• Travelodge expands on the back of refinancing

Travelodge’s announcement last week that it was extending its growth plans will see it aim for an estate of 1,100 hotels by 2025, following an extensive survey of cities in its core market of the UK.

The comments came after owner Dubai International Capital restructured the parent group’s $2.5bn debt. DIC described the refinancing as "an important milestone" which allowed for the implementation of the management team’s long term business plan. It also underlined DIC’s commitment to the brand, ending sales rumours sparked by Dubai’s financial struggles.

Under the terms of the restructuring, $2bn of the debt was extended for six years, with creditors receiving a 2% cash interest coupon on the restructured facilities. The remaining $500m was extended for four years, with interest unchanged.

CEO Guy Parsons has now been tasked with maintaining the group’s strategy of growing profitability and cash flow by increasing supply through the leased financed model, while also improving efficiencies. Under the revised expansion plans, the group has extended its target by five years from 2020, when it was planning 70,000 rooms and 1,000 hotels, to the new plan for 100,000 rooms.

In DIC’s statement confirming the refinancing, it said that the portfolio was "sound" and performing ahead of management’s expectations. The most recent publicly-available financial figures, for 2009, reported a 3% increase in revenue, to £297.3m. However, Ebitda fell by 20% to £45.7m.

Revpar for the UK business was down 9% like-for-like, pulled down by a 5 percentage point fall in occupancy – all in provincial towns, with London flat – and rate down by 3%. Excluding motorway and roadside locations (which the group is reducing, down to 20% of the estate by the end of 2009), revpar fell by 8%. London revpar was described as "positive".

Announcing the expansion, Parsons said that London occupancy was back at 2008 levels, with rates touching historic highs. Outside the capital, he acknowledged that some markets had yet to recover. This recovery would have reassured DIC that it was correct to hold onto the group last year when commentators were pointing to a possible sale to Premier Inn owner Whitbread.

The group’s new expansion plan was built around a study of towns and cities with a population above 17,000, marking a determined move from the group’s motorway and roadside origins.

This year will see Travelodge plan to build 35 hotels, taking it to 495 hotels and more than 35,800 rooms, with an investment of £300m. Eight of these will be in London, in line with Travelodge’s strategy to lead the branded budget market in the capital, which provoked a spat with rival Premier Inn last summer.

Travelodge has, said Parsons, been able to acquire "superior sites" as a result of the recession, which has lowered market property prices to a level which made them suitable for hotel use.

Last year the group exchanged on 96 sites, 52 of which were with Mitchells & Butlers. The group has yet to repeat a similarly-sized group deal, which would speed it towards its target. With more hotels due to come onto the market as trading stabilises, the group will have its eye open for bargains. However, with much of the anticipated stock likely to be in the provinces and in need of expenditure, the brand may find itself building more in the future, with the challenge of fewer property deals available as the downturn wanes.

The brand remains second in the branded budget sector, behind Premier Inn, with the likes of Accor yet to pose a real threat. With the top two now determined to compete on price, Travelodge will find an ever greater focus on keeping its estate rising and costs falling.

 

HA Perspective: It is hard to know exactly how well Travelodge is performing as unlike arch-rival Premier Inn it does not have to make quarterly reports to the stock market.

It ought, theoretically, to be in a better position to pursue long-term value enhancing deals and strategic initiatives rather than be driven by the need to keep producing solid quarterly numbers.

Unfortunately, with DIC’s debt problems, Travelodge is if anything under even more pressure and will be expected to produce as much cash as possible as quickly as possible.

The leased estate is not going to help it here. In the current downturn, the highly leveraged nature of leases will have significantly dented profits. A quick look at the impact at Rezidor of its leased portfolio makes this clear.

And it is hard to see how committing to lots of smaller, peripheral sites around the UK is going to make a positive difference to corporate profitability. Instead, there is a very real risk of the group over extending itself and its management team.

Other hospitality companies have been here before, notably Starbucks in 2008 when it was forced to close hundreds of stores across the globe, including many in the UK, and Burger King in France in 1998 when it withdrew completely from the country.

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