• Jurys Inn brand under review

Pandox said that the branding on the hotels it acquired in its GBP800m deal with Lone Star was currently under review by operator Leonardo Hotels.

The company told us that the “landmark” deal would give it a platform to grow in the UK, with more deals likely after it had built up its market knowledge.

Pandox CEO Anders Nissen said: “At the moment [Leonardo] will keep the brand, that will be evaluated and we would hope that we would be part of the discussion. There will be no change for the first six, nine months.

“The hotel properties are of high quality, belong to the profitable upper mid-market segment and will bring an immediate and substantial contribution to earnings. Through the acquisition, Pandox adds 20 new hotel cities to the portfolio and achieves a considerable market presence in the UK and the Republic of Ireland, which are large and dynamic hotel markets.”

Nissen told us: “The Jurys brand is a question for Leonardo. What I can see is why call it an ‘inn’? These are big hotels in the city, so maybe that would be a starting point. Where they will go with it, I don’t know, although they definitely need a brand.

Following a reorganisation of the portfolio, Pandox will retain 20 investment properties and one operating property in the UK and Ireland and Fattal will take over the leases on the remaining 15 properties, which will be managed by Leonardo Hotels Europe, a subsidiary of Fattal, under long-term revenue-based leases.

Leonardo will operate all 35 Jury’s Inn branded hotels in the UK, Ireland and the management contract for Jurys Inn Prague. The deal will see the value of Pandox’s total portfolio increase from SKr41bn (USD4.91bn) to SKr48.9bn, with 18% of the value in the UK and Ireland. The cost-per-key was SKR1.6m per room.

Pandox will finance the deal with bank loans and a GBP120m loan from Fattal, to be off-set after the reorganisation, after which Pandox’s share of the total acquisition price will amount to GBP680m. The transaction saw Pandox’s loan-to-value ratio increase from approximately 48% to approximately 56%, excluding the loan from Leonardo, within the group’s target range of 45% 60%.

Following the deal, a share issue by Pandox reduced the LTV to closer to 52%. Nissen told us: “It is higher than it was before, but we are strong. We will buy more, but first we will close the deal and spend some time in the UK learning more. We are taking market share in Germany and hope to do the same in the UK.

“This is a landmark deal which gives us potential to grow in the UK. Jurys Inn was the deal that we wanted to do and we were very lucky. It’s very rare that an upper mid-market hotel chain is so well located, they are amazing. They are hotels in stronger locations than normal and they have potential for rate increases.”

“There is more to buy, but not at the moment. First we will wait, we will understand the market, we will listen to people more than talk.”

The hotel property portfolio is expected to contribute the equivalent of approximately SKr450m in net operating income and SKr200m in cash earnings 2018, provided the acquisition is completed before year-end 2017. The hotel property portfolio, including the operating property, has a yield of approximately 5.8%.

Nissen said: “The 5.8% yield is the 2018 expected yield and we hope to get more out of it after the renovations come through. There have been some large investments done in the portfolio and we believe the full benefits of the renovations have not been seen yet.”

Pandox will operate one hotel, the Hilton Garden Inn at Heathrow. Nissen said: “Lone Star and the owner chose to change the brand to a long-term franchise agreement and it was of no interest to Leonardo, which has its own brands, but it’s a no brainer for us. It’s a good idea for us to have one under operations, you come closer to other owners and other networks.”

The agreement takes Pandox to two hotels at Heathrow, having acquired the Hilton London Heathrow Airport for GBP80m in July.

The deal was the second for Pandox and Fattal Hotels. In 2015 Pandox acquired 18 hotel properties in Germany for EUR400m from Leopard Group and Fattal Hotels, signing new 25-year revenue based lease agreements with Fattal Hotels for the portfolio.

Commenting on the Jurys Inn deal, David Fattal, Fattal Hotels’ CEO, said: “We are proud to continue consolidating and developing our collaboration with Pandox. The mutual trust we have built up over the last few years forms the basis for our success.

“For us, the acquisition of Jurys Inn hotels represents a huge step forward in our growth. With this, we have the opportunity to further expand and strengthen our expertise and brand awareness in Europe.”

Lone Star bought the Jurys Inn hotel chain in a GBP680m deal in 2015 and had since invested GBP100m across the 89-strong portfolio, creating what it has described as “the UK’s best performing, most exciting hospitality investment and management company”.

 

HA Perspective [by Katherine Doggrell]: One source close to the deal told us that they would be “amazed” if Leonardo retained the Jury’s Inn brand. With this move back to the UK for Pandox, it is likely to be a case of liking the properties, not the brand. And if that ain’t a summation of Brexit, what is.

Nissen remained to be convinced by the brand, with the ‘Inn’ misrepresenting the position of the hotels, which he saw competing with full-service hotels above their current positioning, particularly in markets such as Birmingham. The global operators no doubt sent out their very best hampers during the festive season.

The Jurys Inn brand has failed to set Europe alight and it is unlikely that it is going to do that with Pandox, which is very much horses-for-courses when it comes to its branding. What is likely for Pandox is that, now it has a taste for the UK, it will fill its boots. Nissen has previously told us that Brexit holds no fears for him, a sentiment shared by the overseas investors which continue to pour into the UK. The group’s reputation and strong cash position will make it a formidable competitor and hey, it likes a lease. Expect to see more from Pandox in 2018.

 

Additional comment [by Andrew Sangster]: With any takeover, acquirers often justify paying a premium by ascribing a value to the intangibles that have been bought. And the value of the brand is usually a convenient hook on which to hang such a premium. When the dust has settled, such values can conveniently be written down, if required.

There are no such sneaky tactics at play here by Pandox. What you see is what you get and Nissen has effectively put a price-tag of zero onto the brand. This may well come as a shock to Fattal, Nissen’s partner in the deal and the business that will actually make the decision on the branding.

Lone Star took a similarly dim view of the usefulness of the brand when it switched one of the two London properties into Hilton Garden Inn. This was perhaps a surprising move as the usual mantra is that London hotels can look after themselves while regional UK properties need all the help they can get from a brand. Perhaps though it reflects the fact that while Jury’s carries some weight in the domestic market, in the more international environment in which London competes the brand is found wanting.

Leonardo was happy to hand over the operations of the Garden Inn property to Pandox so it seems unlikely that the remaining portfolio is going to fall into the embrace of a global brand. Instead, Leonardo is seeking to make its mark as an European brand entity in its own right so presumably it will either drop Jury’s altogether or do a short-term fudge by incorporating Leonardo and Jury’s as one name.

Leaving branding issues aside, Pandox has acquired the business at a yield of 5.8% on projected 2018 revenues. On the conference call discussing the deal, Pandox said it expects the yield to look even better in subsequent years once the benefits of the investment in the Jury’s estate made by Lone Star start feeding through.

The turnover lease structure, which has a minimum guarantee that kicks in at about 83% of current turnover, provides Pandox with a share of any upside. Following the deal, 85% of the Pandox portfolio by value will be property management (leased hotels) with the remainder, amounting to 16 hotels, being operated directly.

Pandox thus has most of its eggs in the basket of leasing property. Only in some of its directly operated properties does it have exposure to global hotel brands and the bulk of its portfolio is with second tier brands such as Leonardo.

Pandox is thus in the crucible of the big debate in the hotel industry: what are hotel brands for and who will be the winners in the years ahead? While the likes of Marriott, Hilton and Accor have challenges, it is a brave man betting against them. Nissen is doing just that.

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