I'll huff and I'll puff and I'll blow your house down

The term "sale and leaseback" has been in the news quite a lot this year, with some major hotel players snapping up offers to sell their property in return for cash injections that allow continued operation or expansion. And the annual PKF Forum, held in London last week, raised the topic for fresh debate ("Experts clash", Caterer, 3 October, page 10) with a motion that read: "Is the current vogue for hotel companies to sell their assets and only retain operational control in the long-term interest of their business?"

It is a deep and complex subject, worthy of more space than last week's news story and this column can allow, but it is also worth continuing the discussion, particularly against a background of tighter economic conditions that may be forcing hoteliers and hotel companies to look at fresh ways of raising investment. A warning was sounded at the PKF Forum that operators would be wise to note.

There is no question that sale-and-leaseback deals are in vogue. In 1999 this magazine mentioned the trend in stories four times. Over the past 18 months the term has made more than 30 appearances, attached to some big names like Hilton and Thistle. In fact, it keeps cropping up every time a hotel company wants to raise some capital to develop its business or expand.

Sell the bricks and mortar, grab the cash, and then get on with what hotel companies do best - serve the customer. That's the idea, but, as speakers at the PKF debate concluded, several conditions need to be taken into account before such ventures can be entertained seriously.

Legal expert Simon Kildahl, a partner with Berwin Leighton Paisner, says that sale-and-leaseback deals could trap operators in rental contracts that, if defaulted, may result in a forfeit of the right to occupy a property. Rod Taylor from Barclays Bank warns against making "huge" business decisions just because they are in fashion. PKF partner Edward Middleton says that sale-and-leaseback deals may remain on corporate balance sheets and, therefore, need careful planning. And UBS Warburg analyst Simon Johnson points out that "You can only sell the family silver once."

As share prices continue in free fall, with the economy in disarray and the talk of recession - even deflation - getting louder, it has become increasingly difficult for hotel chief executives to attract investment, and it must be tempting to raise some spending money by mortgaging the capital assets of their companies. If shareholders benefit from this, there will be a quiet hurrah at the next annual general meeting. If the company makes a purchase or two and expands, financial analysts in the City will be satisfied.

But what happens when, three years down the line, the economy is still proving difficult, room yields are low, there's no cash left in the business and shareholders are left wondering where the long-term value of their investment lies? It won't be any good asking those chief executives what happened to the bricks and mortar - they will have long gone - bricks, mortar, chief executives, the lot.

Sale-and-leaseback decisions will be made by only a handful of directors in the industry, but such deals affect many, many people - not just shareholders and investors, but employees and, in some cases, customers as well. If anyone out there is thinking of going down this path, remember the division-bell vote at the PKF Forum: 72% against the trend, 20% in favour. The warning is: sale and leaseback - treat with extreme caution.

Forbes Mutch
EditorCaterer & Hotelkeeper