Skift Take

Major hotel companies are swooping into the negotiating room for a deal with Travelodge's UK landlords because they represent the most durable line of business in the volatile industry at the moment: economy, drive-to properties.

Global hotel companies are in negotiations with the leading ownership group of a UK-based economy chain to change flag affiliation. If talks result in a deal, it could end up being the first major hotel transaction resulting from the coronavirus pandemic’s downturn in travel.

The Travelodge Owners Action Group, an organization representing the landlords of more than 400 of the 580 Travelodge — no relation to the Wyndham-owned Travelodge — hotels in the UK has been in a tense rent battle with the economy hotel chain since the pandemic forced hoteliers to suspend operations. UK hotels were only able to reopen to non-essential travelers on July 4.

Travelodge, owned by Goldman Sachs as well as hedge fund groups GoldenTree Asset Management and Avenue Capital Group, didn’t pay a round of quarterly rent due at the end of March, citing the tanked demand in travel led to lost revenue. The hotel company, which operates the hotels and pays rent to the landlords — who are responsible for keeping the real estate up to brand standards — has since worked out a deal with creditors for reduced rent with individual landlords through the end of 2021.

But the rent reduction deal struck in June also enables those landlords to consider a new operator, and plenty of companies from outside the UK are jockeying to get a foothold in the country’s economy hotel space.

“We are doing everything we can to procure as many options as possible to determine what the realistic best option may be, preferably one that would give landlords a base payment and profit share,” said Viv Watts, managing partner of Oasis Holding who founded and leads the Travelodge Owners Action Group.

Accor, Hilton, IHG, Magnuson Hotels, Marriott, and Oyo are among the companies in talks with the TOAG, Watts confirmed in an interview with Skift.

A Hilton spokesperson has since refuted Watts’ claim, telling Skift the hotel company has not been in contact or in talks with the Travelodge Owners Action Group.

Travelodge operates under a leasehold business model in the UK, where the company inks 25-year lease terms with landlords. Watts recognizes many of the bigger global companies operate under franchise or management agreements but is still trying to get a compromise deal with a new operator to give landlords a base payment and share of the profits.

Accor is an attractive option for the landlords due to its Ibis Budget brand linking closely with Travelodge and likely not requiring as much capital investment for a conversion as some of the other global brands, Watts said. Magnuson Hotels and Oyo are also leading contenders in ongoing talks.

Marriott would use the Travelodge properties as a way to introduce the Fairfield Inn brand to the UK, Watts said.

Under the June company voluntary arrangement with Travelodge that mandated landlords comply with a reduced rent structure, landlords have until mid-November to consider and enter into a new brand agreement with a different company. If a deal is struck, Travelodge would have 30 days to either come up with their own offer or leave the impacted properties.

But Travelodge repeatedly ignored flexible rent offers and negotiations the TOAG offered the hotel company ahead of its turn to the legal system for a rent deal, Watts claims. He isn’t expecting too much from the company ahead of the November deadline.

“Some operators are getting paid little to no rent through as far as the end of next year,” Watts said. “Why would they want to stay with Travelodge?”

Travelodge did not respond to Skift’s request for comment in time for publication.

Igniting the Conversion Engine

Travelodge landlords are looking for a more financially sound hotel operator. Any deal with one of the global brands would be the first major transaction struck since many of these companies claimed conversions — where a hotel owner changes flag affiliation — will be the major source of growth during the initial coronavirus recovery when construction lending is tight.

“If you look through cycles, in a weaker environment, conversions go up for us and go up for the stronger brands because not every hotel can perform as well in the weaker environment,” Marriott CEO Arne Sorenson said during the company’s first quarter earnings call in May.

But Magnuson Hotels CEO Thomas Magnuson is banking on bigger not always equating to better in his own pitch to Travelodge landlords.

“The Travelodge landlord situation is an economically tragic situation, where the landlords are not being allowed to capitalize on their end of the deal even though — from what we understand — the company does have the resources to pay the rent,” Magnuson Hotels CEO Thomas Magnuson said. “Given our above-market averages through Covid, we are confident we can take the above-industry results during these times and help owners regain their expectation very quickly.”

Magnuson Hotels focuses on midscale and independent hotels in roadside, secondary, and drive-to markets. The company claims its U.S. room sales in April — the worst month of the pandemic for the U.S. hotel industry — outperformed the national average by nearly 17 percent.

The more than 500 Travelodge hotels across the UK are located across primary, secondary, tertiary, and highway markets — nearly identical to Magnuson’s U.S. portfolio. The hotelier aims to do what he did in the U.S. in the UK, where it is headquartered but currently has less than 20 properties.

“I’d love to see what they can deliver here because they seem to have interesting results in the U.S.,” Watts said.

Magnuson argues Travelodge landlords should view his company’s current small UK footprint as an attractive commodity.

“There are 247 Accor hotels already in the UK. Travelodge landlords could find themselves in competition with their own company just as individuals and franchisees have in Choice [Hotels] or Marriott,” Magnuson said. “When consolidation occurs and brand saturation happens, usually the corporation wins and property and hotel owners lose. There’s only so much business to go around, and that’s the way it works.”

Let’s Make a Deal

With roughly five months to go, Watts recognizes there is a lot of negotiating to be done, both with global hotel companies as well as the coalition of Travelodge landlords within his own organization, most operating with only one or two properties. Some may ultimately decide to leave the hotel business altogether.

“The options are not binary between a new deal and Travelodge,” Watts said. “Some operators could decide to convert properties to housing.”

The TOAG needs at least 100 of the more than 400 properties it represents to move into a new agreement for a deal to make sense, Watts added. But he’s aiming for at least 200 to sign onto a deal that would preferably be announced well before the November deadline with Travelodge.

While the deal could be among the hotel industry’s most notable portfolio transactions for 2020, Watts recognizes it is also not exactly the best time to be at the negotiating table.

“This gives us five months to determine our next position and get back in the driver’s seat,” he said. “We’re doing it at probably the worst time in the industry, but at least we will have some degree of control over our destiny.”

[UPDATE: After publication, a Hilton spokesperson contacted Skift to say the company was not among the group of hotel brands in talks to take over Travelodge management contracts in the UK.]

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Tags: accor, coronavirus, coronavirus recovery, magnuson hotels, marriott, oyo, travelodge

Photo credit: Hotel companies from around the world are zeroing in on a struggling group of British budget hotel owners to make a new deal and potentially introduce new brands to the UK. Flickr / Elliott Brown

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