Landlords stick despite rental drop

Travelodge

The last quarter saw only 17% of leisure businesses paying rent, according to Colliers International.

The news came after Secure Income Reit’s non-executive chairman said that the group remained “energised” and that the negative interest rate environment meant that there was still an “investment case for long-dated inflation-linked rental income”.

SIR’s Martin Moore said: “The Bank of England's base rate stands at an historic low of 0.1%, 10-year gilts yield little more at just 0.2% and, with widespread dividend cuts across the quoted universe, it has become increasingly difficult for savers to earn a satisfactory income return.  At over 100% of GDP, the high level of UK government debt is likely to usher in an era of financial repression, where interest rates are kept below the rate of inflation for a protracted period in order to reduce the real value of the debt; a policy that worked successfully over some two decades after World War Two.

“Negative real interest rates pose a challenge for investors to protect their savings against inflation.  This environment underpins the investment case for long-dated inflation-linked rental income, including for Secure Income Reit, albeit one which has been interrupted by the impact of Covid-19.”

SIR said that the group’s budget hotel valuations were adversely impacted by the Travelodge CVA, with budget hotel values down by 20.3%.Under current arrangements Travelodge rents were reduced by a total of £22.9m over the period from 1 April 2020 to 31 December 2021, of which £4.8m related to cash flows in the period to 30 June 2020; 119 of the 123 hotel leases now include a landlord only break right exercisable at any time up to 20 November 2020.

The reit’s Travelodge portfolio was currently being marketed, with this publication understanding that Aroundtown was the front runner for the group, which was last valued at £385m, but was thought likely to raise around £450m. It was not known whether the 123-strong group would be rebranded under the new owners.

Moore said: “Whilst our key operating assets are in less cyclical sectors with high barriers to entry, the impact of the lockdown and sharply curtailed international travel has hit leisure and hotel businesses particularly hard across the globe. 

“Having taken action in 2019 to further reduce the company's leverage and maintain a much enhanced liquidity buffer, the company was able to provide appropriate assistance to those tenants who needed it to protect shareholder value while maintaining the payment of quarterly dividends. 

“Negative real interest rates continue to pose a challenge for investors to protect their savings against inflation.  This environment sets the investment case for long-dated inflation-linked rental income, including for Secure Income Reit, albeit one which has been interrupted by the impact of Covid-19.

“The concessions granted to our tenants are all temporary, with the full rent roll due to return to its original contractual level within the next 16 months. We have the balance sheet resilience to provide further support to our tenants should it become necessary and we remain in close dialogue with all of them while they gradually restore their businesses.”

According to Colliers International, 48% of the tenancies it managed paid their rent in the UK, against 17% of leisure properties, which was up from 12% in the previous quarter. Mark Jarrett, head of property management, Colliers International, said: “Tenants have indicated their confidence for the future by paying half their rent on time. This is very encouraging for landlords when you consider many are now allowing tenants to pay rent monthly rather than quarterly.”

Last month saw the government extend support to prevent business evictions until the end of 2020, with UKHospitality CEO Kate Nicholls welcoming the move, but commenting: “It’s critical that the government also extends the moratorium on statutory demands and winding-up petitions and include County Court Judgments. This should be extended until the end of March 2021 to give maximum opportunity to find solutions. 

“It needs to be followed by further support which, crucially, must include working with landlords and tenants to find a mutually equitable solution. The debt is not going to go away and many businesses have no chance of paying. This is a stay of execution, but we are still short of a full reprieve.”

 

Insight: These solutions are coming to the fore across the ownership structures.  Jeremy Kelly, global research director, JLL, said: “This uncertainty opens up questions about the structure of new leases going forward. For instance, it has brought up the issue of turnover-based leases – where tenants typically pay a smaller minimum-guaranteed rent plus a proportion of their turnover, to more closely align retailer performance with rental levels – in the UK, where this type of lease has traditionally been rare.”

There has also been a campaign in the UK to encourage the government to split the cost of the rent shortfall with landlords, although those in power have made it very clear that the coffers are closed and, after all, it is allowing the hospitality sector to stay open, after all (if you ignore 10pm curfews and the discouragement of international travel).

There are many in the sector who would leap at the chance for a more equable arrangement. Pandox CEO Anders Nissen has long campaigned for turnover-based rent agreements, telling us that it’s the “best business model in our industry” allowing the sharing risk and upside, investing together and the chance to “focus on the most important and value driven part of the value chain - operations”.

Now, about those operations.