Hotel groups: disposing of assets off-market

A hotel group does not sell a hotel the way an independent owner does. The decision is part of a portfolio strategy, it triggers a chain of contracts (financing, franchise, management) and it concerns teams who watch closely for signals from head office. A rumour of a disposal can affect the trading of the hotel in question, but also the relationship with a franchisor, a lender or a partner.

This guide covers the reasons for a disposal, the issues specific to groups and how to run the transaction off-market, with a small number of qualified buyers.

Why a group disposes of assets

There is rarely a single reason. The most common:

• Refocusing: exiting a region, segment or category that no longer fits the group’s strategy.
• CAPEX: a hotel whose upgrade (rooms, compliance, repositioning) would tie up funds the group would rather deploy elsewhere.
• Refinancing: reducing debt, meeting banking covenants or freeing equity for new development.
• Exiting a brand: a hotel whose franchise agreement is nearing expiry, or which no longer meets the brand’s standards.
• Asset rotation: crystallising value after a successful repositioning.

The real reason need not appear in the documents sent to buyers. The information memorandum presents it neutrally, for instance as a strategic refocus. It must, however, be clear to the seller’s adviser: it shapes the scope, the structure and the choice of buyers.

Selling without raising the alarm

A disposal involves several parties, each of whom should be informed, or not, at a time of the seller’s choosing.

The method is that of an off-market sale: nothing is shared without an NDA, the teaser is anonymous, buyers are approached one at a time, and visits are arranged without contact with staff. For a group, two-stage disclosure is often useful: the memorandum remains anonymised, and the hotel’s identity is revealed only at the visit or letter of intent stage.

Some obligations apply regardless of the confidentiality strategy. Depending on the structure and size of the companies involved, information and consultation of employee representatives, or prior information of employees required in certain companies (the so-called “loi Hamon” regime), may be needed. The timetable should be built with the group’s lawyer, early on.

One by one or as a portfolio

Scope is the first structuring decision.

A middle course is to put together coherent lots, by region or segment. That decision follows a review of each asset: performance, physical condition, lease or freehold, attached contracts.

Keeping operations: sale and leaseback

A group that wants to release capital without leaving the hotel can sell the property, or murs, to an investor and stay on as operator and tenant. This is a sale and leaseback. It turns a property asset into cash, but it creates a lasting rent commitment.

The points to negotiate:

• Rent level: a higher rent raises the price of the property, but reduces the operating margin for the whole lease term. The balance shows in the ratio of rent to EBITDA.
• Fixed term and renewal: the investor wants visibility, the operator flexibility.
• Indexation: the index used and whether there is a cap.
• Works and CAPEX: the split between landlord and tenant, particularly for major repairs and compliance works.
• Security: a parent company guarantee, a deposit or other security required by the investor.

The commercial lease created by the transaction is also an asset for the buyer: its quality drives the price. The capitalisation rate the investor applies depends on the strength of the tenant, the fixed term and the location.

Management and franchise agreements

A group hotel is often bound by a management agreement or a franchise agreement. These contracts shape the sale as much as the lease does.

Points to check before any approach:

• Change of control: in a share sale, a clause may give the franchisor or operator a right of approval, a right to terminate or a right to compensation.
• Pre-emption rights: some agreements give the brand a right of first offer or first refusal over the asset.
• Transfer or termination: does the buyer want to keep the brand? If not, what does exit cost, and from when?
• Brand standards: an upgrade programme may be required on transfer. Its cost feeds into the price.
• Non-compete: a clause restricting the hotel’s future use may reduce the number of buyers.

These points determine when the franchisor or operator needs to be told. They belong in the data room, and a summary should be ready before the first letter of intent.

Documentation to institutional standard

Buyers of group assets usually have analyst teams and an investment committee. They expect complete, verifiable documentation: an anonymous teaser, an information memorandum, a business plan with sourced assumptions, and a named-access, logged data room.

For a group, two subjects need particular care:

• Accounts by asset: when the hotel is not held in a dedicated company, or bears head-office costs, intra-group fees or a rent between group companies, EBITDA must be rebuilt asset by asset. Each adjustment is backed by a document.
• Transferred scope: distribution contracts, central reservations, loyalty programmes, IT systems and head-office staff working for the hotel. What stays with the group and what goes with the asset must be set out in writing, with a transition period.

The guide to the data room explains how documents are organised.

Choosing the buyers

A restricted process is only worth running if the buyers approached genuinely match the asset.

Each buyer is selected against the criteria they have declared (segment, size, location, target structure, horizon), then vetted before receiving any information: identity, beneficial owners, financial capacity, proof of funds.

RR Hôtels & Finance also advises groups on disposals, acting for the seller only. The Circle brings together the groups, operators, institutions and family offices that receive these opportunities.