Foncière des Régions agreed to buy the portfolio of 14 UK hotels that formed part of The Principal Hotel Company from Starwood Capital for GBP858m.
The agreement will see the launch of the KImpton brand in the UK, with several hotels taking on the flag, including locations for London, Manchester, Edinburgh. There will also be an increased presence for InterContinental, the group’s upscale brands and its new upscale conversion brand.
The Principal brand may live on, with Principal Liverpool not included in the deal and FdR thought not to have made a decision as yet on the flag.
IHG’s awaited brand, principally focused on conversion opportunities, will, the company said, “capitalise on the significant opportunity IHG has identified to offer consumers an informal but ifferentiated experience in the upscale segment, whilst offering owners a strong return on investment. These hotels will provide high-quality representation for the brand in IHG’s largest market within the Europe, Middle East, Asia & Africa region, where it will initially be launched”.
The deal will see IHG take hotels onto its balance sheet, through managed leases. The structure will see the IHG retain a royalty fee, before rent payments, of an amount equivalent to franchise fees from existing hotels; pay rental amounts which are forecast to stabilise at £48m per annum in 2021, with inflationary increases thereafter; fund any shortfalls in rent payments up to an annual and cumulative cap on losses of around GBP16m and GBP48m respectively at stabilisation; and retain a share of profits after rent payments.
The group said that by 2023, these properties were expected to generate over GBP200m of revenue and mid-single digit operating profit for IHG. It is expected that in the remainder of 2018, these properties will generate total revenues of around GBP £75m and will be operationally breakeven from an operating profit perspective during the transition period.
Speaking to analysts, Edgecliffe-Johnson said: “This will establish IHG as the leading luxury hotel operator in the UK with more than 2,000 rooms in this valuable segment. This portfolio deal will also strengthen our upscale presence in the UK, allowing us to quickly establish a position for our soon to be launched new upscale brand.
“This brand will capitalise on the significant opportunity IHG has identified to offer consumers and informal but differentiated experience in the upscale segment, what offering owners a strong return on investment by converting unbranded hotels.”
The comments were made as the company reported a “strong start” to 2018, with first-quarter revpar up 3.5% and net rooms growth of 4.3% year-on-year, bringing the total system size to 800,000 rooms.
The group added 8,000 rooms to its system, up 16% year-on-year and removed 6,000 rooms. It signed 20,000 rooms or 146 hotels into its pipeline, commenting that this made the quarter its our strongest signing pace for 11 years. Total group pipeline stood at 252,000 rooms at the end of the quarter, with the CFO adding: “With our share of the active global industry pipeline at three times our share of open rooms, we are set up well for future organic growth”.
The comments came as Vivion Capital Partners acquired Project Ribbon, a portfolio of 17 Holiday Inn hotels and three Crowne Plazas in the UK which Apollo bought in 2015 for GBP1bn (at which point it also included the Holiday Inn Kensington Forum and Holiday Inn leasehold in Mayfair, since sold for GBP400m). The vehicle, which is part of Dayan, an Israeli-based group, paid GBP742m for the package, which included the Holiday Inn London Bloomsbury and Holiday Inn Regents Park. All the hotels were long-leasehold and freehold.
The deal marked a gathering pace for the return of CMBS in the hotel sector, with the deal financed with a GBP449.8m senior loan priced at 3.19% over three-month LIBOR,and a five-year GBP69.2m mezzanine loan extended by Goldman Sachs. GBP427.31m of the senior loan was securitised against the portfolio.
The deal included Lapithus Hotels Management UK. It was not known whether the hotels would retain their branding.
HA Perspective [by Katherine Doggrell]: You don’t have to read too closely between the lines here at Hotel Analyst in recent weeks to gauge that IHG hasn’t really been holding our attention too keenly. Blame the MTV generation and too much exposure to MSG, but steady organic growth is not the stuff of headlines. Shallow, we know.
This agreement with FdR is interesting not only because it gives us a potential site for the conversion brand – we withhold the right to excitement on that until later in the year – but because it marks the beginning of a beautiful friendship between FdR and IHG – the French group choosing to make its debut with the UK-based group rather than with longterm partner AccorHotels.
The UK remains the one European territory where AccorHotels has yet to stamp its mark, with just over 150 hotels, at the time of writing, against more than double that, at 326 for IHG.
It would seem to make sense to use an operator which knows the territory – even if some of the brands are untested within it – and one is left to wonder whether, should FdR like what it sees, IHG has found itself a partner which could help with its own mainland European ambitions.
Posted on behalf of Hotel Analyst.