Ménage à Travelodge


For those of us who grew up in the UK in the 1990s, there were few television interviews more attention-grabbing than that of Martin Bashir’s Princess Diana chat and few phrases more repeated than “there were three of us in this marriage”. Royalty had moved on in the UK, you see, and the old harem model was definitely passé. Things could get tricky. Feelings got hurt. Due attention was not always paid to all parties.

So, other than brief aberrations in the 1960s, minority religions and houses with pampas grass outside, it is generally felt that more than two is a crowd and a crowd, particularly in this day and age, is unhealthy.

Enter the hotel sector. The structure keeping a hotel up and running and connected to guests and potential guests can have many more people than one could fit in the most enthused of harems. King Solomon may have had 700 wives and 300 concubines (numbers rounded up) but chuck in a franchise, an owner, a ground lease, a management company and all manner of other interested parties and hotels are not too far off. All of a sudden it’s hard to remember who is having their needs met or even who is getting fed.

So time to move away from that metaphor and onto the state of the hotel industry today, for industry it is. If you can invest in something without having to know how it works, it’s an industry and there are plenty of hotel owners out there who would be hard pressed to get the guests through the door and leaving a pleasant review the next day. The markets have long felt the same about hotel brands combining with hotel ownership, which is one of the reasons why so many Reits have popped up out of the likes of Hilton - and why Accor causes such confusion to analysts. It is felt that, with a complicated structure such as a hotel, it is better to pare it down to constituent parts and get the relevant expertise in each area.

The pandemic helped to illustrate why this approach was not working for all the parts. Owners have been griping for years about not getting their fair share of returns and paying too much to the brands, with not enough opacity. Put more skin in the game, they nipped. The brands said that they were staking their reputation and that was worth, oo, loads. Plus they were bringing in guests and good luck doing that yourselves  - they also added value to the property which they didn’t benefit from if it was sold.

Owners felt that there was no comeback, until, with the hotels closed, there was. The many adventures of Travelodge have shown that there is power in owner numbers, although hopeful observers would do well to note that the owners of the Travelodge brand have not appeared to put up much of a fight, which is one of the fascinating aspects of the tale. Things may look very different if they had.

What is keeping the sector agog is who will win the heart of the owners and what is becoming clear is that those who are leading the running are those who are prepared to stump up some cash. In the case of Accor, it looks like around £1,000 per key to assist with conversion. Magnuson Hotels is also looking to invest. Owners will tell you that money doesn’t normally flow in that direction from the brands.

It’s not just money, it’s also the structure of the deal, with the frontrunners leading in terms of innovation. At Magnuson Hotels the company eschews the typical franchise fee in favour of a flat fees structure. At Ago, the company will be owned by landlords, management, investors and Accor with landlords paying a base rent plus a profit share. There will be a fee on gross room revenue which will be redistributed amongst the stakeholders.

Three income streams at a time when any income stream is hard to come by is gaining attention. Sébastien Bazin, Accor CEO, is thought to have described the opportunity as “cheeky and innovative”. As he would, given how many Ibis Budgets he stands to score.

As one observer noted to us: In terms of stakeholder alignment, then yes, this is a step forward in alignment – all stakeholder are interested in the operational performance, but the business is more secure and stable because it does not have the high fixed rent commitments that Travelodge has. Effectively it is trading shorter term volatility for longer term stability, as total rent will vary more from year to year, but less likely to suffer cyclical shocks resulting from CVAs or insolvency.

“The stakeholder alignment will to some extent decline over time as and when landlords sell their properties, but do not necessarily sell their shareholding in AGO Hotels with it. As these interests get de-stapled, then some of the alignment that comes from being both a landlord and a shareholder in the tenant, will disappear.

“Operators have often talked about taking equity stakes in hotels to aid alignment, but for a single asset/owner, the shareholder structures are expensive and complex to negotiate and put in for relatively little benefit. Across a bigger portfolio, with a take-it-or-leave-it shareholders agreement and terms, this difficulty to some extent disappears due to economies of scale and standardisation, allowing a structure whereby owner and manager both have an equity stake in the operations without the difficulties that prevent this being done on an asset-by-asset basis.”

Travelodge is a special case - the spoils in the case being a leap into the UK budget hotel market which it has taken years to build. Any owner reading this and thinking of giving their brand a call may find themselves disappointed. But it has started to make them think about a future where the standard franchise, management or lease contract gets something of a rework. Princess Di had to bat her lashes at Bashir for a decent slice of the cake. Owners may be able to hold onto more dignity.