The top tips for portfolio hotel deals...when more really is more

You might think that if you've bought one hotel, it will be the same as a "portfolio" of two hotels (or ten hotels), but that's where you would be wrong! Acquiring a portfolio of hotels brings with it an additional set of opportunities and challenges.

We share below key issues to be considered and managed in any portfolio hotel deal.

1. Structuring

Portfolio hotel deals may be structured as either an asset acquisition (ie, buying the assets and the business) or a corporate acquisition (ie buying the entities that own and operate the business). The right structure for a portfolio acquisition will be driven by various considerations, including:

• risk and liability associated with each acquisition structure. For example, acquiring a company will mean acquiring all the historical liabilities of that company;
• third party consent requirements;
• tax implications (including stamp duty, GST, CGT and income tax) and
• ease of completion of the transaction.

Getting the structure right at the outset is fundamental to overall success.

2. Go alone or with a friend?

Due to the scale of some hotel portfolio deals, it is common for a portfolio to be acquired by a consortium, which may be comprised of two or many more parties. This will require the establishment of the joint venture and agreement on key joint venture terms - such as structure, funding, decision making, exit and liquidity, exclusivity and management arrangements, to name a few.

Joint venture partners may also have a view on the due diligence being undertaken and the terms of acquisition that will need to be addressed.

3. Key commercial terms

While the baseline commercial terms of price and timing for exchange and completion may not change, certain terms such as the deposit, conditions precedent, exclusivity and seller/buyer guarantees may be impacted by a portfolio deal.

This is closely followed by other fundamental terms – including warranty regimes, material adverse change provisions, financial adjustments, pre-completion restrictions, transitional arrangements and so forth.

4. Regulatory approvals

If the buyer is ultimately foreign owned, foreign investment approval may be required. Allowing sufficient time in the process to lodge, progress and obtain foreign investment approval (if required) is critical for the timing of the deal.

Similarly, merger clearance notifications and/or approvals may be required. These should be identified up front so as to ensure these do not disrupt the transaction timetable.

5. Diligence, diligence, diligence

A portfolio deal equals larger scale of due diligence. An appropriate level of materiality will need to be adopted. It remains fundamentally necessary to understand any key issues associated with the individual hotels within the portfolio, particularly issues which could impact value or give rise to material risk. A systematic approach to the due diligence scope and process – including legal, technical, planning and financial due diligence - is necessary.

6. Material contract renegotiation

Portfolio hotel deals have greater scale which can generate greater negotiating power. If hotels in the portfolio are managed by the same hotel operator, there may opportunities to renegotiate key management agreement terms, particularly if some of the assets have a vacant possession on sale provision.

7. Warranty regime & W&I insurance

Seller warranties are typically the product of significant focus and negotiation, and are ultimately tied to the outcomes of the due diligence process and the purchase price. Normally, the ability to make warranty claims is subject to disclosure, time limitations and monetary caps.

Where a seller has the potential for more exposure (on a dollar basis), it is common for parties to look to W&I insurance packages. In order to make use of this, it is necessary to confirm which party is required to effect and pay for any such policies.

8. Key employees

A hotel is an operating business that relies upon its employees. Due diligence on employee terms and conditions, compliance with relevant awards and the potential for any employee claims is fundamental. Commercially, it is necessary to take steps to ensure that key persons such as general managers, financial controllers and those key to driving revenue, remain with the business after closing.

9. Dealing with each states nuances

Where hotels in the portfolio are located across various states and territories in Australia, there is a need to deal with the different legislation that applies in each state. In particular, the following differ from state to state:

• rates and timing for payment of stamp duty;
• liquor licensing transfer requirements and timeframes; and
• land titles office registration requirements.

To manage timing and cost expectations, you need to understand these differences and ensure they are managed appropriately.

10. Business transition

A smooth transition requires planning. A few key areas to consider include:

• the timing and content of public announcements to staff, customers and the market;
• if there is any change in brand, how and when the rebranding will occur;
• commencement of asset management teams and where on-site operation is necessary;
• identifying any key seller employees to retain as part of the sale; and
• migration of computer systems and data.

11. All the other stuff

There are a myriad of other material issues to be worked through, for example FF&E accounts, asset management arrangements, financing, KYC and key/material contracts. The key is to understand these issues and where they fit so that they do not derail the overall transaction.

You will need a team of advisors who are familiar with the types of issues which arise in these sort of transactions and who can help you manage and strategically navigate the life of the deal and achieve a successful transactional outcome.