• Pandox sees ‘time to sell’

Pandox has sold a portfolio of 14 hotels in Sweden for SEK2.2bn (USD334m) to Fastighets AB Balder, the majority of which were acquired when it bought Norgani Hotels.
CEO Anders Nissen said that after several years of acquisitions at the group, it was “time to sell something”, evidence of the current buoyancy in Europe’s transactions market.
The portfolio consisted predominantly of hotels under the Scandic brand, with nine under the flag, plus two Quality hotels, and one each under Park Inn, Clarion and Best Western. All but one, the Park Inn by Radisson Solna, was acquired by the group when it bought Norgani Hotels in 2010.
Nissen told Hotel Analyst: “We have been buying hotels for over 18 years – we have done transactions for close to 200 hotels. It was time to sell something – we didn’t have to sell, we found a situation where the timing was good.”
After the sale the Pandox portfolio will comprise 105 hotel properties, one congress centre and 16 hotel operations, with a total of 22,000 rooms in nine countries. Sweden is the company’s most important market, with 49% of its total number of rooms at the end of last year.
The group’s hotels are run under various types of leases, either under brands such as Scandic, Hilton, InterContinental, Hyatt, Radisson Blu, Crowne Plaza, Holiday Inn, Clarion, Comfort, Quality, Elite, First, Rica, Best Western, Rantasipi and Omena or through independent distribution channels.
The sale followed the disposal by Pandox of a the Hilton Docklands in London in February, for an undisclosed fee, to H.I.G. Capital.
Pandox has been notable in Europe for its acquisitions, rather than its disposals, with the company securing its dominant position in the region with the Norgani deal. The group acquired Norgani Hotels for NOK8.3bn (USD1.38bn) from Oslo Properties, a 100% owned subsidiary of Norwegian Property, taking it to 119 sites.
At the time, Norgani owned 73 hotels and one conference centre, with 41 of the properties located in Sweden, 14 in Norway, 16 in Finland and three in Denmark, with operators including Scandic, Choice and Rezidor.
The largest brand was Scandic, with 45%. Choice, with its three brands of Clarion, Quality and Comfort, represented just over 13% of revenues, while the Hilton share was nearly12%. Other brands include InterContinental, Radisson Blu, Crowne Plaza, Hyatt, Holiday Inn, Elite, First, Rica, Ibis and Best Western.
The majority Pandox’s estate is located in city locations, near airports or close to exhibition and conference centres, with the hotels mainly in the upper-middle and premium segments. According to the company’s 2013 report, over the last three years it has invested over EUR250m in its portfolio.
The main part of the investment was related to Norgani, which Nissen described as “in need of considerable development work”. In 2011, Pandox and Scandic entered an agreement to invest SEK 1.6bn in the development of 38 of the hotels, with the joint venture code-named Shark. The project was started in 2012 and is scheduled to be completed at the end of 2014, with the majority of the hotels in this most recent deal having been renovated last year.
Nissen has long been outspoken on what he feels is the unfair risk placed on hotel owners in agreements with brands, commenting in the annual report “the traditional division of responsibilities between owners, who used to handle property issues, and operators, who used to take care of the running of the hotel, has changed.
“This change has meant that the property owner is left shouldering all the risk whilst having to share in the upside with the brand owner. The question I ask, given the unfair risk profile, is if it makes sense to let a hotel’s brand have a deciding influence on operations and investments.”
Nissen used the opportunity of this year’s International Hotel Investment Forum in Berlin to call for a new agreement structure. He said that brand companies preferred agreement structures that obstruct profitability and value growth in hotel properties. Hotel property owners should phase out the old management agreements and replace them with incentive based rent agreements.
He said: “The rent the operator pays to the property owner is based on turnover and the costs for investments and product development is shared in a way that creates common goals and incentives. This agreement structure incentivises the operator to increase profitability by adding revenue, lowering costs and making sound long term investments in the product. The parties share upsides as well as downsides, with capital, potential and risk being reasonably balanced between the parties.”
Pandox has put its money where its mouth is and has, during the year, assumed operative responsibilities for four of its hotel properties and is currently running a total of 15 hotels as own operations.
Of the group’s total rent revenues during the year, 60% was derived from revenue-based leases with guarantee, 21% from revenue-based leases, 13% from own operation and management agreements and 6% from ‘other’.

HA Perspective [by Katherine Doggrell]: One of the more intriguing aspects of the current return of confidence is that it seems to be neither a season for buyers, nor a season for sellers, but for both. The majority of sales still appear to fit into the ‘properties of some concern’ category, so are likely to favour buyers, but in the case of Pandox, this deal is utterly in keeping with its strategy. As Nissen told Hotel Analyst: “We in Sweden do things differently. When the guys in London said ‘buy’, we sold. When they said ‘sell’ we bought.”
Swedes aside, Pandox’s strategy since inception has been to acquire under-performing hotels, develop them and increase the company’s cash flow and value – which in turn was used for further expansion.
And this is what it has done, since 1995 when the group launched with 18 hotels in nine Swedish towns and cities. All in all, transactions with a total value of more than SEK20bn have been completed and the group claims to have generated an average annual return of 17% since being formed.
For Pandox, some of the Swedish sites were felt to be a little too regional, upsetting the balance between international and domestic which the company favours. Nissen felt that the price was good and that the buyer would also benefit from the growth in the country’s fortunes, a warming capitalist tale indeed.
But now for the money. “There will be no problem spending it,” said Nissen. “We’re waiting – we love to buy underperforming hotels, but there is not a lot on the market at the moment.”
Telling the difference between a property which is being dragged under by debt and one which is in need of a better operator is turning into the sector’s current skill of choice.

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