Landlords have hit back at plans by Travelodge to launch a company voluntary arrangement (CVA), arguing that it was “unnecessary” and undermined investors’ ability to rely on long-term leases for income.
Under the proposals, landlords will be paid a total £230m in rent for this year and next, around 62 per cent of the contracted sum due. But unlike traditional CVAs, Travelodge does not intend to shut any of its hotels or permanently cut rents.
However, Viv Watts, who has been leading an action group of landlords owning more than 400 Travelodge hotels, argued that the company was not in distress and did not have structural challenges to its business model, pointing to the record cash reserves on the company’s balance sheet at the start of the year and highly liquid shareholders, which include Goldman Sachs and hedge fund Avenue Capital.
The duration of rent relief requested by Travelodge also went beyond that asked for by other businesses, he said. “This isn’t some business looking for short-term support," he argued.
Travelodge said that given the challenges facing the business and wider hospitality industry from Covid-19 - which would continue into 2021 - the best way to preserve the company’s liquidity position would be to temporarily reduce rent payments, which are its largest cost at around £215m a year. It has estimated that the pandemic would result in a £350m hit to revenue this year.
It also pointed to that fact that shareholders in Travelodge have agreed to inject an additional £40m in capital into the business, making available £100m in additional reserves and £100m in new credit facilities.
The Travelodge Owners Action Group includes Secure Income Reit (SIR), which has 123 Travelodge hotels in its portfolio that account for just over a quarter of its annual contracted rent.
The Reit would lose £23.4m in rental income if the plans are approved, equivalent to 10 months' rent spread over two years across the properties it lets to the hotel chain.
The commercial real estate group said it was “scrutinising these proposals further along with a team of expert advisors in order to best protect its position and will report back to shareholders at the earliest appropriate time”.
LXI Reit (LXI), which owns 12 hotels let or pre-let to Travelodge, said the proposals would result in annual contracted rent cuts of 4.6 per cent this financial year and 2.9 per cent during the next.
Travelodge accounts for 10 per cent of LXI’s annual contracted rents. However, two of these hotels are under construction and benefit from cash-backed developer licence fees and a further two hotels were in developer-funded rent free periods, which reduced the current quarter's exposure to 8 per cent.
LXI also emphasised that the CVA would have no impact on the first quarter dividend guidance of 1.30p a share, provided last month.
In April, landlords submitted proposals to Travelodge offering to forgo second quarter rent entirely and cut the amount due from July until the end of the year by 20 per cent, equivalent to total rent write-offs of £70m. However, Travelodge requested cuts amounting to £146m from landlords.
Mr Watts, who owns two Travelodge hotels, said it was too early to have made a decision on which way he might vote. “The overall structure of what they’re proposing is not necessarily something that we can’t support, but there needs to be some refinement of the detail,” he said.
Travelodge's attempt to launch a CVA undermined the rationale for investors to purchase such assets, which typically have leases of around 25 years, Mr Watts argued. "We buy it because it's an asset that produces a fixed cashflow," he said. "A CVA becomes a tenant-only break clause."
The CVA proposal requires at least 75 per cent of creditors by value, as well as at least 50 per cent of creditors that are unconnected with the group, to vote in favour at the creditors’ meeting to approve the CVA, due to be held virtually on 19 June 2020.
