• Portfolios slip away from the brands

As the tectonic plates shift in the aftermath of the coronavirus lockdown, several portfolios of hotels are coming into play. And some winners and losers are already evident.
In the UK, Travelodge is looking likely to lose around 100 hotels from its portfolio, in the aftermath of a move to force rent cuts on landlords. Many reacted badly to a company voluntary arrangement pushed through by the operating company’s owners that required discounts on rents in 2020 and 2021; and will be exploiting a lease break option that was written in during the CVA negotiations.
Alongside the break option was an alternative offering landlords extended lease terms, if they agreed to them before the end of August.
Landlords are understood to have been made a variety of offers from a number of alternative hotel brands, but one tabled by AGO Hotels, backed by Accor, to convert properties to the Ibis Budget brand. This offer includes a hybrid lease, and profit share in a structure that gives landlords an ownership stake. Accor will cover the costs of rebranding properties, and offer a rental guarantee.
AGO Hotels co-founder Lionel Benjamin told Hotel Analyst: “Certainly progress is being made – everything’s happening at such a pace, and we’re working flat out.” He said the group’s legal documentation was not yet fully completed such that it could be signed, but is confident the offer is an attractive one. “I’m delighted with Accor’s approach – the rental support facility is that slam dunk we were looking for.”
And co-founder Viv Watts said negotiations continue, with around 55 hotels committed to the switch and close to 50 more properties in legal discussions. He said there “many” institutions that have not taken up the Travelodge lease extension offer, and so will still be weighing up the merits of switching brand.
August also saw the publication of Travelodge’s full year accounts for 2019, with the group declaring total revenues up 4.9% year on year to GBP713.2m, and ebitda of GBP334.3m. While average occupancy had edged up 2.1% to 80.6%, average rate softened 2.3% against 2018. The company said that in normal conditions, “approximately half our operating cost base is the relatively fixed costs of property, the majority being rent”.
The results also marked the end of a five-year transformation plan for the business, which included a GBP150m expenditure on the estate, and growing the portfolio by more than 75 properties.
Travelodge is not the only brand under pressure to maintain a hold on its portfolio. In the US, InterContinental Hotels has lost a tranche of 103 properties, after failing to agree a payment with landlord Service Properties Trust (SVC). The pair fell out over a payment of USD26.4m, which was due to cover minimum returns and rents for July and August.
IHG will lose three InterCons, three Holiday Inns, five Kimptons, 11 Crowne Plazas, 20 Staybridge and 61 Candlewood Suites, largely in the US, but also including the InterCon in San Juan, Puerto Rico. The properties will be rebranded under flags of the Sonesta brand stable, a company that SVC owns one third of.
“We were unable to reach a mutually agreeable resolution to the defaults by IHG under our management agreements with them,” said SVC president John Murray. Therefore, after a period of negotiation with IHG, we determined to terminate IHG and rebrand these hotels.”
SVC switched 16 former IHG properties in 2012, and reports that under Sonesta flags it believes they subsequently delivered superior returns.
This is not the first time in recent years that IHG has had to make a difficult decision, when faced with a slug of costs against a portfolio of properties. In its 2019 results, IHG took a USD50m impairment charge against Kimpton management contracts acquired in 2015, and a USD81m charge against its 2018 acquisition of a UK leased portfolio. The latter was blamed on “trading disruption as a result of renovations and the re-branding of the hotels and increasingly challenging trading conditions in 2019”.

HA Perspective [by Andrew Sangster]: The prospect of IHG and Travelodge losing such large numbers of hotels should give pause to any bulls still out there. If either IHG or Travelodge were confident about the future, why would they let these properties go?
With Travelodge, maybe it is the case that the owners – Goldman Sachs and the two hedge funds – were too arrogant and thought they could bulldoze their way through the objections of the landlords. If so, then there has been a monumental mistake.
More likely is that the owners do not believe the recovery is going to be strong enough to warrant the investment required to have secured the properties. The owners believe that such cash can be better deployed in other opportunities. This should give pause for optimists as Travelodge is surely one of the best placed outfits to lead the recovery given its market segmentation.
Meanwhile, IHG is prepared to shed 103 hotels for just USD26m – this is less than the key money it might normally deploy to secure such a portfolio. What gives? Possibly, IHG has taken a look at future prospects and decided that this year’s payment to retain the properties is likely to be followed by many more.
Again, the bulk of the hotels is in segments that ought to be leading the recovery. With 81 extended stay properties, the portfolio has a profile that many are tipping to be a winner in the post-pandemic environment.
Either IHG is more nervous about its liquidity position than it is letting on or it is planning for a very subdued period of trading. Maybe it is a bit of both. The Runes from these events are forecasting a tough time ahead.

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