Protected: Long Let Hotel Investment with Uncapped Index Linked Rent Reviews

Accommodation

The property has been measured by BKR Floor Plans and provides the following accommodation:

A set of floor plans is available to download and the measured survey report will be re-addressed to a purchaser at a cost of £1,090 + VAT.

Tenure

Long leasehold for a term of 250 years from 25th April 2012 (in excess of 239 years unexpired). The current ground rent is £60,171.84 per annum and is reviewed annually to RPI with a 2% collar.

The ground floor retail unit has been underlet for a term of 250 years (less 3 days) from 25th April 2012 at a peppercorn rent.

Tenancy

The property is let to Travelodge Hotels Limited on a full repairing and insuring lease for a term of 25 years from 19th March 2012 expiring on 18th March 2037, without breaks. Hence, in excess of 13 years unexpired lease term. However, under the terms of an Option Agreement the landlord can require the term to be extended by a further four years and 1 month.

The tenant has an option to renew the lease from 19th March 2037. Please refer to the legal pack for further information.

The lease is subject to rent reviews based upon the Retail Price Index excluding Mortgage Interest Payments (RPIX) without any caps. The last rent review was 19th March 2022 at which time the rent increased from £255,664 per annum to the current passing rent of £306,391.14 per annum. The next rent review is on 19th March 2027 and five yearly thereafter.

Therefore, after deduction of the head rent an investor will benefit from a net income of £246,219.30 per annum.

Reversionary Income

Increases in the Travelodge income and the head rent are determined in accordance with the Retail Price Index excluding Mortgage Interest Payments (RPIX). (see here).

The Travelodge rent review is determined by reference to the RPIX figure last to be published before the rent review date of March 2027.

RPI will continue to increase between now and March 2027. Based upon the December 2023 figure the income will rise to a MINIMUM OF £356,917.13 per annum.

The head rent increase in April 2024 is also based upon RPI. Were a review to occur today, based upon the December 2023 figure the head rent would increase to £61,375.28 per annum.

Therefore, the net income available to a purchaser (based upon the above comments) will increase to AT LEAST £295,541.86 per annum.

Covenant

Travelodge’s latest financial results for H1 2023 were strong:

• Revenue up 22.4% to £478.7m
• RevPAR increased by 20.7% to £54.92m
• Average Room Rate up 15.5% to £66.48
• EBITDA up by £33.9m to £104.5m
• Occupancy up 3.5 pts to 82.6%

Plus, the company delivered record financial results in 2022, significantly ahead of its previous best year in 2019.

• Total underlying revenue up 22.7% to £669.9m (2019: £546.1m, 2021: £374.7m)

• Occupancy up 0.7pts to 81.5% (2019: 80.8%, 2021: 58.2%)

• Average room rate up 19.8% at £63.59 (2019: £53.08, 2021: £51.15)

• Revenue Per Available Room (RevPAR) up 20.8% to £51.80 (2019: £42.86, 2021: £29.76)

• RevPAR performance 10.8pts ahead of the competitive segment vs 2019

• EBITDA (adjusted) of £164.4m (2019: £102.2m, 2021: £43.7m)

• Cash of £221.6m at 30 September 2022

• 5 new hotels opened to date, including one Irish franchise

• Total network now 595 hotels and 45,624 rooms as at 30 September 2022

This performance reflected the strength and resilience of the UK budget hotel market which performed well in 2022, driven by strong levels of domestic leisure demand and a rapid recovery in ‘blue collar’ business demand, with a more gradual recovery in ‘white collar’ corporate demand.

The company’s Chief Executive, Jo Boydell, announced:

“Travelodge has delivered a record set of financial results, significantly ahead of 2019, driven by strong demand for our great value hotels as customers return to both business and leisure travel. Our purpose is to provide affordable travel for everyone and amid the growing cost of living pressures, we have seen that more customers are choosing to stay with us.

We have continued to outperform against the competitive segment, for the eighth consecutive year, and it’s particularly pleasing to see these trends continue in the first weeks of the fourth quarter. Our cash position remains strong, and we have continued to invest in the business whilst also further de-leveraging, with the term loan repaid in full on 26 October.

Looking ahead, we are very mindful of the cost-of-living crisis and are doing all we can to navigate the cost pressures on our business…the budget end of the hotel segment is the most resilient, with budget brands historically performing strongest in tough economic times. Travelodge, with its strong brand, diversified network of hotels and value proposition, remains well placed to deliver for customers and we are excited about the growth opportunities ahead.”

Travelodge Hotels Limited (Co. No. 0769170) has reported the following figures:

*The company was significantly impacted by the Covid-19 pandemic, with the majority of hotels closed for large periods since March 2020. As a result, the company proposed a Company Voluntary Arrangement (CVA) which was approved on 19th June 2020. The CVA formed part of Travelodge’s recovery plan, which included steps taken to (i) re-open its hotels once the UK Government restrictions are lifted, (ii) reduce operating and capital costs, (iii) raise additional funds and (iv) temporarily reduce rents paid to landlords.

The recovery plan offered the best approach to address the short-term challenges facing the business as a result of the COVID-19 outbreak and to secure the future of its more than 10,000 employees.

Unlike most CVAs, there were no proposed hotel closures or permanent rent reductions. Prior to the outbreak of COVID-19, Travelodge entered 2020 with a record level of cash reserves and delivered five straight years of strong growth, outperforming the midscale and economy sector and its peers.

The CVA has now been fully implemented and is now formally at an end.

In 1985, Travelodge became Britain’s first value hotel brand when it launched in the UK, opening its first hotel at Barton under Needwood in the heart of England. Travelodge is now the UK’s largest independent hotel brand, with more than 590 hotels and 40,000 guest bedrooms across the UK, Ireland and Spain.

Travelodge hotels can be found in the centre of major cities, including London, Edinburgh, Cardiff, Manchester, Birmingham, Belfast, Dublin, Barcelona, and Madrid; in most of Britain’s larger towns, as well as in the classic seaside locations and vital roadside stops (Source: www.travelodge.co.uk).

Hotel Market Summary

The hotel market has rebounded impressively since the challenges of the Pandemic, delivering a robust trading performance. The UK budget hotel market has performed strongly, with revenue as a percentage of 2019 levels ahead of the total hotel market, driven by the strong levels of domestic leisure demand and a good recovery in ‘blue collar’ business demand. In their “UK Hotel Market Update Q4 2022”, BNP Paribas Real Estate report that “trading performance continued to hold up with Revenue Per Available Room (RevPAR) outperforming 2019 levels. This was predominantly underpinned by continued robust demand allowing hotel operators to increase average daily room rates to new highs. Additionally, occupancy also continued to improve over Q4 contributing to overall performance. Average daily rates were c.23% higher in December 2022 compared to December 2019 (source: CoStar)”.

“International demand is expected to continue to drive RevPAR in 2023, when it is expected that London could record RevPAR growth of 24.5% y/y. In the regions, where demand can be more sensitive to GDP growth, RevPAR growth is estimated at 5.1% y/y (Source: PwC U.K. Hotel Forecast Nov 22).”

VAT

The property has been registered for VAT. It is anticipated that the sale will be treated as a Transfer of a Going Concern (TOGC).

Proposal

We are instructed to seek a figure of £2,750,000 (Two Million, Seven Hundred and Fifty Thousand Pounds), subject to contract, reflecting a true net initial yield of 8.4%, assuming standard purchaser’s costs of 6.42%.

The yield is already guaranteed to increase to no less than 10.10% at the rent review in March 2027, based on the current RPI figure.

Please note that a purchaser will be re-charged the costs of the searches (£1,658.31) and measured survey (£895 + VAT) which are provided in the data room.

Please note that a purchase will be charged a Transaction Fee of £10,000 + VAT.

Investment Considerations

1. An opportunity to acquire a purpose-built 69-bedroom Travelodge hotel;

2. In excess of 13 years, with a landlord option to extend by a further 4 years and 1 month;

3. Travelodge has reported record financial results for 2022 with EBITDA increasing to £164.4m (2019: £102.2m);

4. The lease benefits from uncapped RPIX rent reviews;

5. The property is well located, opposite Bradford Forster Square train station;

6. A purchase at the asking price reflects an attractive net initial yield and reversionary yield.