REPORT FROM THE UNITED KINGDOM—One of the United Kingdom’s two budget hotel giants, Travelodge, has asked its landlords for rent reductions and said it might have to undergo a process called a company voluntary arrangement, or CVA, according to sources.

The hotel firm, owned by Goldman Sachs and New York City hedge funds GoldenTree Asset Management and Avenue Capital, was founded in 1985 and has 589 hotels, most in the U.K.

The company has said if landlords do not reduce rents through December 2021, it is likely to pursue a CVA, and could close or remove its brand flag from underperforming hotels or those which do not agree to its terms.

Travelodge released the details of its CVA proposal late on 3 June, in which it proposes a “schedule of differing rent levels, with some hotels receiving full rents and the majority receiving a temporary reduction in the rent payable covering the period between April 2020 and the end of 2021.”

Under the proposal, all hotels would “return to full contractual rents in 2022,” the company said in its statement.

It added no hotels will close and that “the best way to preserve (Travelodge’s) liquidity position is to temporarily reduce its rents payable as rent payments are (our) largest cost at around £215 million ($269 million) per annum.”

The document states:

• “Landlords will be paid £230 million in rent, being approximately 62% of the contracted sum due …
• “77 leases will receive their rent in full (and) …
• “94% of leases will receive at least 50% rent through to the end of 2021.”

Landlords, the largest of which is London-based publicly traded real estate investment trust Secure Income, will now consider whether to accept or reject the proposal.
Speaking to Hotel News Now before the 3 June CVA announcement, sources were skeptical of a plan they had yet to see.

Sandy Gumm, COO of Prestbury Investment Partners Ltd.—the ownership vehicle of Secure Income—said he along with other landlords were waiting to see the details of the plan.

In a statement, Secure Income said it was “extremely aware of and sensitive to the challenges facing so many businesses today in this unprecedented pandemic,” but that “Travelodge has over 580 hotels with more than 44,500 rooms and recently reported record earnings of £129.1 million ($161.8 million) with net debt of (circa) £311 million ($389.9 million).”

“It is owned by large, multinational investment businesses,” the statement continued. “In light of this, Secure Income REIT plc has already reluctantly initiated actions to recover this debt, but remains hopeful that this matter can still be settled prior to those options being fully pursued."

Prestbury owns 123 Travelodge assets with an annual rent of £28.3 million ($35.5 million), as of the end of December 2019.

While there are a few larger landlords in the Travelodge ownership stable, most landlords are small, according to Viv Watts, managing partner of Oasis Holding, who owns two Travelodge properties.

This spring, Watts formed the Travelodge Owners Action Group, which he said is the first time the chain’s fragmented ownership base has been brought together.

“Effectively, (Travelodge) is trying to force a CVA through,” Watts said. “We know that inevitably many sectors are going to take a hit, some pain, but what they are trying to do, unjustly, is to have landlords take the losses so that its shareholders are not impaired.”

He said that TOAG has not received any disclosure as to Travelodge business operations, despite the brand posting strong 2019 performance in a resilient sector that is expected to bounce back first with domestic travel as the pandemic impact subsides.

Watts, a former investment banker turned developer, said GoldenTree also is an investor in British retail chain Debenhams, which went through the CVA process in 2019. The chain of department stores currently is looking at scenarios to carry on its business.

Watts said a CVA would undermine the legitimacy of long-term leases, many of which are owned by pension companies, some of which are managed by REITs.

“Offshore private equity is using break options. They want us to write it off,” he said.

Watts claims he has organized the vast majority of Travelodge’s landlords, with the TOAG looking at potential liaisons with alternative hotel-management companies and brands.

“There are 10 substantial institutional landlords and more than 100 individual landlords. We have sufficient support to refuse (Travelodge) the opportunity of a CVA, so they will have to think of other options. They had a record (2019), and with one little hint of down-trading, which we knew would happen,” Watts said.

TOAG sent a restructuring proposal to Travelodge on 11 May but was told it was not sufficient to Travelodge’s needs in 2021, Watts said. The action group replied on 22 May and is awaiting response.

Watts said the landlords are optimistic, indicating to Travelodge they would be prepared to write off rents for the quarter in return for equity, but that a CVA would affect its right of forfeiture.

“A huge number of landlords are saying they’ll do (a CVA) again and it might be better to go to an operator who will respect the leases and contracts. We’re in discussions with operators,” Watts said. “Travelodge is not a company in distress. The proposal was put to us barely two weeks into lockdown.”

Watts said he estimated the quarter’s rent might have been approximately £50 million ($62.7 million).

“I understand the private equity and distressed-debt side well. If their value (goes) to zero, the bond holders get paid first. I think that is reckless and risky, and if (Travelodge does) care about the company, this process will be calamitous and no one will trust their credit,” he said.

Watts also said TOAG had offered a 20% reduction of second-half 2020 rent, in addition to a deferral of six months to be paid back in three years against profits.

“This is all goodwill, and we feel they have not shown any in return. I have two, with debt on my hotels. I feel I am representative,” Watts said.

Watts added he expects his landlord group would be able to secure £100 million ($125.4 million) in equity from numerous operators and hotel-management companies.

“There would be new options and, of course, different categories of landlord, but there also would be no exposure, just rent and zero debt. It would be better capitalized,” Watts said. “A few (landlords would) want leases, others management with the upside on the good years.”

He added he started a simple landing page when he felt he was being kept in the dark.

“The lockdown likely is only for one quarter, so this is blown out of proportion,” Watts said. “If we do not get the chance of forfeiture, it will be time wasted, but this might be a once-in-a-Travelodge-lifetime opportunity to do something different. (Travelodge) is not the only option in town.”

Watts said he has been in discussions with all the relevant owners about new possibilities.

Secure Income said its Travelodge income comprised 6.4% of its overall annual income.

Real Estate Diversified Income, or RDI, is another REIT that owns Travelodge five properties. In its 2019 annual report, RDI stated those assets brought in £2.4 million ($3 million) in annualized gross rental income.

RDI, which owns 27.4% of hotel-management firm RBH Hospitality Management, told HNN it had no comment on the issue, while Travelodge itself did not return requests for comment.

Simon Thomas, a London-based partner in legal firm Goodwin financial restructuring team, said “up until this point, the vast majority of CVAs only reduce payments to landlords and no other creditors” and “statistically 50% of companies that implement CVAs subsequently go into administration.”

“A CVA will right-size the business with its outgoings in the short term, but CVAs do not address underlying operational issues, which is why so many CVAs fail,” he said.

Thomas said with so many CVAs failing, their use has not prevented the demise of several high-profile retail and casual-dining businesses in the U.K. that were underperforming.

Travelodge’s previous CVA in 2012 is viewed by some as one of the few high-profile examples of a successful CVA. With debt of approximately £500 million ($626.9 million), Travelodge did enter a CVA arrangement, bringing in Goldman Sachs, GoldenTree Asset Management and Avenue Capital.

Then, 49 Travelodge hotels were closed and rents were reduced over a three-year period at 109 of its properties.

The U.K. chain’s finances in late 2012 included approximately £75 million ($94 million) of new capital, £55 million ($70 million) capital expenditure, £235 million ($294.7 million) of bank debt written off and £71 million ($89 million) repaid.The CVA process would enable the company to shed its underperforming hotels, Thomas said.

“To use a CVA, a company needs to be in financial distress and show underperformance,” he said. “The accountants look at the operating model, identifying which hotels by geography are the most profitable over a 12-month cycle, taking into account seasonality, and those that are loss-making.”

He said before the crisis Travelodge’s owners would have put in investment and capital expenditure, but now COVID-19 has likely resulted in breaches of banking facilities that put Travelodge in the spotlight of its lenders.

Those lenders, he added, have agreed to provide Travelodge with a financial covenant holiday until 30 June 2021, provided it enters into a compromise or CVA with its landlords.

The U.K. financial restructuring tool—instigated in the 1986 Insolvency Act and mostly used in relation to retail and casual-dining businesses —generally leaves all creditors other than landlords unaffected, although that might change due to the COVID-19 crisis, Thomas said.

“Landlords will say, if the pie has shrunk, why should it be only the landlords whose slice of the pie gets smaller?” he said.

Landlords could also point out that Travelodge’s backers are quite financially stable. In Travelodge’s latest quarterly earnings numbers dated 31 March, the hotel firm reported total revenue of £129.5 million ($162.3 million), down 10.8% year-over-year; earnings before interest, tax, depreciation and amortization of £40.2 million ($50.4 million), down £13.3 million ($16.7 million) in the same period; and cash reserves of £141.3 million ($177.1 million).

“It is all about compromise, as there is not enough money to pay liabilities,” Thomas said. “All of the government measures so far, with the exception of the furlough scheme, merely delay liabilities and do not cancel them.”

He said in the U.K., many hotels are preparing to open, and if able to bounce back immediately, may only require a restructuring of unpaid lockdown debts.

“However, these debts need to be addressed at the same time that hotels will likely face reduced and uncertain turnover during the recovery period,” Thomas said. “As lockdown measures are relaxed, hotels are having to reassess their future business plans without any certainty as to how long social distancing measures will be enforced and when a vaccine will be available. Indeed, the government has suggested that lockdown measures could be reimposed on a regional basis where spikes in COVID-19 cases occur.”

CVAs can have a ripple effect on other business partners, Thomas said.

“Looking forward in a situation where there has been no income for 10 weeks, it is likely that we’ll see CVAs being used to compromise more creditors than just landlords,” he said. “Key stakeholders who may not have been paid include suppliers, employees, (Her Majesty’s Revenue and Customs) and lenders.

“All stakeholders are likely to be asked to compromise in relation to some of the money they are owed. In exchange, those stakeholders will expect the current shareholders and investors to ensure that sufficient capital is available in order to enable the business to trade through and out of the crisis.”

Thomas explained why Travelodge might consider a CVA necessary.

“With almost 600 hotels, it is impossible for Travelodge to enter into individual compromise agreements with all of its landlords. Provided the consent thresholds are met, all landlords are bound in,” he said.

Thomas said a vote of at least 75% in favor is required to pass the CVA (by value of debt), and this includes any votes by proxy or post. However, the results of the vote will be calculated without “connected” creditor participation, which means if 50% or more vote to accept the CVA, it will pass.

Travelodge stated a vote on the CVA proposal is scheduled for 19 June.

Thomas said a typical CVA would split properties into three categories: 

• untouched by the CVA terms,
• underperforming sites that could be made viable by reduced rents of between 20% and 50%, and
• unprofitable sites that the company wishes to exit.

The proposal would be prepared in conjunction with an insolvency practitioner, who would provide an estimated outcome statement (EOS) to creditors.
“The EOS will illustrate the potential returns to creditors depending upon the outcome of the vote,” Thomas said. “For example, the EOS will provide an estimate of potential returns should the CVA be approved. It will contrast this with likely returns should the CVA not be approved and the company has to enter into either an administration or liquidation process.”

He added that “insolvency practitioners will look at things from a Travelodge corporate level only, from cash flows and investment levels, not from that of investor.”

Correction, 9 June 2020: This article has been updated to remove one of Simon Thomas' quotes for relevance.