• FdR lines up for Principal

Foncière des Régions has confirmed that it is exclusive talks with Starwood Capital to buy Principal Hotels for an undisclosed fee.

The transaction latest in a series of anticipated portfolio deals in the UK, despite slowing performance growth.

FdR said that the deal could be finalised by the end of the first half. The investor, which has property assets under management valued at EUR6bn, with almost 500 hotels, said: “With the capacity to support partners for sale and leaseback transactions, acquisitions or developments for buildings and buildings plus business, FdR concentrates investments on Europe’s most dynamic cities each attracting over 2 million stop-overs a year.

FdR is thought to have beaten bidders including InterContinental Hotels Group (working with a property partner) to the transaction.

The portfolio included a total of 2,626 rooms, with nine hotels located in England (Birmingham, Leeds, Liverpool, London, Manchester, Oxford, Wotton and York), four in Scotland (Edinburgh, Glasgow), and one in Wales (Cardiff).

Principal Hayley Group has been owned by Starwood Capital Group since 2013, when it acquired Principal Hayley in a deal worth an estimated GBP360m, providing an exit for Lloyds Bank, which held approximately one third of the company.

In 2016 the group was relaunched under the Principal Hotel Company brand, with Starwood Capital investing GBP200m on the repositioning of its key properties.

Barry Sternlicht, chairman & CEO, Starwood Capital Group said: “At the heart of a great business is a unique and authentic story. Our people and our buildings have great stories to tell, and these stories differentiate you from the competition, giving your guests and your staff something to cheer about.

“Reviving these historic, grande dame hotels is a truly great story – they are spectacular buildings in which we can create dynamic scenes. The story of each hotel, its amazing history and architecture is the opposite of the mass-produced chain hotel, and provides us with a canvas on which to curate a unique sense of place.”

Sternlicht told the Financial Times that, “to defend against the Airbnbs and the internet, you have to create distinct experiences. Consumers are too smart and it’s too easy to check if it’s a good Marriott or a bad Marriott … In a world that’s getting hyper-competitive, you have to create a more differentiated experience or you are simply a commodity. A lot of hotels have become commodities and they became indistinct from each other.”

The Principal name dated back to 1984 when it was founded and built up into a 22-strong company, before suffering in the recession of the 1990s and passing through the hands of management and Nomura. Permira acquired the six-strong chain for a rumoured GBP300m in 2006 from Royal Bank of Scotland.

Principal Hayley was created in 2007 when private equity group Permira paid GBP358m to draw in Hayley Conference Centres to its Principal hotel group. Hayley’s eight properties in the south of the UK were perceived as a good fit with Principal’s nine more northern based outlets. Subsequent additions included the 2009 buys of London’s Connaught Rooms and the Central Hotel in Glasgow.

In 2010, poor trading forced lender Lloyds to intervene in the business. In early 2012, the group added back six hotels it had previously sold, with a sale and leaseback deal passing the property freeholds to Pramerica.

Starwood Capital paid GBP360m for Principal Hayley and its 23 hotels in early 2013. A refinancing  of the debt the following year saw an improving market mean that the properties were revalued with a 16% uplift at GBP417m. The refinancing saw it free up GBP80m to spend on upgrading the portfolio of hotels.

Starwood Capital deployed almost GBP700m in a little more than a year in the hospitality sector in the UK. In early 2014, it followed the Principal Hayley deal by buying regional hotel group Four Pillars, gaining five further UK hotels; and followed that with the purchase of De Vere Venues, for which it paid around GBP232m.

Despite forecasting a slowdown in performance growth, PwC anticipated more portfolio deals to come this year, with the company commenting that this could be driven by owners “considering whether the number of exits in the second half of 2017 might signal that the end of current cycle could be in sight”.

The group has forecast 2018 deal volume in the UK to be around GBP6.0bn, up c. 22% from the GBP4.9bn achieved in 2017. For 2019, it said it anticipated future investors into the UK hotel market “becoming even more vigilant in their due diligence when considering the longer term potential impact from Brexit; we consider long-term holders and family offices looking for a multi-generational freehold being a more prominent buyer profile”.

The forecast for 2019 was a c.25% drop from the higher 2018 deal volume to around GBP4.5bn.

HA Perspective [by Katherine Doggrell]: So bad luck IHG and onwards to Belmond, as is the hope, putting the issue of having to explain why it would buy a brand such as Principal behind us. For those other losing bidders, there are options still out there.

Russell Kett, chairman, HVS London, told us: “There is no such thing as the last deal, it is only the last deal until the next one comes along. Such is the interest in the UK hotel sector that there will always be an appetite. There will be 24 underbidders on this deal who will be all fired up, who were hoping to win and they will look for another deal. The fact that deals are getting done, despite Brexit, shows that demand is there.”

While appetite for assets in their multiples in the UK may not yet be abating, what has changed since Brexit is the profile of the investor, with more overseas family funds and institutions buying assets. They will look to ride out any slowdown through dint of being long-term holders, but such prudency does not make for a vibrant deals market.

Additional comment [by Andrew Sangster]: It is not yet clear whether it is indeed bad luck IHG. Maybe IHG will yet buy the operating platform of Principal Hotels in a separate deal. After all, there was no question that IHG was looking to buy the property assets.

Sternlicht as ever nails it with his comments that it is experience that counts. But perhaps the struggle Sternlicht appears to be having rolling out his own experiential offer, 1 Hotels, will cause FdR to move swiftly to find the right partner to drive forward its hotel operations.

For IHG, a deal to acquire the Principal brand and leaving Tony Troy’s team in situ, looks the most promising way forward. IHG gets the collection brand it desires, while FdR gets a proven operator in Troy coupled with the big brand firepower afforded by IHG.

It is worth noting just how forward thinking FdR is being. It has not been deterred by Brexit and is plunging into the challenging upscale UK provincial market. It shares Sternlicht’s faith in the experiential and has put this above short-term distractions.

Similarly, FdR is at the cutting edge of developments in hotel alternatives, a long-held passion here at Hotel Analyst. Last month it launched Wellio, its own co-working brand. FdR invests across commercial and residential real estate as is ideally placed to exploit such new trends. And it is demonstrating a willingness to innovate sadly lacking in many of its rivals.

Wellio links the hotel investment expertise with the office investment expertise to offer coworking space and dedicated offices for more established companies on one site. From 2,000 sq m to 6,000 sq m per building, the new offer is expected to grow to a total of 70,000 sq m by 2022.

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