• Travelodge on cusp of losing owners

The row between Travelodge UK and landlords has escalated with landlords now examining what they believe are viable alternatives to continuing the Travelodge leases.
Leading the field of the options is a joint effort between Accor, Gullwing Hospitality and Oasis Holdings. AGO Hospitality teams owners, operator and brand in a pooling of operational real estate risk.
Travelodge has run into opposition following its Company Voluntary Arrangement which was passed by creditors on 19 June. The CVA shaved GBP144m from Travelodge’s rent bill, with some owners receiving no rent until 2022 while 77 lease contracts had rent paid in full.
The animosity created by the CVA, which follows a CVA undergone in 2012, has been met by an attitude of “two strikes and you’re out” by some landlords. This has encouraged discussions with other operators and brand owners.
AGO Hotels describes itself as a “landlord friendly platform” offering a hybrid lease structure which gives landlords exposure to the operating company, through an income share and capital stake.
Lionel Benjamin, the ex-Topland executive and now CEO of new entity Gullwing Hospitality, told Hotel Analyst: “I’d like to see over 100 hotels on our platform. On our last call we had more than 112 participants representing in excess of 200 hotels.” But Benjamin did admit that a deal wasn’t a “slam dunk”.
The offer from AGO is for new 25-year fully repairing and insuring leases index-linked at 50% of the original Travelodge rent. Owners would in addition receive a 50% share of the operation’s EBITDA and annual dividends from the 49% equity stake in AGO (share weighted according to rent payment).
Accor is taking a 10% stake in AGO and is offering GBP32m towards rebranding Travelodge hotels to Ibis Budget (the former Etap). Benjamin’s Gullwing and Oasis Holdings, owned by Viv Watts, the organiser of the Travelodge Owners Action Group which represents more than 400 hotels, are the other equity holders in AGO.
Watts said in a statement: “The platform has very significant expansion potential and offers the best of both worlds – institutional leases and operational participation. By making the owners partners in the business, the AGO Hotels platform is a disruptive business model, protecting the income and values upon which so many individuals, local authorities and charities rely on.”
Accor has over 230 hotels in the UK and Ireland but it lags Whitbread’s Premier Inn, Travelodge and IHG’s Holiday Inn Express in the branded budget hotel category.
In 2019, Premier Inn had 72,740 rooms; Travelodge had 41,000 rooms; Express had 17,400 rooms; and Ibis, including the core, Styles and Budget category, had 14,585 rooms [source: Hotel Analyst’s Branded Budget Hotel Report 2019].
Guarav Bhushan, chief development officer at Accor, spoke exclusively to Hotel Analyst. He said that Travelodge was a “shoe-in for Ibis Budget, it fits perfectly”. There are 600 Ibis Budget properties globally but just 25 in the UK and taking on a significant number of Travelodges would greatly strengthen the brand’s global coverage.
“Owners are now considering what is a long-term viable solution for their hotels,” said Bhushan. “The AGO offer is attractive because landlords get participation in the upside. They are currently taking the downside without taking any [future] upside.”
Accor’s capital input is restricted to the key money and similar needed to meet rebranding costs. The company is not offering to stand behind the lease deals with its covenant strength.
There is significant sweat capital with an initial manchise type agreement using Accor’s management know how which would convert to a standard franchise within an expected 12 to 24 months. The initial period would see Accor assist AGO to establish its operating platform.
Bhushan said that Accor was committed to an asset-light future with 95% of its estate now on franchise or management agreements. “We will work with investment partners. Our intent is not to invest in assets.”
The majority of Accor’s network is management – a point of distinction to its global major rivals Marriott, IHG and Hilton – and it will retain management for its upscale and luxury properties while increasing franchising at the economy end of its brand portfolio.
The 30-page AGO Hotels presentation to Travelodge owners was made available to Hotel Analyst. It emphasises the hybrid lease structure and the significant expansion potential as the largest hybrid lease platform in the UK. It shows worked p&ls that indicate landlord returns will be 10% or more higher with AGO than if they stay with Travelodge.
Both Marriott and IHG are understood to have engaged in discussions with Travelodge owners but Marriott was unwilling to provide adequate key money and IHG’s Avid brand was thought too high a risk as it is still to debut in Europe.
The most competitive offer to AGO is backed by KSL Capital’s Village Hotels platform. But this offer suffers from adjusting downwards the rent paid to some landlords where the rent cover was less than 1.7 times. In addition, the creation of a new brand, Goodnight, is not thought to be appealing.
Goodnight is reportedly in negotiations with other hotel owners offering leases where management agreements and franchises are in place. And it is not complicated by offering owners a stake in its own business.

HA Perspective [by Andrew Sangster]: I was wrong about Travelodge. When Goldman Sachs, Goldentree and Avenue – the three owners of the Travelodge brand and operating business – succeeded in pushing through the CVA I said it was unlikely that many owners would walk away from Travelodge.
There are probably a couple of factors at play here. Firstly, the New York abrasiveness of the negotiations may well have alienated a good number of landlords to such a degree that they want change. Secondly, and I would argue more importantly, landlords are much readier to move towards operational real estate than I expected.
The irony of the second observation is that Hotel Analyst has been beating the operational real estate drum for several years now, culminating in our launch of the Operational Real Estate Festival (sort of launch, the June in-person event was a victim of Covid and now due to return in June 2021).
AGO brings in both the sharing of risk / reward of operational real estate and the trend to separate out ownership, management and brand – the bricks, brawn and brain division.
The simultaneous emergence of a rival in the form of Goodnight, backed by the sophisticated and knowledgeable investor KSL Capital, demonstrates that this is not just a one-off.
For its part, Accor has grasped this opportunity. Lionel Benjamin was fulsome in his praise of Accor for its commitment of time and access to senior management including CEO Sebastien Bazin with Bazin making himself available to owners during online meetings.
The AGO model has many merits. In particular, it aligns the interests of owner, operator and brand much more clearly. Benjamin justifiably proselytises the advantages of his model and the benefits owners will derive by switching. He points out that sticking with Travelodge cannot be regarded as any safer than changing sides given Travelodge’s track record and the bias of the UK’s insolvency laws against landlords.
But there are challenges. While it is likely to prove true that owners are, over the longer term, going to be better off sharing risk, it moves property further away from its quasi bond-like status. This is no bad thing in my view and the structural and cyclical challenges ahead for most real estate asset classes warrant a more realistic approach from investors than to simply receiving a fixed rent cheque every quarter.
Alongside this, however, is going to be a rerating. If you are moving up the risk curve, then you usually need to deliver higher returns. Not all investors will be happy with this repositioning.
The good news is that with bond yields in negative territory, property yields need only to be low single digit to look compelling. There is room to nudge up a few basis points and there is sufficient investor demand to support the transition.
Travelodge is a unique case in that the CVA created an unusual one-sided break clause for landlords. They have to exercise this option before the end of the year but most will make a decision before the end of August because that is when Travelodge’s offer of extending leases expires.
But Covid has created sufficient trauma across the industry that upending traditional models is no longer seen as such a radical option. There is substantial evidence that institutional investors are reappraising their approach to property investment.
Travelodge may or may not end up shedding properties in favour of hybrid lease models. But even if operational real estate loses this battle it looks set to win the war. Those participants prepared to embrace the change – be they owner, operator or brand – will be the victors.

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