Travelodge, the UK budget hotel brand that operates nearly 600 hotels, has exchanged contracts to buy 66 branded hotels on a freehold and long leasehold basis from its largest landlord, LXi REIT, for £210 million.
The portfolio includes hotels in London, Birmingham, Bath, Leeds, Liverpool, and roadside locations. The sale comes three years after a high-profile spat between Travelodge's private equity owners, a consortium of Golden Tree Asset Management, Avenue Capital and Goldman Sachs, and its landlord over rent payments during the pandemic.
Travelodge is now working through a hotel refit programme with plans to upgrade approximately 50% of the room estate by the end of 2024. The programme includes a new hotel design featuring a reception area, "next-generation" rooms with bedside charging ports and blackout curtains and upgraded bar cafes.
Jo Boydell, chief executive of Travelodge, said in a statement: “The acquisition of 66 Travelodge hotels from LXi REIT, with support from our owner GoldenTree Asset Management, will mark a positive step for Travelodge as we seek to optimise our hotel portfolio and diversify our freehold/leasehold split to enhance value. The new structure will provide us with a platform to explore further freehold acquisitions. We have nearly four decades of expertise in operating budget hotels and we look forward to continuing to invest in our hotel network to drive growth."
Boydell said the group looked forward to continuing to work with LXi, which remains its largest landlord at another 69 Travelodge hotels.
Simon Lee, chief executive of LXi REIT Advisors, said the sale price is in line with the latest book value.
"Most of the sale proceeds will be used to pay down debt, reducing group LTV to 34%, and Travelodge’s proportion of group rent will reduce to 11%. The sale and debt repayment are not expected to have a material impact on the company’s earnings.
The transaction comes after Travelodge reported record-breaking third-quarter financial results in November 2023, with double digit revenue growth of 16.7% to £782 million and underlying earnings up 22.4% to £201.2 million.
The group said it is targeting over 300 more locations following a comprehensive review of gaps in the market and will continue to review extension opportunities across its existing estate. It has established a profitable market presence in Spain, operating six hotels including its third in Madrid which opened last year, and has identified 20 target locations across the country.
The transaction is expected to complete on 28 February 2024. The purchase price for the transaction is expected to be funded through a combination of a further shareholder investment from Golden Tree, the proceeds of a third-party financing facility secured on the assets acquired in the transaction, and approximately £35 million of cash from Travelodge. The newly created property holding group that will acquire the assets will be held by a newly formed parent company of Thame and London and will not guarantee or be subject to the covenants under the existing Travelodge senior secured notes due 2028.
At the end of last year LXi REIT, the long income REIT that is in merger talks with LondonMetric, said it had exchanged contracts with Travelodge Hotels on a lease restructuring across all 122 hotels in the Secure Income REIT portfolio, which had become a poster child for the breakdown in relations between landlords and tenants during the COVID-19 pandemic.
LXi REIT took on the portfolio via its merger with the Secure Income REIT business in May 2022.
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 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 lease restructuring saw LXi insert caps and collars of 4% a year and 1% a year on the previously uncapped and uncollared retail price index rent reviews and convert the reviews to consumer price index plus 0.5% a year, to "future-proof them for the phasing out of the RPI by 2030". It also extended the unexpired lease terms on the 122 Travelodge hotels by a weighted average of nine years.