Landlord Secure Income REIT (SIR) has cast a vote of confidence in Travelodge in announcing its decision not to exercise its break options to terminate the leases of its 123 Travelodge hotels.
SIR said it will maintain its current arrangements, with its Travelodge portfolio remaining on the same terms and conditions with a short-term reduction in rent.
The group confirmed it had discussions with several third-party hotel operators "to ascertain whether there were opportunities to enhance shareholder value in relation to the Travelodge portfolio".
However, it concluded that Travelodge "remains one of the best in class operators in the low cost hotel sector and the terms offered by any replacement would carry unacceptable risks for the company", adding that for the last five years, Travelodge had seen good earnings and growth prior to this year's Covid pandemic, which led to a Company Voluntary Arrangement (CVA) in June.
SIR also ran a sales process but decided not to pursue this option and is discussing restructuring its leases with Travelodge.
Under the terms of the CVA, in 2021 it is due to receive £19.8m of rent from Travelodge and in January 2022 the rents will revert to the full contracted level.
The break options were part of the hotel chain's acrimonious CVA restructuring earlier this year, allowing landlords to terminate leases and re-let the hotels without penalty before the end of the year. Despite this vote of confidence, hundreds of undecided Travelodge landlords could still enact their break clauses and, in doing so, seriously weaken the brand.
Chairman of Secure Income REIT Martin Moore said: "We have carried out a thorough review of the options available to the company and are satisfied that Travelodge remains a market leading operator, albeit with ongoing capital constraints in the same challenging market facing all hotel businesses. Its trading trajectory in the months following national lockdown illustrates how the best operators in the budget hotels sector should be the first to recover once the pandemic subsides.
"We are very alert to the challenges facing the industry but, with our hotels held at close to vacant possession value and with rents reverting to 70% of the previous full contracted amounts in 2021 and the full amount by January 2022, we believe that provided sufficient capital is made available, Travelodge should benefit materially as the economy recovers, as should SIR from any consequential yield compression."
In the 2019 annual report for Thame and London, Travelodge's parent company, it reported total revenue of £727.9m, up 5%; and adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £129.1m, up 5.8%.
But chief executive Peter Gowers said in the report that current estimates suggest revenue in 2020 could be half that of 2019, with the potential for Covid to hit sales by £6m-7m.
Travelodge's CVA in June saw it agree temporary rent reductions with landlords of up to £140m through to the end of 2021. It was the company's second CVA in eight years and two new platforms, AGO Hotels and Goodnight Hotels, were launched to tempt disgruntled landlords into exercising their break clause with Travelodge and rebrand.
Founded in 1985, Travelodge is the second largest hotel brand in the UK, based on number of hotels and rooms operated. The group leases, franchises, manages and owns 591 hotels, mostly in the UK but also in Ireland and Spain. The company is owned by funds managed by GoldenTree Asset Management, Goldman Sachs Group and Avenue Capital Group.