Having paid third-quarter rents to its landlords and already guaranteeing some profit upside on top of upcoming fourth-quarter rents, management firm AGO Hotels’ executives are feeling more convinced their new business model has staying power.
Coming to the end of its first year in existence and having demonstrated the firm could pay rent in full and on time after taking on hotels in December 2020, sources said the integrity of the model has already been proven.
AGO — co-founded by Lionel Benjamin, CEO of Gullwing Hospitality, and Viv Watts, manging partner of Oasis Holdings — initially took over operations of nine former Travelodge hotels.
A 10th hotel is now in development, while on Oct. 11 the firm announced it acquired for an undisclosed sum the freehold interest in two more hotels, both in Wales — the 99-room Ibis Swansea and 103-room Ibis Budget Newport.
All 12 properties are branded with Accor.
“We held our heads above the parapet and delivered on our promise on rent. That will hold us in good stead,” Benjamin said.
He added the initial plan was to re-open the original nine hotels in January 2021, but due to the pandemic, that was delayed to May and June.
“We started full trading in July. We had a strong July and August and were already able to pay profit in the third quarter to landlords,” Benjamin said.
He said there had been "a surge in holiday bookings for the late summer and early autumn season, with a 29.5% increase in occupancy from June to July and a further 17% increase from July to August."
His partner Watts set up the Travelodge Owners Action Group after Travelodge (United Kingdom) presented landlords with a company voluntary arrangement that the ownership group claimed would decrease rent payments.
Benjamin is confident more hotels will convert to the AGO brand.
“Coming over to us requires that jump, but we can pitch it and convince [landlords]. We’ve walked the walk, and our landlords are already going to the bank,” he said.
Benjamin said it is increasingly difficult to assess operational profitability on earnings before interest, tax, depreciation and amortization, noting in the past two years there has been inconsistency in valuations due to a lack of or erratic input of revenue.
That model is not a consistent enough formula for the modern age, he said.
“We need consistency. Traditionally, if you look at the EBITDA model, yield is based on that, and valuers are looking at base rent and [capital expenditure], but is that base rent affordable? The value of the underlying asset is not a number on a piece of paper on a contract but something that gives landlords strength, a strong yield and the ability to fund what they need to finance,” he said.
Protection and Value
Benjamin said AGO’s model protects assets, as rent already has been paid and value is constantly being added.
He said the model provides a strong yield to the base rent that allows landlords to fund renovations, and the top-up on rent gives banks extra assurances.
“Base rent is paid quarterly in advance, while profit is paid quarterly in arrears,” he said of the model.
AGO leases include a 25-year term on a fully repairing and insuring basis and a retail price-linked base rent of 50% of the formerly contracted Travelodge rent, he added.
“We’re not overstretching on our contractual obligations. We’ve set the rent levels linked to the retail price index,” Benjamin said.
“We have no debt. Of course, our success will be on how well we perform, how many hotels we take on and how we develop the model,” he added.
He expects to add new hotels in the coming months as landlords look for both protection against the downside but also more risk to profit on the upside.
Post-Travelodge
Benjamin said he was disappointed initially to not secure more former Travelodge assets.
“[Travelodge] did well holding on [to the majority of its portfolio]. Yes, we’re disappointed that more landlords did not come to us in the initial phase. Had the offer been more aggressive from brands, I think Travelodge was very vulnerable, but it weathered the storm exceptionally well and came out on front, if the truth be told,” Benjamin said.
He added he will be interested to see what happens in January when Travelodge rents are due.
“Hotels in its A category [of hotels] and urban centers, I imagine, will fare well. Every operator did well in summer, too, unless you were in some city centers such as London," he said.
“We’re confident that after this period under our belt, we can demonstrate to a wider ownership group, where it will be for a franchise or management, that our lease model works. We provide both the security and the value. We’ve proven the added value,” he added.
AGO’s assets are in secondary and tertiary United Kingdom markets, such as Peterhead, Dundee, Burton and Bromley. It also has assets in larger markets such as Glasgow.
Benjamin said AGO has extended agreements on two Accor-branded hotels in Wales, in Newport and Swansea.
“It is an example of skin in the game. [AGO does] not earn anything until we have paid the rent and the owner gets some profit,” he said.
“That is the whole reverse of the usual fee structure,” he added. “Protection is built into model, with profit derived once CapEx is done.”
He said capital expenditures have been a tool to further digitize operations, not to merely be a defensive exercise to retain value.
He added that in all real estate asset classes it has become more prevalent to take a lower rent but have more access to profit via sharing risk.
“You cannot sustain an over-rented environment. We need more joined-up thinking. The historic lease, with landlords collecting rent every quarter must evolve into more of a hybrid model, or variations of that,” he said.
Benjamin said the next 24 months will be fundamental to AGO’s growth, with the firm looking to also manage non-branded hotels.
“We can work with multiple brands. We must take the best brands,” he added. “We will take a number of unbranded hotels. At what price does a brand have a place?”
Benjamin said “the way forward is to understand distribution, what the target audience is and how to reach them at the most cost-effective level."
“Brands would say it is via loyalty, and [online travel agencies] still spend millions on distribution, he added. "The market has room for everyone. We’re going to be ever present, with exposure to the investor."