Budget battlers brave it out

Budget brands Motel One and Travelodge are preparing for a better 2021, having battled their way through months of lockdowns.  

In Germany, Motel One has had to tough it out with precious little in the way of support from government. Instead, it has had to rely on the forbearance of landlords across its predominantly rented portfolio, and the support of longterm investors, as it declared the first loss in its history.  

Meanwhile in the UK, leading budget brand Travelodge is now well known for having deployed a CVA, to strong arm landlords into rental concessions. The move, which in the moment surprised many in the sector, and caused some collateral damage, may now be viewed as a pragmatic solution for the brand, which operates entirely from a leased portfolio of hotels.  

Motel One saw 2020 sales fall by 63%, to EUR209m, pushing the company to a EUR102m loss, the first in its 20year history. The group recorded an average 28% occupancy, against 77% for the previous year. This fell to just 13.9% in the fourth quarter, as several European markets were subject to Covid-19 lockdowns – leading to an ebitda loss of EUR30m for the period.  

The company lost out on government support, being ineligible in Germany, apart from a potential retrospective sum for November and December, which has yet to be granted. In Austria, authorities there provided EUR4m of state assistance.  

Currently, the brand has 75 hotels in its portfolio of 21,000 rooms. Alongside an extensive presence in its home German market, there are seven hotels in the UK and in Austria, two each in Switzerland and the Netherlands, plus hotels in Brussels, Barcelona, Paris, Prague and Warsaw.  

The group has been modest in its view of the pace of market recovery. “Our assessment assumes that we will only return to the trevpar level of 2019 in autumn 2023,” it said in its latest quarterly review. “The hotel industry was a successful sector with promising growth prospects before coronavirus and will remain so after coronavirus.” 

The group has maintained sufficient liquidity to face the coming months with confidence, and is planning to open six new hotels in 2021, adding 2,300 rooms. The 2021 pipeline includes a third hotel in Manchester, UK, with German additions in Cologne-Messe, Nuremberg-Hauptbahnhof, Hamburg-Fleetinsel and Stuttgart-Hauptbahnhof. In addition, there will be a Dutch addition in Aachen. There are a total of 27 hotels in the confirmed development pipeline.  

Motel One’s portfolio has six owned properties, with the balance of largely flexible rental deals, and some fixed leases. The pipeline has six more directly developed sites, with a further 21 developed by external investors.  

The group managed to buttress its cash reserves by stopping dividend payments, and was fortunate to have agreed a sale and leaseback deal in 2019 that enabled the group to pay down EUR32m of debt.  

Ahead of the pandemic, in August 2019, the group’s early investor Morgan Stanley sold its 35% interest in the company, held via its special situations fund. The deal saw Proprium Investment Partners taking on the stake, for an undisclosed fee. For Proprium, the deal was a follow-on investment, as it had earlier backed Motel One via an interest in a previous Morgan Stanley fund in 2007. Proprium has several hospitality sector investment interests, including stakes in Admiral Taverns in the UK, and Dutch serviced apartment operator Yays 

At Travelodge, with a larger but almost entirely UK oriented portfolio, revenues fell 61% in 2020, to GBP284m, resulting in an ebitda loss of GBP74m.  

The group’s enforced CVA led to a GBP78m reduction in rents for 2020, down 37.4% on previous levels and leaving a net rent cost of GBP130.8m for the full year. The loss of a handful of hotels, as landlords exercised their right to tear up leases as permitted under the CVA agreement, was offset by new openings, leaving Travelodge with 571 UK hotels at the year end, plus 5 in Spain and 10 in Ireland. For 2021, the company expects to open 17 hotels.  

The company finished 2020 with GBP136.2m of cash on hand. In December 2020, Travelodge raised GBP65m with a private placement of senior secured notes. The paper has a 2025 maturity, a 9% coupon and was issued at 96% of face value. This followed the November announcement that a GBP60m revolving credit facility had been refinanced, while shareholders committed to add a further GBP30m of equity funding into the business.  

As of the beginning of April, Travelodge had around 400 hotels in the portfolio open, and reported revenues of GBP3-3.5m per week, from occupancy levels compromised by the UK government restriction on leisure travel; net cash had diminished to GBP120.9m, before the second quarter rents had been paid. Compared with its peers, the company said hotels were outperforming; and every 1% improvement in revpar feeds through to a growth of around GBP6m per annum in profits.  

HA Perspective [by Andrew Sangster]: The results from these two large privately held economy chains show a number of things. Perhaps most remarkable is the resilience of these businesses, given that both are predominately leased with substantial fixed overheads. 

Travelodge gave figures for operating costs for 2019 that showed 47% were rent and other property costs23% were wages and 30% other costs (of which 60% were variable). In 2021, thanks to rent reductions and business rate holidays, the weekly run-rate for operating costs is between GBP8m and GBP12m (which shows how being open in the current environment is still loss making).  

There should be no mistake: this has been a torrid year. Only by slashing capex and taking drastic action such as the CVA, has Travelodge survived. But remaining in the game has been critical and ensures that Travelodge is still the UK’s second biggest hotel brand by room numbers. 

The future is going to remain tough given capital constraints. Analysts at HSBC reckon that on a per room basis, Travelodge’s capex is around 80% lower than Whitbread’s, which owns its bigger competitor Premier Inn. The differential on capital spending should give Premier Inn the edge during the recovery and lead to significant outperformance.  

Since the summer, Travelodge says it has been outperforming its midscale and economy rivals by 10 percentage pointsRevpar in the current lockdown has been in line with that seen during the November lockdown. 

As hotels reopen properly to all guests, the challenge for Travelodge will be in ensuring it continues with a strong comparative performance. The under investment in refurbishments will make this challenging against better capitalised rivals but it might still pick up market share as even harder hit independents exit the market.  

It is hard to see anything other than a significantly more consolidated hotel market in the post-Covid landscape. 

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