Behind the scenes of Pandox's €400 German hotel buy

Germany's hotel scene just got a multimillion-euro boost: Sweden's Pandox has entered into an agreement to buy 18 hotel properties in Germany from the Leopard Group (a holding company with property interests in the U.K. and Germany) and Israel-based Fattal Hotels, adding 3,415 rooms to its portfolio on 25-year revenue-based leases with Fattal. The acquisition is made with Eiendomsspar as a minority shareholder with 5.1 percent. 

At a price of €400 million and yield of approximately 6.3 percent, this deal reportedly represents the largest hotel sale and leaseback transaction in Germany since 2007. The acquisition price is on a debt-free basis including minority interest. 

The portfolio comprises assets in 12 cities and includes hotels in key international markets. Significantly, the deal is expected to contribute the equivalent of approximately 150 million Swedish kronor in cash earnings in 2016. The hotels will be marketed under the Leonardo brand, which means that the hotels currently managed under the Holiday Inn brand will be converted to Leonardo when the agreements expire. The hotels have either recently been refurbished or are currently under refurbishment, and will be operated by the Fattal group. 

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According to a representative of CBRE Hotels, which advised Pandox throughout the acquisition, the transaction takes the German hotel investment market "into new territory," with investment volume for the year now in excess of €3 billion, representing a new all-time high.

The deal drivers
In a statement, Pandox CEO Anders Nissen said that the main value for the deal is that the company is increasing its rental revenues by 250 kronor in 2016 as long as the deal is finalized by the end of 2015. "We have a big portion of revenue coming from Germany," he noted, adding that he expects to see growth in Germany's hotel market, especially in the major international cities where many of the hotels will be. "The German market has a more stable market [that is poised to continue] over a longer time," he said, which inspired a cash-flow driven acquisition. 

Nissen listed several drivers for the acquisition, including the location (Germany is a "prioritized market" for the company and the cities have a strong balance of domestic and international demand), hotel type (the hotels are full-service products in the upper midmarket segment with an average size of 190 rooms, which Nissen said is important for the company's risk portfolio), the terms (the hotels will contribute to Pandox’s earnings via long-term revenue-based lease agreements with guaranteed rents, and have long-term development potential) and the partnership with Fattal. 

"This creates opportunity for value growth in terms of investing together with Fattal hotels and value-driven cash flow investment," Nissen said. "That mix is important for our risk portfolio." The deal is also beneficial to Fattal, he noted, which was looking to expand and needed funds to do so. "We see also—hopefully—a potential of doing more to expand our business with Leonardo, which is a company that would like to expand its brand in Germany, specifically, and they need a partner. We like their model," he continued. "They are focused on operations. They are good at productivity and management, and that is the most important [quality] for value growth from our side—that they can pay their rent and have available daily money before doing necessary investments. 

The financials
Pandox CFO Liia Nou explained that the transaction structure was the most efficient solution for all Pandox shareholders. "In Germany, you pay a state transfer tax, but if you have ownership of less than 94.9 percent, there will be no real estate transfer tax," she said. Eiendomsspar was brought onboard to help the company avoid that added penalty.

Nou said that the company's responsibility for future investments is limited to major technical investments and building structure, which means property costs will be lower compared with its Nordic hotel property portfolio. The company also sees good potential to make future cash flow enhancing investments in the acquired hotel property portfolio in close cooperation with Fattal Hotels. 

Based on the market value of the hotel property portfolio (as of the end of the third quarter for 2015), the portfolio value increases from approximately 27.7 billion Swedish kronor to 31.4 billion. The investment properties’ share of the total property value increases from approximately 77 percent to approximately 80 percent. Pandox’s loan-to-value ratio (net) increases from approximately 44 percent to approximately 51 percent, which should be compared with the company’s financial target of a loan-to-value ratio of 45-60 percent (gross) with normalized liquidity.

The acquisition is expected to be completed by the end of 2015, and is still conditional upon having received necessary approvals by all necessary German authorities, as well as the fulfillment of the terms in the share transfer agreement. Pandox will consolidate the acquired hotels to 100 percent and report these under the business segment property management, and report minority interest at the consolidated group level, as of the first quarter of 2016.