LXI REIT has regeared leases on all of the 122 Travelodge hotels which formed part of the Secure Income REIT portfolio.
LXI and Secure Income completed their merger earlier this year.
The 12 Travelodge hotels which formed part of the LXI REIT portfolio have already been regeared or were new forward fundings.
In return for inserting caps and collars (4% pa and 1% pa, respectively) on the previously uncapped and uncollared RPI rent reviews and converting the reviews to CPI+0.5% pa (to future-proof them for the phasing out of the RPI by 2030), the LXI has extended the unexpired lease terms on the 122 Travelodge hotels by a weighted average of nine years.
This has the effect of extending the weighted average unexpired lease term (WAULT) to first break on the hotels from 19.5 years to 28.5 years and increasing the WAULT of the total LXI REIT portfolio from 25.6 years to 27.3 years.
Following discussions with the company’s valuer, the lease extensions are anticipated to have a material positive impact on asset values and further enhance the investment attraction of the hotels.
The change in rent review profile is also designed to ensure that the rents remain affordable over time and avoid becoming potentially over-rented versus market rents. The new collars also provide uplifts in lower inflationary environments. No rent-free periods have been granted and no rent reductions have been made.
Travelodge is trading robustly, with 2022 already on track to be its most profitable year on record.
Travelodge, like Premier Inn, tends to outperform during recessionary periods as both business and leisure customers are attracted to the low cost and value offered by the budget hotel brands.
LXI has also taken the opportunity to agree “green lease” provisions within the Travelodge leases, including to effect the following principles:
- sharing of energy, water, recycling and waste data;
- co-operating on the environmental, social and governance strategies of the landlord and tenant; and
- future proofing the leases to ensure the landlord has the necessary rights to enter the properties to make environmental performance improvements.
These measures are designed to enhance the company’s own ESG reporting as well as the energy performance of the hotels and further enhance their investment attraction.
LXI and Travelodge have also agreed the “rent-smoothing” of these 122 hotels. This means that the individual rent levels have been reset per hotel to best reflect the trading performance of each site. The total rent across the hotels remains the same, but has been “smoothed” on a site by site basis, to ensure that each hotel has a robust stand-alone rent cover*.
What they said
Simon Lee, fund manager of LXI REIT Advisors, said: “We’re delighted to have worked so effectively with Travelodge to execute this material and accretive lease extension and rent-smoothing exercise, whilst inserting green lease provisions. This transaction is the latest step on our plans to unlock further embedded value from the merged LXI/SIR portfolio, following the earnings and NAV enhancing Merlin “income strip” transaction which completed in October this year. Our expanded portfolio has defensive characteristics and further potential for value accretive asset management opportunities which we are also actively exploring. This will be supported by our proactive accretive recycling of capital and wide range of refinancing options to enable us to continue to underwrite our progressive dividend policy and deliver outperformance for our shareholders.”