An increase in the number of CVAs under discussion was less a sign of stress and more an attempt to bring landlords around to turnover rent.
The solution has been presented a number of times during the pandemic, with landlords instead favouring deferments.
Ryan Grant, Partner, Business Restructuring, BDO, told a webinar hosted by HOSPA and BDO: “We’re seeing a lot of sitting and waiting. At the moment all landlords are offering are deferment, but what this sector and the economy needs are turnover rents. The banks will provide covenant waivers, they will provide payment waivers - enforcement is not an option as it crystallises a big loss.
“This isn’t a recession, it’s something affecting supply and demand, it’s to do with liquidity in the market. The government intervention has bought businesses time to respond
“We are seeing that businesses need to be viable and need to demonstrate that, but how do you estimate occupancy and covers? It’s very hard to complete restructurings and refinancings - many of don’t know how long this will take to get back the new normal. There are a lot more conversations around CVAs, but this is a drive to get landlords to a turnover rent position.
Grant advised businesses to be “proactive and reactive to all the announcements, which are on a daily basis. Speak to your landlords - when businesses have been open on what they can and can’t do, they have been quite open to discussion. Stakeholder management is key, we’re all in this together. The government will keep applying new measures as they can’t let the investment they’ve put into the UK economy go to waste.”
Grant followed Robert Barnard, partner, Hospitality Consulting, who was hopeful about the future of the sector, commenting: “Hotels and the wider hospitality sector have been among the worst hit industries, but there are also opportunities, but also opportunities for investors and operators able to react quickly out of the lockdown world. Hospitality businesses will have to wait for step three of the lockdown plan, which will be no earlier than the 4th July.
“When hotels do open the sector will have endured one of the longest and damaging lockdowns to hit any part of the UK economy. Hotels have been in survival mode. Some forecasts suggest 40% occupancy when hotels reopen, 50% in 2021 and 2019 levels in 2022, 2023. The biggest casualty will be GOP, which is unlikely to return to 2019 levels until 2024/25.”
Barnard did, however, point to an increase in the deals market, adding: “The industry is gong to be in a very fragile position and I’m afraid that there are people out there described as vultures waiting to swoop. There are plenty of funds sitting on piles of cash looking for distressed purchase. I cannot comment on Ebitda multiples because they will plummet during 2020 but because the industry is recognised as able to bounce back, a lot of people will look at 2019 as the 2021/21 as the new normal. Yes there is nervousness, but by 2022, 20223 at the latest we will see a new normal, but by that time I expect there will have been a considerable number of transactions.”
He added: “The measures taken by the government have been crucial in helping hospitality businesses stay afloat during lockdown, however these have not been enough to prop up all hotel businesses and several small and independent businesses have gone into administration, with Covid-19 cited as a contributory factor
“It is possible that there will be a boom in staycations. Hotels in attractive holiday locations such as the Lake District and coastal resorts are likely to benefit. Guests are likely to be attracted to well known brands which are more likely to be trusted t implement improved hygiene standards. We have seen major hotel brands partnering with hygiene brands. We are likely to see a slower recovery from hotels reliant on international travel or meetings and events.
“Even well hotels do open it will not be business as usual. Social distancing and enhanced cleaning measures must be introduced. Lobbies and restaurants will need to be reconfigured. Face-to-face interaction should be minimised. Customers may be made nervous by table service and hotels may need to offer enhanced offerings for in-room dining. Much of this will require a complete shift in hoteliers’ mindset.
“Historically the hotel industry has bounced back from recessions, but C-19 has created challenges which may last for months or years. Hotels that are able to adapt quickly and find innovative solutions will be in the strongest position to survive.”
Insight: We have heard the turnover rent argument before during this pandemic, when David Roberts, corporate partner, head of leisure, CMS, told us that a fair deal might look like: “Rent free until two months after reopening and then a fixed rate turnover rent (say 5% or the relevant % of turnover to rent for 2019) until the business at the premises delivers two quarters of like for like sales figures that are equal to the 2019 quarter sales figures; at which time the ‘patient’ is back in financial health and the normal rent resumes.
“What we don’t want to happen is 3 million conversations between lawyers, landlords and tenants to try and get a fair outcome. If you had a strong tenant in before then you have to adjust the risk/reward slowly and if there’s an easy way to adapt it, that would make a world of sense. No landlords wants to end up owing loads of empty properties.”
No no they really don’t and there are those who have suggested that turnover rent deals are more suited to restaurants. That’s as maybe, but what is clear here is that fresh thinking is needed if the sector is going to come out the other side.