• Accor sends ‘strong signal’ with Europe deal

Accor has signed its first significant deals under its new ownership strategy with the purchase of 97 hotels in Europe.

The group’s CEO Sébastien Bazin said that they sent “a strong signal”, with other Accor owners now likely to be considering their position in Europe’s rising property market.

The two transactions, for a total of EUR997m, see Accor acquire a group of 86 hotels in Germany and the Netherlands, which have been operated by the group since 2007 under variable-rent leases. The sellers are two funds: Moor Park Fund I and II. The second portfolio, of 11 hotels in Switzerland, is being sold by Axa Real Estate and has been operated since 2008 under variable-rent leases.

Accor said that both acquisitions would be accretive to Accor’s Ebit in 2014. Based on pro forma 2013 figures, the relative contribution of owned hotels to HotelInvest’s net operating income was expected to increase by around fourteen points to 68%. One of the key objectives for HotelInvest, Accor’s newly-formed ownership arm, is to raise this proportion to more than 75% over the medium term.

“These transactions send a strong signal of our capability to rapidly implement the strategy of restructuring the HotelInvest portfolio,” said Bazin. “They are fully aligned with our selective asset acquisition criteria: hotels located in key European cities and delivering excellent operating performance in our most profitable market segments”.

According to Fitch Ratings, in purchasing the Moor Park Fund portfolios for EUR722m, Accor is replacing more expensive variable-cost lease liabilities with cheaper debt financing. Although leverage will initially rise from the current lease-adjusted net debt/ Ebitdar of 3.6x at end-2013 to an estimated 3.9x, the group’s fixed charge coverage will slightly improve.

The agreements came just over a month since Accor appointed John Ozinga from CBRE Global Investors, as COO at HotelInvest, with the new hire not yet in the role (he is due to join on 18 June).

At the time of Accor’s first quarter results, the group had restructured a total of 21 hotels for HotelInvest, with 16 leased properties restructured since the start of the year. The company has made these deals as Europe sees a recovery in trading fundamentals. As previously reported in Hotel Analyst, at HotelInvest, northern, central and eastern Europe, which accounted for 44% of total HotelInvest revenues, saw a 4.0% like-for-like gain in the first quarter, led by sustained strong demand in the UK and “solid” business in Germany.

Bazin said at the time: “HotelInvest consolidated its position as the leading hotel investor in Europe, benefiting in particular from strong dynamics in the UK and Germany. These trends should continue in the coming months. At the same time, the group is pursuing deployment of its new strategy at a fast pace.”

Accor CFO Sophie Stabile had previously cautioned analysts that there was “a lot of work to do on the HotelInvest side”, work which has started with gusto. Eyes are now on the position of Accor’s other owners in Europe.

Foncière des Murs and Crédit Agricole subsidiary Predica currently hold 49 hotels in France, Belgium and German, also operated under variable lease agreements, with the rent averaging 19% of the hotels’ annual revenue. The 49 hotels came into the possession of Foncière des Murs and Predica in 2010, when Accor agreed a EUR378.4m sale-and-variable leaseback deal with the pair under its previous divestment strategy.

As of last year, Foncière des Murs had a total of 135 hotels with Accor as tenant, as a result of a sale-and-leaseback deal done in 2005 when it acquired 128 hotels in France for EUR1bn.  The mid-scale portfolio, a mixture of Mercure, Novotel and Ibis hotels, consisted of 16,700 rooms, a quarter of which were located in Paris.

In the UK, Land Securities owns 29 Ibis and Novotel branded hotels, where the Reit receives a percentage of Accor’s turnover as rent on the portfolio (at 30 September last year annualised net rent was GBP30.8m). Land Securities puts the market value of the portfolio in the range of over GBP200m. The group did the sale-and-leaseback deal in 2007 for GBP439m, through its property partnership arm, Trillium.

According to a report from HVS, released in March, European hotel transaction volume in 2013 reached a new peak since the onset of the global financial crisis, signalling a comeback of the hotel real estate market. Total transaction volume across Europe reached EUR7.7bn in 2013, a 39% increase on the year. Co-author Louise Fury said: “The question now is whether there be enough assets available for sale to meet investor demand?”

It is likely that Accor’s owners can expect a knock on the door from their tenant.

 

HA Perspective [by Chris Bown]: Six years ago, Accor’s logic was to sell its hotels and reduce debt: today, its logic is to buy those hotels back using cheap finance.

In a Bloomberg interview, Accor chief executive Sebastien Bazin insisted both actions were, and are, consistent with the mood of the moment. He painted the repurchases as “exactly breaking even”. They were sold in 2007 and 2008 for around EUR50m less than the buyback price, so their interim landlords might well consider that a profitable exit, bearing in mind the rents they received along the way.

Today, the logic is about using low cost funds to give the business flexibility and put it in control of its destiny, by owning its hotels. Bazin says he has a further EUR1.2bn of funds to play with, but that he does not have a timescale or any immediate pressure to deploy those funds.

Analysts seem to like the move and are, for now, happy with Accor’s strategy to buy its hotels in mature markets. However, there are already some mutterings about the low return on capital employed, as they get their heads around splicing together the combined returns from the operational and property holding divisions of the restructured Accor.

So long as debt remains manageable, the strategy of holding the hotels you operate seems to work for many, not least Whitbread with its fast-expanding Premier Inn. And right now, it could be a good defensive move. Contrast Accor’s situation with that of IHG, which has completed its asset light journey and has been generously returning cash to shareholders – and now finds itself under bid pressure.

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