Reits ride out the storm

UK listed Reits invested in hotels are weighing up their decision to continue backing the sector, and tenant Travelodge, as they eye up further acquisitions.  

Both Secure Income Reit, and LXi Reit took a major income hit through 2020, as the Travelodge CVA was approved. At Secure, the loss was GBP14.4m in rent foregone for 2020, and a further GBP8.6m for 2021.  

At LXi, which holds a smaller portfolio of a dozen Travelodge assets, some of which are still under construction, the hit was smaller and the company negotiated a return to full rents on some sites from the beginning of 2021. There would be a 4.6% reduction in 2020, and 2.9% in 2021, the company reported. Overall, Travelodge represents 8% of rental income, with the hotel portfolio also featuring sites rented to Whitbread’s Premier Inn, and Jury’s Inn.  

Both businesses have the potential to claw back further income from the Travelodge operating business, dependant on the strength of future performance.  

Secure’s current portfolio has a major investment in hospitality and leisure, through a portfolio of 123 Travelodge hotels, and theme and leisure park assets operated by Merlin Leisure. Its rental income is split roughly one third Merlin, one third healthcare assets rented by Ramsay Health Care, with Travelodge a little less than one third; while there are also minor holdings in other leisure businesses.  

While full year 2020 earnings per share were considerably down due to property revaluations, Secure’s dividend dipped only slightly to 15.7p, compared with 16.3p in 2019. Chairman Martin Moore commented: “The Covid-19 pandemic has created significant challenges for our leisure and hospitality tenants, which has in turn had an impact on the company’s results, particularly in the first half of the year.  The support we’ve been able to provide to occupiers should aid the resumption of their strong performance track record once the effects of the pandemic diminish.” 

The impact of rent concessions was a 10.5p per share loss, though Sandy Gumm, COO of manager Prestbury, noted: “Had we spread the impact, on an IFRS basis….we’d be showing something like a less than 1p a share impact for the next 20 years.” 

Gumm said the company will see its Travelodge rents revert to normal levels from January 2022, while it expects a strong recovery in its Merlin business during 2021, as leisure is allowed to reopen.  

Mike Brown, CEO of Prestbury, which manages the Secure holdings, noted the portfolio valuation fell by 6.5% during the year, driven by a 20.3% fall in the value of its Travelodge hotels, as a result of the operator’s CVA. Leisure assets fell 6.9% in value during the year. 

He said that valuations were modest, and hobbled slightly by a lack of transactional evidence in the market. “We think our current valuation is conservative, as it reflects only GBP58k per room, which is 80% of replacement cost.”  

In contrast with Secure, LXi already has a more diversified portfolio. The mix includes 21% industrial, 21% budget hotels, 20% foodstores and essentials, 13% healthcare and the balance in car parks, pubs and drive through coffee sites.  

In half year results declared in November 2020, LXi saw its hotel and leisure assets downvalued by 7.7%. Six month operating profits at GBP17.6m were ahead of the GBP13.9m for the same period a year earlier. 

LXi has already gone on the offensive, spotting market opportunities in the wake of the pandemic. In February, the company said it intended to raise GBP75m, to leverage up and spend GBP140m on a pipeline of assets. These would include “foodstores, industrial, drive-thru coffee and garden centres”. Strong demand for the shares led to the fundraising being expanded to GBP125m.  

LXi chairman Stephen Hubbard commented: “The proceeds of this fundraise will allow us to capitalise in short order on the significant identified pipeline of additional assets diversified across a range of defensive and structurally supported sub-sectors and let to high-quality tenant covenants. These are expected to be accretive and further strengthen and diversify our portfolio.”  

Nick Leslauchairman of Prestbury Investment Partners, gave an insight into considerations around the Travelodge CVA at Secure. “At the time that we managed to negotiate the landlord break clause, we looked at many different operators that came forward – and there were many of them.” Landlords “came pretty well to the conclusion that the other big operators in the sector were not going to be able to deliver the same sort of margins off the same cost base that Travelodge actually deliver, because they are an incredibly efficient organisation. So it wasn’t a very difficult decision…. we decided they were the best alternative.”  

He also added that he saw the current Travelodge valuations as simply too low. “I don’t think personally those levels are going to last for very long, it doesn’t make any sense that you have these hotels trading at below construction cost, and the land is free.” 

Brown said the company is looking at further investment opportunities this year, with a medium term aspiration to diversify the portfolio, and improve liquidity. Leslau added: “We are starting to see things that are starting to look interesting – but we’re not out of the lockdown yet.” 

Secure’s big commitment to Travelodge has put it under pressure to better balance its portfolio. Numis analyst Ewan Lovett-Turner commented recently: “We would expect management to take the opportunity to broaden its roster of tenants, indeed we believe it will be essential for the future investment case.” 

And it is diversification that has helped French Reit Covivio weather the pandemic. In February, it reported a solid performance with revenues for 2020 up 1%, with offices and residential, which make up 85% of the portfolio, offsetting a weak year for the 15% of the portfolio in hotels. Covivio shared the pain for hotel operators by agreeing to rent deferrals or rentfree periods – albeit in return for an average threeyear extension to leases.  

HA Perspective [by Chris Bown]: Comparing these two UK listed Reits gives a great opportunity to see how diversification, both across sectors, and across tenants within a sector, can have an impact. Both have been hit by the Travelodge hard ball, one much less than the other, not least due to its broader base. 

The LXi formula looks strong, with investors keen to plough in more cash, confident the team will find more suitable property assets to buy. All eyes will now be on Secure, to see what they can come up with to grow and balance the portfolio. Short term, that’s probably not going to be hotels.  

One other big opportunity for Secure is that of reducing the cost of its debt, currently much higher than its peer. However, as we note elsewhere, that may be a shortterm challenge, as mainstream banks sit on their hands. But with a staycation summer beckoning, there will be hopes the Travelodge business gets racing away again – giving lenders greater comfort.  

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