Starwood Capital Group on Thursday announced the sale of 14 UK hotels with 2,648 keys from its Principal Hotel Co. to Foncière des Régions (FdR), who in turn said it reached a long-term managed lease agreement with InterContinental Hotels Group (IHG) to operate and soon rebrand 12 of the hotels with approximately 2,000 rooms with another 185-room hotel in the pipeline. Within one or two years, the hotels currently trading under the Principal and De Vere brands will move into IHG’s Kimpton and InterContinental brand porfolios.
FdR was quoted as saying the price tag for the assets was £858 million (US$1.17 billion) with the deal expected to be completed in June 2018. The properties occupy flagship locations in high-growth cities across the U.K., including London, Manchester, Edinburgh, Glasgow, Oxford, York and Leeds. Included in the portfolio are the high-profile Principal hotels in London and Manchester.
This FdR-IHG deal enables IHG to launch its Kimpton Hotels & Restaurants brand in the UK, building on the brand’s first global signings last year for Asia and China. IHG expects the deal will act as a catalyst for Kimpton’s growth in Europe, while strengthening its position in the upscale segment in the UK. While no details were offered, FdR hotels will be rebranded under both the InterContinental and Kimpton brands. IHG also eluded to plans to launch another upscale brand later this year.
“This was a great opportunity for us to build an immediate scale presence in the luxury and upscale segments in one of our largest markets with some really high-quality hotels,” an IHG spokesperson told HOTELS. “It gives us an exciting opportunity to launch Kimpton in the UK in some key cities and prime locations – a big part of our ongoing plans to take the brand global. It’ll also strengthen our position in upscale, establishing a presence for our new upscale brand, which itself will be launched later this year.”
IHG CEO Keith Barr added in a statement, “We are focused on continuing to expand our leadership in luxury and upscale, which are both high-value segments with significant growth potential. Bringing Kimpton to such an important market as the UK is a key part of our plans, as is the introduction of our new upscale brand, which will provide an exciting, differentiated offering to both guests and owners. Together with the recent addition of Regent Hotels & Resorts to our portfolio, we are building real momentum behind our plans to deliver industry-leading net rooms growth.”
In line with the treatment of the four other managed lease hotels operated by IHG, the revenues and profits from these properties will be fully consolidated within the Owned & Leased segment in IHG’s Group Income Statement.
As part of the deal with FdR, IHG will:
- retain a royalty fee, before rent payments, of an amount equivalent to franchise fees from existing hotels,
- pay rental amounts which are forecast to stabilize at £48 million (US$66 million) per annum in 2021, with inflationary increases thereafter,
- fund any shortfalls in rent payments up to an annual and cumulative cap on losses of ~£16 million (US$22 million) and ~£48 million (US$66 million) respectively at stabilization; and,
- retain a share of profits after rent payments.
By 2023, these properties are expected to generate over £200 million (US$275 million) of revenue and mid-single digit operating profit for IHG. It is expected that in the remainder of 2018, these properties will generate total revenues of ~£75 million (~US$103 million) and will be operationally breakeven from an operating profit perspective during this transition period.
As part of the rebranding process, IHG will make capital contribution within its existing capital expenditure guidance. Maintenance capital expenditure will be funded from the hotels’ FF&E reserves.
From Starwood Capital’s perspective, the transaction represents a major milestone for its Principal Hotel Co. “Five years ago, we embarked on an investment strategy aimed at consolidating more than 50 hotels across four different U.K. hotel companies to form a leading platform,” said Cody Bradshaw, managing director and head of European hotels for Starwood Capital Group. “With this sale to Foncière des Régions, we will have realized 35 asset disposals in total since our acquisition. As long-term institutional investors, Foncière des Régions are extraordinary custodians of real estate and we could not be more thrilled to pass them this iconic collection of assets.