Travelodge secured a creditor vote to approve a CVA which will see rent payments cut by 38% to December next year, but allows landlords to break leases within six months.
Secure Income Reit, which has 123 Travelodge leases, said that it was “in preliminary discussions with alternative hotel operators” over options that could “add incremental value over and above the existing lease arrangement with Travelodge”.
Travelodge said that it would “like to thank its creditors for their support during this period and look forward to reopening and welcoming guests back to its hotels in the near future.
"The CVA proposal was a critical part of Travelodge's recovery plan to manage the current Covid-19 pandemic and today's approval will ensure the company can manage its operations in the short-term as well as help position the business for success in the long-term”.
At SIR, 119 of the Reit’s 123 Travelodge leases now include a landlord-only option to break the lease for no consideration payable. For the majority of those leases - 114 of the 119 - the break option may be exercised at any time before 19 November 2020 and for the remaining five leases the break option period runs to 31 December 2021.
Those 119 leases, representing some 88% of the pre-concession hotel portfolio passing rents, also now include a landlord option to extend the existing Travelodge lease term, provided this option is exercised within the period to 28 August 2020. If this extension option is exercised, the landlord break option referred to above falls away and the Weighted Average Unexpired Lease Term of the Company's entire 123 hotel Travelodge portfolio increases by 2.75 years.
Martin Moore, chairman, SIR, said: "The break clause optionality provided to us by the CVA agreement, in conjunction with Secure Income REIT's strong balance sheet and considerable liquidity, creates a solid position from which we can actively explore options for our hotels portfolio, whilst at the same time providing Travelodge with the breathing space it requires to re-establish its business.”
SIR had already rejected a proposal from Travelodge suggesting a rental cut of 80%. SIR said: “Until the pandemic struck, Travelodge had substantial earnings and significant operating cash flows, and we consider that this business has considerable equity value as well as long-term viability. It also has very substantial shareholders in Goldman Sachs, Goldentree and Avenue Capital.”
Viv Watts, representing The Travelodge Owners Action Group, which represented more than 400 out of the group’s 580 hotels, said: “As landlords, big and small, we remain concerned by the precedent this CVA sets for the wider real estate industry. It is clear that CVAs are being used by overseas shareholders to extract and repatriate domestic capital from the commercial property sector.
“The inability of property owners to exercise their rights in the current climate is being actively exploited at the expense of UK savers and investors. We urge the government to examine the implications of this as a matter of urgency, including the effects on investment and consumer sentiment as well as job security. If this conduct is allowed to continue unchallenged, the pension and insurance sectors in the UK will be irrevocably damaged”.
Travelodge withheld quarterly rents due at the end of March and proposed rent reductions until 2021.
In a letter, Travelodge said: “We have been generating substantial losses since the lockdown began and there is no date yet for it to be lifted. It appears increasingly likely that any lifting of restrictions will be phased and come with new operating conditions. We would expect that this may result in a lasting impact over at least the next two years and perhaps beyond.”
Insight: Four hundred million years ago, when Travelodge was going through another tricky financial moment and this hack was editing another hotel title, I ran a story written by a bass player of my acquaint in a small indie band, who had done what small indie bands tended to do and toured the country in a Transit van, with the whole band crammed into a single Travelodge room every night. Cheap and flexible rooms, you know.
The story went down about as well as a bucket of hot knives at a soft butter convention with Travelodge. Why? Because it exposed that the brand had broken the cardinal rule of branded hotels - consistency. The estate varied wildly between sites, with some purpose-built hotels, but some questionable conversions and one occasion when a can of Lynx was offered as an air freshener.
Times have changed since then and the estate has been overhauled, but there is still great variety within properties, which becomes relevant when you are a landlord thinking about which operator you might offer your many Travelodges to. At SIR, the group’s estate is dominated by purpose-built properties at motorway service stations, which could be perfect for Accor. Rebadged with mere replacement in signage. Likewise Holiday Inn Express. You can see how things went down in the CVA discussions.
Of the city-centre sites, more heavy on conversions, the mind would have turned to OYO, although that ship appears to be foundering, so, maybe a touch of easyHotel? Would Whitbread be interested? We think not so much.
Do the owners at Travelodge care about this potential debadging? Goldman Sachs, Avenue Capital and GoldenTree took ownership of Travelodge in 2012 from Dubai International Capital in a debt-for-equity swap. The financial restructuring encompassed writing off bank debt of £235m and infusion of £75m of fresh capital. They then invested in the estate and bought another 144 hotels at a good price. In short, the trio has had what is known as “a good run”.
That the break clause offers a breathing space speaks more to the current climate than to any generosity on the part of the landlords. Do they want to get stuck with a load of hotels now? No they don’t. But in six months’ time things could look more positive for the hotel sector. Given that the stakeholders on both sides have options and no-one seems too committed to the Travelodge brand, is this the end for that icon of the budget sector?