Principal hotels to split between three brands following sale by Starwood Capital

The 13 hotels to be operated by InterContinental Hotels Group (IHG) following the £858m acquisition of the Principal hotel group by French company Foncière des Régions (FDR) from the US-based Starwood Capital Group are likely to be split between three brands.

As well as providing IHG with the opportunity to introduce the luxury boutique brand Kimpton Hotels & Restaurants into the UK for the first time, the deal will also see some of the properties being tagged with either the InterContinental badge or the group's new upscale conversion brand which will be launched in the second half of 2018. IHG will operate the hotels under managed leases, along the same lines of only four other managed hotels leased by IHG across its global portfolio of around 5,300 properties.

IHG has confirmed that the Principal hotels in London (pictured) and Manchester will join Kimpton, along with one of the two Principal hotels in Edinburgh, which is most likely to be the property in Charlotte Square. The Principal Edinburgh George Street may then once again become an InterContinental hotel, having been sold by IHG in 2005.

With two Principal hotels in Glasgow (Grand Central and Blythswood Square), it is expected one will join InterContinental, while the other will become a Kimpton.

Meanwhile the fate of the other hotels in the Principal portfolio in Birmingham (currently under development), Leeds, York, Cardiff and Oxford have also to be decided.

Keith Barr, chief executive of IHG, said: “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."

Separate from the IHG agreement, FDR acquired a 14th site from Starwood Capital Group, the former Martins bank building in Liverpool which was due to be converted into a Principal hotel. It is expected that this property may now be converted into apartments.

The FDR-IHG deal is something of a game-changer in that it heralds a move away from the asset light approach IHG has adopted in recent years. Hotel industry consultant Melvin Gold said: “This represents a real departure from IHG using their balance sheet strength to launch the Kimpton brand and another brand in the UK and fuel the growth of existing brands in their UK portfolio.”

IHG will pay rent of £48m per annum from 2021, with inflationary increases thereafter. If bottom line profit does not provide the required £48m, then IHG will have to make up the shortfall by up to £16m in any one year or £48m cumulatively. This has a balance sheet impact for IHG and the hotels will sit within the ‘owned and leased’ part of the portfolio which had been reduced to just four hotels prior to this transaction. IHG will also earn license/franchise fees, but apparently will also be liable for property taxes, insurance and future maintenance capital expenditure.

A spokesperson for IHG said that while the company does not now use the lease model widely â€" preferring to manage hotels on behalf of owners or franchise brands to third parties â€" the transaction was still considered to be consistent with the group’s asset light policy.

The deal will also mark the disappearance of the Principal name, which was announced with great fanfare in November 2016 as a new brand of iconic city centre lifestyle hotels created by Starwood Capital Group from a disparate collection of properties it had acquired over the previous three years. Starwood consolidated the hotels brought from Principal Hayley, Four Pillars, De Vere and the Townhouse Collection into Principal and the De Vere collection of country house properties, under the Principal Hotel Company, while selling off a further 21 hotels. The American private investment firm is now looking for a new owner for the remaining 13 De Vere hotels.

Cody Bradshaw, managing director and head of European hotel for Starwood Capital Group, described the sale to FDR as “a major milestone in our remarkable journey with the Principal Hotel Company. As long-term institutional investors, FDR are an extraordinary custodian of real estate and we could not be more thrilled to pass them this iconic collection of assets.” It is believed that Starwood invested around £182m in the Principal portfolio over a period of four years.

David Taylor, who headed up Principal as chief operating officer, will now join IHG at UK vice-president operations to oversee the integration of the hotels into their new brands.

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