A package of 21 Holiday Inn hotels is coming to the market in the UK, offering the potential for a buyer to make a major move into the mid-market sector.
The hotels are being sold by joint venture vehicle LRG, which acquired the hotels in 2005 as part of a larger 73 hotel portfolio. They will be offered for sale with the option of retaining the Holiday Inn affiliation, or with the opportunity for reflagging under a new brand. Should Holiday Inn not retain the properties, then brand parent IHG may then be in the market for new properties near those they leave behind.
Hotel Analyst understands that the original deal saw LRG insert a non-compete clause, which restricted IHG from opening other hotels carrying its brands within a certain radius of each of the properties. Should new buyers wish to rebrand the properties, then IHG could avail itself of its new freedom, to open Holiday Inn, Holiday Inn Express or Crowne Plaza hotels in the same location.
A spokesman for the LRG vehicle commented: “LRG and IHG has a long-standing and productive relationship. Following a thorough review of the LRG Holiday Inn portfolio, IHG has agreed with LRG that 21 of their 61 hotels under IHG’s brands in the UK can be sold with or without a contractual tie to the Holiday Inn brand.” The consortium is expecting the sales to take place over the next 6 to 18 months, suggesting they are under no pressure to achieve fast sales.
Based on the consortium’s medium term timescale for disposal, the owners are expected to achieve the maximum value from a series of individual sales. This suggests that Christie + Co, which has been appointed to handle the sales, might be looking to attract interest from regional hotel operators, rather than looking to position the package for a single sale to another pure investment vehicle.
The hotels were originally sold as IHG moved to an asset light structure, in 2005. LRG brought together a trio of investors, Lehman Brothers Real Estate, Realstar and GIC, who bought a package of 73 branded hotels. The portfolio was predominantly Holiday Inns, with some Crowne Plazas, with its largest property being the 906 room Holiday Inn Forum in Kensington. A year later, in 2006 the trio sold off 12 hotels from the package, with 7 going to Premier Inn and 2 to Britannia; and the remainder was refinanced with a GBP650m loan from Citi, which was subsequently securitised.
In 2013, the 61 strong remaining portfolio was refinanced in a GBP585m transaction that saw a group of investors share the risk of a GBP430m senior loan, with GIC providing a GBP155m junior loan. The senior lenders were understood to include LaSalle, HSBC, Axa and GE in a package co-ordinated by Deutsche Bank, with a medium term outlook. At that point, the portfolio was valued at GBP780m, putting the senior debt LTV at 55%, and the total debt at 75%.
IHG currently has 134 Holiday Inn hotels in the UK, so the prospect of losing 21 is a not insignificant dent in the portfolio. However, if those up for sale, which include Ashford, Portsmouth, Norwich, Rochester and Ipswich are considered secondary locations, or are properties that struggle to meet the brand’s latest quality standards, then the group may well consider the discomfort of losing them to be a short term issue.
HA Perspective [by Katherine Doggrell]: One operator’s dent is another’s helpful step up and, with talk elsewhere in this week’s issue of MacDonald Hotels, one recalls how happy Accor was to get hold of the group of 24 hotels which MacDonald lost after selling to Moorfield. Interest in the estate will be high from other brands.
And herein lies the problem with the asset-light model. While IHG’s shareholders have been happy to see the cash from the sales, they also run the risk of seeing the estate eroded when owners decide they want out. As any tenant leaping out of a cold shower will tell you – if you don’t own it, you don’t control it, it doesn’t matter what the contract tells you.
While the gains from contracts may be less glamorous than those from ownership, they are consistent and, with the UK rebounding, growing. The brand also needs volume to sell the brand elsewhere. IHG may have agreed to the with-or-without sale, but it cannot be sitting easily. One of the most repeated refrains from the brand guys is the damage caused by a change of flag. Taxi drivers will point it out, they say, and then people will talk.
IHG’s USD1bn campaign to revamp Holiday Inn should mean that it can weather any regional squall, but should it lose the group, expect uneasy shivers from its fellow asset-light devotees.