IHG to benefit after Starwood Capital cycles out of Principal investment

France's Foncière des Régions is betting big on the UK. The investment giant has shelled out a reported $1.1 billion for 14 hotels and more than 2,200 rooms owned by Starwood Capital Group under the Principal Hotels and De Vere brands. Each hotel is based in the UK with the Principal London the trophy in the lot, where rooms sell for more than $550 per night. Properties also included are in Edinburgh, Leeds and Manchester, among other UK markets. 

After the deal is completed, likely in June, 13 of the hotels will convert to brands under the IHG umbrella, reportedly either its luxury InterContinental flag, its upper-upscale Kimpton Hotels or a new upscale conversion brand that is still under wraps. The deal should help spur expansion of the Kimpton brand in Europe, where currently there is only one hotel, in Amsterdam. In 2016, IHG announced a 149-room Kimpton property in Paris, near the opera house, scheduled to open in 2020. Kimpton has also signed deals for Kimpton hotels in Asia.

IHG acquired the Kimpton brand in 2014 for $430 million, but has been slow to grow it internationally. 

Under the terms of the agreement with Foncière des Régions, IHG will operate the hotels under long-term managed leases. 

The accretive deal for IHG is part of a recent spate of growth for the company under CEO Keith Barr, who took the helm last July. Since then, he's made moves that have included acquiring a stake in the Regent Hotel brand and announcing the aforementoned new upscale conversion brand. Barr, since he became CEO, has made it a point to grow the Kimpton brand internationally.

Of this deal, Barr said: "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."

Under the terms of the agreement between IHG and Foncière des Régions, 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 at $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 22 million and $66 million respectively at stabilization; and,
  • retain a share of profits after rent payments.

For Foncière des Régions, the billion-dollar deal displays confidence in UK's property market and UK tourism, spurred in part by sterling devaluation post Brexit and a sluggish UK economy. The pound has edged slightly down against the euro, with the currency now worth around €1.134 at the time of this posting.

"This acquisition is an opportunity to duplicate the development strategy already rolled out in France, Germany and Spain," said Foncière des Régions deputy chief executive Dominique Ozanne. "This transaction will help Foncière des Régions cement its leading position on the hotel real estate investment market in Europe."

Starwood Capital Group acquired Principal Hayley in February 2013. In a two-year span thereafter, Starwood Capital combined Principal Hayley, De Vere Venues and Four Pillars under The Principal Hotel Company.

"This landmark transaction represents a major milestone in our remarkable journey with The Principal Hotel Company," said Cody Bradshaw, managing director and head of European hotels for Starwood Capital Group. "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. 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."

Starwood Capital had brought the portfolio of hotels to market in November 2017.