Valuers face yoyo challenge

Hotel leases continue to face a number of challenges, as landlord and tenant and tenant negotiate their way back to a situation where all can pay their way once more.  

The cashflow shock of the pandemic has led to lease payments being renegotiated temporarily, and to some leases being more substantially renegotiated. In not all cases have those agreements been concluded, leaving a potential overhang of disputed claims and counter claims that have yet to work their way through.  

Also in the mix is the Travelodge portfolio, the largest grouping of leased hotel assets. Travelodge forced landlords to agree a grouped revision of lease terms in three tranches, leading to temporary rent reductions for many. Some leases were lengthened in return, while others had sweeteners such as break clauses added.  

Leases need to be valued on a regular basis, for company accounts, and the challenge for those with the valuation task, is working out impairments around the cashflow shocks of the last 18 months. There are also the challenges of working out current market values, when directly comparable deals have not been executed on the open market.  

Nervous valuers worry about whether banks will make a move, against property loans that may currently be in default, triggering sales. They will typically consider the vacant possession value of a property, should a tenant default and the brand be lost; and in high demand, difficult to access markets such as London, that VP value could be higher.  

Tim Stoyle, head of hotel valuations EMEA at Savills, notes that the challenge for valuers has been not just the losses during the pandemic, but the uneven return of business, with enforced staycations moving demand around the continent in unusual ways. “The challenge for a valuer right now, is how long the unusual market conditions will continue. The regions have been surprising buoyant, and there are swathes of the market that are overperforming at the moment.”  

In contrast, hotels in London are seeing a slower recovery of business, as business travellers are only now starting to return. “One thing we are clear on, is there is no uniformity. It is crucial to look asset by asset.”  

In addition, the market upset has shone a light on those hotels that are overrented. But Stoyle said most hotel leases today are generally negotiated with index-linked rent rises, as opposed to older property leases with five yearly rent reviews that were upwards-only.  

Will Kirkpatrick, head of hotels and extended stay at Gerald Eve, advises many landlords on asset values. He said that the big issues for many valuers are around the Travelodge and Premier Inn portfolios, which between them hold a major volume of leased hotel properties in the UK market.  

“There are no Travelodge transactions that anyone can hang their hat on.” He noted that some properties had simply been bought by investors for income, without longer term considerations of issues such as residual values, refurbishment costs, or alternative tenants or uses.  

One Premier Inn property in the Norwich area has sold in recent months, for a 4.08% yield: “That’s an example of the amount of money in the market. But we still need to see the first Travelodge sell.”  

Stoyle, who advised on the Travelodge CVA and reasonable market rents at that point, agrees: “What we’ve seen since the CVA is a complete lack of transactions.”  

A Travelodge in Tolworth, southwest of central London, is currently being marketed. However, that site is wrapped up within a mixed-use project, making comparisons tricky. And a second Travelodge hotel, in Edinburgh, may well be on the market shortly, as landlord Mansfield District Council weighs the option of a residential conversion instead. Travelodge, which has a lease renewal at the end of 2021, has offered a softer rent at renewal, effectively reducing the valuation and leaving council bosses to consider an alternative future for their asset.  

While there have been no sales, there have been losses for Travelodge. Landlords of a handful of Travelodge sites opted to break their leases with the operator, and sign instead for a new package with Accor-backed Ago Hotels, which has seen their sites rebrand under the Ibis flag.  

For tenants, Kirkpatrick says there have been several options to offer landlords, including longer lease terms in return for short term rent reductions, or perhaps an adjustment to future rent uplift, such as a relinking of rent rises to a different inflation index, giving the landlord the likelihood of a higher future yield. He has worked with aparthotel operator Staycity, looking at ways to manage their commitments. “That’s worked really well – Staycity have been very open with their landlords.”  

But not everyone has been so transparent. Stoyle warns that the coming months, when a moratorium on landlord action ends, could trigger some decisive moves: “There’s a great deal of frustration that landlords have not been able to take action.” And with business rates and VAT relief ending, “there will inevitably be some people who will have a struggle.”  

HA Perspective [by Andrew Sangster]: What is the value of a lease? There are two answers: one for landlords and one for tenants. And, all else being equal, they have an inverse relationship: landlords succeed by squeezing the most rent and tenants succeed by paying as little as possible. 

It is looking increasingly that this is not a helpful state of affairs for either party. There are lots of noises about wanting to create “win-win” relationships between tenants and landlords but a lose-lose is sometimes the outcome too when landlords have over rented and otherwise viable tenants are booted out, causing rent voids. 

One answer is to create a mutually dependent relationship, most obviously via turnover or profit related rents. But this is not always possible and it is usual for caps and collars to be put in place that result in distorted outcomes when there are unprecedented events such as the lockdowns during Covid. 

Where assets have a straightforward recovery in prospect, the challenge for landlords is smaller. An example is the Qbic London City, which has just been sold to Great Portland Estates with RBH put in as the operator. The agent in the sale, Christie & Co, said it had received 75 NDAs and had to hold two rounds of bids to reach its final deal. 

More interesting, however, is what happens to assets that have a less clear recovery prospect. The valuation report for GLH, the 15-strong chain of upscale London hotels, that was conducted in February this year and put on the parent group’s investor relations website does not make for happy reading regarding some assets. For example, the Hard Rock Hotel was given a negative market value of GBP31m and the Thistle City Barbican was listed as minus GBP33.6m. Ouch. 

Landlords of properties like these face a choice of either pursuing the tenant for any arrears and future rent, risking the cost and potential failure of legal action, or reaching a reasonable accommodation on the way forward where the pain of the current downturn is more mutually shared. 

Any landlord that is willing to take on pain should expect a share of any upside, meaning that fixed leases are unlikely to offer much of a solution. Something more creative is clearly called for. 

In the specific case of GLH, it will be an intriguing outcome. GL Limited, the previously Singapore-listed parent, has been taken private and absorbed within the Guoco Group (which already owned 70% of the business). 

In the six months to the end of December 2020, GL lost USD19.8m compared to a profit of USD26.9m for the six months a year earlier. In the previous full year, to end of June 2020 there was a loss of USD26.7m. 

Guoco has the resources to revive the GLH business. It may take the view that the existing leases will be OK once trading picks up, writing off the current bleak period. Or it may revisit some agreements in an attempt to create a more mutually beneficial outcome for tenant and landlord. 

 

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