Secure Income to maintain existing Travelodge CVA
By Josh White
Date: Friday 23 Oct 2020
(Sharecast News) - Secure Income REIT announced on Friday that, following a "thorough review" of potential strategies in relation to its Travelodge portfolio, it had determined not to exercise its break options to terminate the tenant's leases on those properties.
The AIM-traded real estate investment trust said it would maintain the current arrangements following the recent company voluntary arrangement (CVA), under which the leases of its 123 hotels portfolio remained in place on the same terms and conditions, with a short term reduction in rent.
Under the terms of the CVA, in 2021 Secure Income would be due to receive £19.8m of rent from Travelodge, and in January 2022 the rents would revert to the full contracted level.
Travelodge hotels represent about 19.6% of the company's portfolio value of £1.96bn, as at 30 June.
As part of the review, the board said it had discussions with several third party hotel operators in order to ascertain whether there were opportunities to enhance shareholder value in relation to the Travelodge portfolio.
The board said it concluded that Travelodge remained "one of the best in class operators in" the low-cost hotel sector, with the terms offered by any replacement likely to carry "unacceptable risks" for the company.
Travelodge had, for five years until December 2019, produced "consistently sector beating" earnings and revenue per available room growth, before the exceptional circumstances created by the Covid-19 pandemic led to the recent CVA.
As part of the process of exploring the company's options, Secure Income said it also ran a sales process where multiple bids supported the 30 June hotels portfolio valuation.
However, none of those offers reflected the potential for value recovery once the pandemic subsided.
As a result, and given the lack of certainty of outcome of those discussions, the directors said they decided not to pursue that option.
Constructive discussions had also taken place with Travelodge about restructuring its leases, which the company said would be considered on its merits in due course.
"We have carried out a thorough review of the options available to the company and are satisfied that Travelodge remains a market leading operator, albeit with ongoing capital constraints in the same challenging market facing all hotel businesses," said chairman Martin Moore .
"Its trading trajectory in the months following national lockdown illustrates how the best operators in the budget hotels sector should be the first to recover once the pandemic subsides.
"We are very alert to the challenges facing the industry but, with our hotels held at close to vacant possession value and with rents reverting to 70% of the previous full contracted amounts in 2021 and the full amount by January 2022, we believe that provided sufficient capital is made available, Travelodge should benefit materially as the economy recovers, as should Secure Income from any consequential yield compression."
Moore said Secure Income held uncommitted cash of £220m, and a net loan-to-value ratio of 35.3% as at June. with robust 'shock absorbing' debt covenants.
"Whilst there are clearly major hurdles ahead to jump over in the coming months, we take encouragement from the sense that we are more likely to be closer to the end of the pandemic than the start."
At 1230 BST, shares in Secure Income REIT were down 0.19% at 257.5p.
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