is the presence of Richard Balfour-Lynn on the Vector board and on the board of two of the hotel groups selling properties to Vector.
Vector has sought to head-off such criticism by establishing a Conflicts Committee to handle tricky situations such as where the Alternative Hotel Group, which is retaining 11 De Vere hotels after the flotation, might sell its assets.
Although Vector has a board of six directors – Simon Duffy, Richard Balfour-Lynn, Sir David Michels, Manish Chande, John McNeil and Henry Staunton – the main business, including the role of finance director, is to be conducted by the investment manager Cameron.
This entity, while requiring the approval of the board for material transactions, will manage the REIT on a day-to-day basis. At the helm of Cameron are three executive members – Richard Balfour-Lynn (the chief executive of MWB and chairman of AHG), Jagtar Singh (an MWB board member and a founding shareholder in AHG) and Michael Bibring (also an MWB board member and a founding shareholder in AHG). Plus there are two non-executive members, one from Bank of Scotland Corporate and one from Royal Bank of Scotland.
This means that the investment manager is controlled by individuals directly linked to the companies selling hotels to the REIT.
It should be stressed that Vector has been open about these relationships and they are clearly flagged up in the detailed 392 page prospectus (downloadable from www.vectorhospitality.com).
If few aspersions can be cast on the initial deal, the ongoing connection between these directors and the operating companies of the hotels could well be problematic going forward.
AHG and Malmaison account for 60% of the assets of Vector (the other 40% is coming from RBS). The situation of being both tenant and landlord is a tricky one.
For Malmaison, about 14% of the assets, the MWB connection could well disappear as MWB is itself set to be wound up as it sells off its assets. The spin-off of the Malmaison operating company and any remaining connections by executives from Cameron will be interesting to note.
Even more awkward, however, is the AHG situation, with AHG still remaining an active owner as well as an operator.
AHG is signing up for 20-year leases, renewable twice, on the hotels it is selling to the REIT. Only one of the upscale De Vere Deluxe properties, Oulton Hall, is going to Vector. All but one of the seven-strong De Vere Heritage portfolio (the exception is Mottram Hall and two former conference hotels are now labelled as Heritage) is being bought by Vector.
The main bulk of Cameron’s work as investment manager is to be undertaken by Vision Hospitality which is contracted as the operational asset manager and is chaired by Sir David Michels.
Vision is receiving £2.485m for its work which will be paid by Cameron out of its own fees which are set at 0.6% of the gross asset values of the portfolio. Taking the DTZ valuation of £2.59bn this works out to be a healthy £15.2m. On top of this, Cameron, like Vision, is eligible for an incentive fee if total returns to shareholders exceed a 10% annual hurdle rate.
All told, Cameron looks set to be handsomely rewarded for its role given that the heavy lifting is mostly subcontracted out to Vision.
The extent to which all this begins to matter will be determined by the performance of the company. If it delivers on its promises, and in particular its target dividends (£23.4m in both Q3 and Q4 and then £25.0m in Q1 and Q2 of next year) then there is unlikely to be too much of a fuss.
Certainly, investor appetite is such that the float is unlikely to be derailed. Anecdotal reports suggest interest in the float is huge, particularly given that it has yet to be priced.
Look further ahead, however, and there may well be problems. In particular, the ties between Vector’s investment manager and AHG will come under significant scrutiny.