• Puma reborn as Lone Star takes control

Former Travelodge chief executive Grant Hearn has been drafted in to help revive The Hotel Collection, as the company restructures under the ownership of investor Lone Star.

Three further appointments have completed a series of changes that now put the 21 strong chain in a position to move forward once more; while Frederick Korallus, who was recruited as chief executive to steady the ship in 2012, will remain in post.

With Lone Star having bought the company’s debt pile from Irish bank IBRC earlier this summer, a series of changes has been enacted. In June, the group dropped its former name of Puma, in favour of The Hotel Collection. August saw Lone Star turn ownership of the debt into ownership of the chain, as a pre-pack administration affecting parent company UK Group of Hotels plc was enacted. Adminstrators Duff & Phelps were at pains to point out that it remained business as usual, while corporate changes took place.

The group is now talking of investing substantial sums in refurbishing the group’s properties, which are a disparate mix of lightly branded properties, including some historic landmarks.

“The Hotel Collection has a fantastic portfolio of properties across the UK and I am thrilled to be joining them at this pivotal time,” said Hearn. “Frederik and his team have done a great job in improving the performance of the company and now everyone is ready to take it to the next level as we invest in and build the portfolio.”

Hearn led Travelodge for 11 years, including taking it through some tough times during its restructure. According to a report in the London Times, he is expecting to commit two days a week to the company, working on a three year plan to improve the company’s fortunes. 

“Grant’s appointment as chairman will further strengthen our board and support our growth ambitions following 18 months of sustained growth in revenue, profit and market share'” said Korallus. It’s great that we are now in a position to invest further in our assets and staff as we grow the business.”

Joining under Hearn are operations director Peter Manby, previously revenue director at Travelodge; Andrea McKay as marketing director, formerly at Hilton; and new human resources director Helen Smith, who joins from Menzies Hotels.

Puma’s debt stood at around GBP325m when it was sold on by IBRC as part of the bank’s Project Rock disposal. That was secured against the portfolio of 19 hotels which, in mid-2014, were valued at GBP185.7m, suggesting a loan to value ratio of around 175%.

The recent valuation is a far cry from the heady days of 2011, when the portfolio was valued in the company’s accounts at GBP349.6m. However, that valuation relied on the future value of rents payable by lessee Barcelo, the Spanish hotelier, which had been signed at unsustainably high rental levels.

Barcelo exercised a right to cancel the leases, paying a GBP20.25m penalty for the privilege, but with future cashflows no longer factored in, the value of the properties fell to an extent that Puma was obliged to declare a GBP175m loss. In 2012, Puma took over the management of the hotels directly. IBRC restructured the debts in 2013, with a GBP323.1m loan hedged by an interest rate swap.

 

HA Perspective [by Chris Bown]: Lone Star now has The Hotel Collection poised for a comeback, with talk of refurbishments and growth of the portfolio. Its addition of Hearn and other senior team members means it has invested in creating its own management platform – something many of the private equity players have done ahead of picking up hotel assets – and it will want to get its value from the platform, by acquiring further hotels as they come up. In this respect, the soft branding of the portfolio – each hotel looks unlike the next – makes for easier additions, as it does away with the need to rebrand each new addition.

The recession saw the market polarise, and while the luxury and budget sectors have grown, the mid-market has seen precious little activity. Topland has already shown itself to be an aggressive buyer in this sector, acquiring Menzies and then adding Hallmark. Expect them to be bidding against Lone Star for future mid-market properties.

[Additional comment by Andrew Sangster]: The problem for the UK provincial hotel market is moving out of the business cycle trap it has been in for the past few decades. When the hotel properties are traded at the top of the cycle, the new owner has usually paid too much and borrowed too much for the deal to make sense.

Usually in these circumstances, very little is done to the properties or the operations that enhances the business proposition, rather the new owners are buying into a myth of ever increasing business thanks to an never ending period of economic expansion. The approach could be dubbed the “Gordon Brown fallacy” after the former finance minister’s comments that he had ended boom and bust.

The Hotel Collection looks to have been formed at a propitious time in the business cycle and the portfolio stands a good chance of making a return for its current owners provided they exit before the economy turns for the worse.

The Hearn / Korallus axis makes a formidable operating team that should be able to squeeze significant improvements from the portfolio. And given the weight of capital still keen to deploy in the sector, a greater fool ought to be able to be found. The philosophy of Gordon Brown appears to be alive and well, unfortunately.

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