LXi REIT, the long income REIT, has exchanged contracts with Travelodge Hotels on a lease restructuring across all 122 hotels in the Secure Income REIT portfolio that became a poster child for the breakdown in relations between landlords and tenants over rents during the pandemic.

LXi REIT took on the portfolio via its merger with the Secure Income REIT business in May this year.

Travelodge's attempts to reduce its rent payments during lockdown, which were ultimately approved via a company voluntary arrangement, were a high-profile example of wrangling between private equity tenant owners and landlords over who should foot the bill for the damage done to the leisure sector. Secure Income REIT put the £300 million portfolio up for sale at one stage after it slated Travelodge's shareholders, the private equity consortium of Golden Tree Asset Management, Avenue Capital and Goldman Sachs, citing an unpalatable mix of being extremely well-capitalised and difficult to reach and negotiate with over payment.

The 12 Travelodge hotels which formed part of the LXi REIT portfolio have already been regeared or were new forward fundings.

It has now inserted caps and collars of 4% a year and 1% a year on the previously uncapped and uncollared retail price index rent reviews and converted the reviews to consumer price index +0.5% a year, to "future-proof them for the phasing out of the RPI by 2030". It has also extended the unexpired lease terms on the 122 Travelodge hotels by a weighted average of nine years.

This has the effect of extending the weighted average unexpired lease term to first break on the hotels from 19.5 years to 28.5 years and increasing the weighted average unexpired lease term of the total LXi REIT portfolio from 25.6 years to 27.3 years.

LXi REIT said the company’s valuer predicts the lease extensions will have a "material positive impact" on asset values and make the hotels more attractive to investors. The change in rent review profile would also make the rents more affordable over time and avoid becoming potentially over-rented versus market rents, it added, saying the new collars also provide uplifts in lower inflationary environments.

No rent-free periods have been granted and no rent reductions have been made, LXi REIT said.

It also said Travelodge is trading robustly, with 2022 already on track to be its most profitable year on record, LXi REIt said. Travelodge, like Premier Inn, tends to outperform during recessionary periods as both business and leisure customers are attracted to the low cost and value offered by the budget hotel brands.

"Green lease” terms have also been agreed.

The agreements include: sharing of energy, water, recycling and waste data; co-operating on the environmental, social and governance strategies of the landlord and tenant; and future-proofing the leases to ensure the landlord can enter the properties to make environmental performance improvements.

The measures are designed to enhance the company’s ESG reporting as well as the energy performance of the hotels.

LXi REIT and Travelodge have also agreed the “rent-smoothing” of the 122 hotels. This means that the individual rent levels have been "reset per hotel to best reflect the trading performance of each site". The total rent across the hotels remains the same, but has been “smoothed” on a site-by-site basis, to ensure that each hotel has a robust standalone rent cover, LXi REIT explained.

It said this is expected to "further enhance the value and investment attraction of the hotels".

Simon Lee, fund manager of LXi REIT Advisors, said in a statement: “We’re delighted to have worked so effectively with Travelodge to execute this material and accretive lease extension and rent-smoothing exercise, whilst inserting green lease provisions.

"This transaction is the latest step on our plans to unlock further embedded value from the merged LXi/SIR portfolio, following the earnings and NAV enhancing Merlin “income strip” transaction which completed in October this year.  Our expanded portfolio has defensive characteristics and further potential for value accretive asset management opportunities which we are also actively exploring. This will be supported by our proactive accretive recycling of capital and wide range of refinancing options to enable us to continue to underwrite our progressive dividend policy and deliver outperformance for our shareholders.”