sale and leaseback. unlocking value. christian gomez rudek
DESCRIPTION
Sale and Leaseback. Unlocking value for shareholders through Sale and Leaseback strategies. Analysis of the effects of the application of this strategy in the Spanish Hotel industry.TRANSCRIPT
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Sale and LeasebackUnlocking Value
Christian Gomez Rudek
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Table of Contents
Introduction: What is it? Benefits for the Seller. Benefits for the Investor. Risks to be considered.
Target Company.
Financial Model. The Financial Model. Changes to the FM. Valuation Methodology. WACC Calculations.
Lease Valuation.
Scenarios & Results. Scenarios. Results.
Conclusion.
Complementary materials:Excel model: http://goo.gl/13Ckx0
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Introduction
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What is it?
Commercial real estate transaction
One party (Seller) sells its corporate real estate assets to another party (The Investor)
The seller then leases the property back form the investor
Rental rate and lease term that is acceptable to the investor (Investor’s IRR)
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Advantages for the Seller: Reallocation of Capital
Capital locked in RE does not create value. Unlocks 100% of value. No LTV limit.
Financing Tool
Transfer of residual risk Risk of unwanted property transferred to third party.
Improving the Balance Sheet Capital Gain (Loss). Repayment of Debt.
Premium pricing 13% premium, empirical data. Higher cash flows, absence of
tenant turnover. Higher credit. Lower Risk. Lower required IRR.
Tax considerations Rent is100% deductible.
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Advantages for the Investor:
Steady performance Steady and Safe returns for investors. Behave similarly to a bond, but with a hedge against
inflation.
Appreciation potential Investor can capture appreciation in RE asset.
Lower management cost Single tenant property. Long term lease. No uncertainty on operating expenses and vacancy costs.
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Risks to be considered:
Increased scrutiny. Markets reaction Markets tend to react badly to S&LB transactions. Suggests that the company cannot find other source of
financing.
Change in strategy New strategy might require ownership of asset.
Changes in tax code and accounting rules Might mitigate incentives the company considered when it
entered the transaction.
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Target Company
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NH Hotels:
The company selected to conduct our research is NH Hoteles S.A.
Its intrinsic characteristics make it an ideal candidate for S&LB strategies.
NH operates hotels under different models: Owned Hotels. Leased Hotels. Management contracts. Franchises.
Owns 98% of Sotogrande. Real Estate company.
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NH Hotels:
Owned Hotels: 23% of the rooms NH operates. 82 Hotels. Market value between €1.400 – 1.600 millions.
The value underpinning the business speaks to the potential value that might be trapped in real estate.
Heavily leveraged company: Problems not breaching covenants. Recent debt refinancing:
€250 million in convertible bonds. €250 million in High Yield Bonds. €200 million in syndicated loan.
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NH Hotels:
Recent capital Increase: €234 million. HNA entered into the ownership base of the company.
Recent Sale and Management Back: Grand Hotel Krasnapolsky in Amsterdam. €142 million cash inflow.
Pursuing Asset light strategy. This speaks to the willingness of the company to free up
the capital invested in real estate.
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NH Hotels:
New 5 year Business Plan: Refurbishing plan.
€200-220 million in the 2013-2016 period. Plan to reposition brand in order to become:
The “top 2 choice” for city/business travellers. Best option for investors looking to sing a
management/franchise contract NH plans to finance this plan partly with sale of Assets.
A S&LB strategy could help NH finance the repositioning plan, pay down part debt, and give money back to their investors.
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Financial Model
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The Financial Model:
We built a full financial model of the company. Projected IS, BS and CFS.
The model is created taking into account the recent actions taken by the company: Debt refinancing. Capital Increase. Sale of Amsterdam Hotel.
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Changes to the Financial Model:
We introduce changes into the model in order to account for S&LB strategies. Capital gains (losses) goes through the IS. We reduce fixed assets in the BS. We account for the cash inflow in the CFS. This feeds the cash account in the BS. We introduce the new lease payments in the IS.
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Income Statement Hitorical Period Projected Period
Pro
forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9Year
10
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Total Income1.21
8 1.335 1.428 1.312 1.299 1.335 1.358 1.408 1.437 1.458 1.480 1.501 1.523 1.546 1.568
Total opex ex leases -876 -917 -935 -936 -906 -913 -910 -921 -939 -948 -962 -976 -990 -1.005 -1.019
Management Profit 342 418 494 376 394 422 447 487 498 510 518 525 533 541 549Non recurrent revenues 0 0 0 -5 42 0 0 0 0 0 0 0 0 0 0
Leases and Property Rates -272 -270 -291 -294 -288 -285 -274 -270 -275 -278 -282 -286 -291 -295 -300
EBITDA 70 148 202 77 147 137 174 216 223 232 236 239 242 246 249
Asset impairment provision -37 -9 -15 -268 0 0 0 0 0 0 0 0 0 0 0
Depreciation -125 -123 -119 -116 -116 -125 -152 -178 -198 -211 -185 -159 -135 -117 -105
EBIT -92 15 68 -306 31 13 22 38 25 22 51 80 107 129 145Total interest expence -37 -66 -60 -82 -46 -44 -42 -41 -39 -33 -23 -5 -5 -4 -4
Equity Method Profit (Loss) -7 -2 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4
EBT -135 -52 4 -392 -19 -36 -25 -6 -18 -16 24 70 98 120 136Corporate Income Tax 20 5 6 56 5 9 6 2 5 4 -6 -18 -25 -30 -34
Income before Minority Interest -115 -47 11 -337 -14 -27 -19 -5 -14 -12 18 53 74 90 102
Minority Interest -18 -6 4 -44 0 0 0 0 0 0 0 0 0 0 0Net Income attributabole to parent company -97 -41 6 -293 -14 -27 -19 -5 -14 -12 18 53 74 90 102
IS Before S&LB
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Income Statement Hitorical Period Projected Period
Pro
forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9Year
10
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Total Income1.21
8 1.335 1.428 1.312 1.299 1.335 1.358 1.408 1.437 1.458 1.480 1.501 1.523 1.546 1.568
Total opex ex leases -876 -917 -935 -936 -906 -913 -910 -921 -939 -948 -962 -976 -990 -1.005 -1.019
Management Profit 342 418 494 376 394 422 447 487 498 510 518 525 533 541 549Non recurrent revenues 0 0 0 -5 42 -75 0 0 0 0 0 0 0 0 0
Leases and Property Rates -272 -270 -291 -294 -288 -378 -369 -367 -374 -379 -385 -392 -398 -405 -411
EBITDA 70 148 202 77 147 -31 78 119 124 131 133 134 135 136 138
Asset impairment provision -37 -9 -15 -268 0 0 0 0 0 0 0 0 0 0 0
Depreciation -125 -123 -119 -116 -116 -125 -13 -83 -103 -116 -90 -65 -41 -23 -10
EBIT -92 15 68 -306 31 -156 66 36 20 15 42 69 94 114 127Total interest expence -37 -66 -60 -82 -46 -44 -42 -41 -39 -33 -23 -5 -5 -4 -4
Equity Method Profit (Loss) -7 -2 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4
EBT -135 -52 4 -392 -19 -204 19 -9 -23 -23 16 60 85 105 119Corporate Income Tax 20 5 6 56 5 51 -5 2 6 6 -4 -15 -21 -26 -30
Income before Minority Interest -115 -47 11 -337 -14 -153 14 -7 -17 -17 12 45 64 79 89
Minority Interest -18 -6 4 -44 0 0 0 0 0 0 0 0 0 0 0Net Income attributabole to parent company -97 -41 6 -293 -14 -153 14 -7 -17 -17 12 45 64 79 89
IS After S&LB
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BS Before S&LB
Year 0Pro
Forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9Year
102011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Net Tangible Fixed Assets 2.116 1.876 1.746 1.774 1.767 1.705 1.595 1.408 1.234 1.084 959 852 757Intangible Fixed Assets 228 194 178 163 147 131 116 102 102 102 102 102 102Financial Fixed Assets 321 392 392 392 392 392 392 392 392 392 392 392 392
Non-Current Assets 2.665 2.462 2.3172.3292.3062.22
92.1031.9021.7281.579 1.4531.3461.25
1
Inventories 116 106 107 107 107 107 108 108 108 108 108 108 108Trade Debtors 194 187 186 192 194 198 201 202 204 205 207 208 210Other Debtors 11 29 29 29 29 29 29 29 29 29 29 29 29Cash & Securities 91 41 209 114 72 107 93 16 0 146 337 526 715
Current Assets 413 363 531 442 402 441 430 355 341 488 680 8711.06
2
Total Assets 3.077 2.825 2.8472.7712.7082.67
02.5332.2582.0682.067 2.1342.2172.31
3
Shareholders' Equity 1.139 841 1.061 1.034 1.015 1.010 997 985 1.003 1.056 1.129 1.219 1.321Minorities 205 159 159 159 159 159 159 159 159 159 159 159 159
Total Shareholders' Equity 1.344 1.000 1.2201.1931.1741.16
91.1561.1441.1621.215 1.2881.3781.48
0
Total Debt 1.057 1.036 891 845 804 763 635 369 159 102 93 84 75Other non-current Liabilities 365 353 353 353 353 353 353 353 353 353 353 353 353
Total non-current Liabilities 1.422 1.389 1.2441.1981.157
1.116 988 722 512 455 446 437 428
Trade creditors 236 261 208 204 202 209 213 216 219 221 224 226 229Other creditors 76 176 176 176 176 176 176 176 176 176 176 176 176
Total current Liabilities 311 437 384 380 378 385 389 392 394 397 400 402 405
Total Liabilities & Equity 3.077 2.825 2.8472.7712.7082.67
02.5332.2582.0682.067 2.1342.2172.31
3
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BS After S&LB
Year 0Pro
Forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9Year
102011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Net Tangible Fixed Assets 2.116 1.876 1.746 154 286 319 303 211 131 76 45 33 32Intangible Fixed Assets 228 194 178 163 147 131 116 102 102 102 102 102 102Financial Fixed Assets 321 392 392 392 392 392 392 392 392 392 392 392 392
Non-Current Assets 2.665 2.462 2.317 709 826 843 811 705 625 571 540 527 527
Inventories 116 106 107 107 107 107 108 108 108 108 108 108 108Trade Debtors 194 187 186 192 194 198 201 202 204 205 207 208 210Other Debtors 11 29 29 29 29 29 29 29 29 29 29 29 29Cash & Securities 91 41 209 1.608 1.4601.397 1.285 1.110 944 1.036 1.123 1.2061.288
Current Assets 413 363 5311.9361.7901.73
21.6231.4491.2851.378 1.4661.5521.63
5
Total Assets 3.077 2.825 2.8472.6452.6152.57
52.4342.1541.9101.949 2.0062.0792.16
2
Shareholders' Equity 1.139 841 1.061 908 922 915 898 881 893 938 1.002 1.080 1.170Minorities 205 159 159 159 159 159 159 159 159 159 159 159 159
Total Shareholders' Equity 1.344 1.000 1.2201.0671.0811.07
41.0571.0401.0521.096 1.1601.2391.32
9
Total Debt 1.057 1.036 891 845 804 763 635 369 111 102 93 84 75Other non-current Liabilities 365 353 353 353 353 353 353 353 353 353 353 353 353
Total non-current Liabilities 1.422 1.389 1.2441.1981.157
1.116 988 722 464 455 446 437 428
Trade creditors 236 261 208 204 202 209 213 216 219 221 224 226 229Other creditors 76 176 176 176 176 176 176 176 176 176 176 176 176
Total current Liabilities 311 437 384 380 378 385 389 392 394 397 400 402 405
Total Liabilities & Equity 3.077 2.825 2.8472.6452.6152.57
52.4342.1541.9101.949 2.0062.0792.16
2
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CFS Before S&LBPro Forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Operating Activities Net Income (14) (27) (19) (5) (14) (12) 18 53 74 90 102 Plus: Depreciation 116 125 152 178 198 211 185 159 135 117 105 Plus: Amortization --- --- --- --- --- --- --- --- --- --- --- Plus: Amortization of Financing Fees --- --- --- --- --- --- --- --- --- --- ---
Changes in Working Capital Items (Inc.) / Dec. in Accounts Receivable 0 (6) (2) (4) (3) (1) (1) (1) (2) (2) (2) (Inc.) / Dec. in Inventories (1) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (Inc.) / Dec. in Prepaid and Other Current Assets --- --- --- --- --- --- --- --- --- --- ---
Inc. / (Dec.) in Trade Creditors (53) (3) (3) 7 4 3 3 3 3 3 3 Inc. / (Dec.) in Accrued Liabilities --- --- --- --- --- --- --- --- --- --- --- Inc. / (Dec.) in Other Creditors --- --- --- --- --- --- --- --- --- --- ---
(Inc.) / Dec. in Net Working Capital (53) (9) (5) 3 2 1 1 1 1 1 1
Cash Flow from Operating Activities 49 88 128 176 186 200 204 213 210 208 208
Investing Activities Capital Expenditures (71) (137) (129) (100) (72) (10) (10) (10) (10) (10) (10) Other Investing Activities 100 --- --- --- --- --- --- --- --- --- ---
Cash Flow from Investing Activities 30 (137) (129) (100) (72) (10) (10) (10) (10) (10) (10)
Financing ActivitiesDebt repaid in 2013 refinancing (113) --- --- --- --- --- --- --- --- --- ---Revolving Credit Facility --- --- --- --- --- --- 48 (48) --- --- ---Term Loan A Facility --- (19) (19) (19) (76) --- --- --- --- --- ---Unsecured Convertible Bond --- --- --- --- --- (250) --- --- --- --- ---High Yield Bond --- --- --- --- --- --- (250) --- --- --- ---Mortgage Loans + Asset Loans (32) (27) (22) (22) (52) (16) (8) (9) (9) (9) (9)Subordinated loan --- --- --- --- --- --- --- --- --- --- ---
Dividends --- --- --- --- --- --- --- --- --- --- ---Equity Issuance / (Repurchase) 234 --- --- --- --- --- --- --- --- --- ---
Cash Flow from Financing Activities 89 (46) (41) (41) (128) (266) (210) (57) (9) (9) (9)
Excess Cash for the Period 167 (94) (42) 34 (14) (76) (16) 146 191 189 189 Beginning Cash Balance 41 209 114 72 107 93 16 --- 146 337 526
Ending Cash Balance 209 114 72 107 93 16 --- 146 337 526 715
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CFS After S&LBPro Forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Operating Activities Net Income (14) (153) 14 (7) (17) (17) 12 45 64 79 89 Plus: Depreciation 116 125 13 83 103 116 90 65 41 23 10 Plus: Amortization --- --- --- --- --- --- --- --- --- --- --- Plus: Amortization of Financing Fees --- --- --- --- --- --- --- --- --- --- ---
Changes in Working Capital Items (Inc.) / Dec. in Accounts Receivable 0 (6) (2) (4) (3) (1) (1) (1) (2) (2) (2) (Inc.) / Dec. in Inventories (1) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (Inc.) / Dec. in Prepaid and Other Current Assets --- --- --- --- --- --- --- --- --- --- ---
Inc. / (Dec.) in Trade Creditors (53) (3) (3) 7 4 3 3 3 3 3 3 Inc. / (Dec.) in Accrued Liabilities --- --- --- --- --- --- --- --- --- --- --- Inc. / (Dec.) in Other Creditors --- --- --- --- --- --- --- --- --- --- ---
(Inc.) / Dec. in Net Working Capital (53) (9) (5) 3 2 1 1 1 1 1 1
Cash Flow from Operating Activities 49 (38) 22 79 88 100 103 110 106 103 101
Investing Activities Capital Expenditures (71) (137) (129) (100) (72) (10) (10) (10) (10) (10) (10) Other Investing Activities 100 1.620 --- --- --- --- --- --- --- --- ---
Cash Flow from Investing Activities 30 1.483 (129) (100) (72) (10) (10) (10) (10) (10) (10)
Financing ActivitiesDebt repaid in 2013 refinancing (113) --- --- --- --- --- --- --- --- --- ---Revolving Credit Facility --- --- --- --- --- --- --- --- --- --- ---Term Loan A Facility --- (19) (19) (19) (76) --- --- --- --- --- ---Unsecured Convertible Bond --- --- --- --- --- (250) --- --- --- --- ---High Yield Bond --- --- --- --- --- --- (250) --- --- --- ---Mortgage Loans + Asset Loans (32) (27) (22) (22) (52) (16) (8) (9) (9) (9) (9)Subordinated loan --- --- --- --- --- --- --- --- --- --- ---
Dividends --- --- --- --- --- --- --- --- --- --- ---Equity Issuance / (Repurchase) 234 --- --- --- --- --- --- --- --- --- ---
Cash Flow from Financing Activities 89 (46) (41) (41) (128) (266) (258) (9) (9) (9) (9)
Excess Cash for the Period 167 1.399 (148) (62) (112) (176) (165) 91 87 84 82 Beginning Cash Balance 41 209 1.608 1.460 1.397 1.285 1.110 944 1.036 1.123 1.206
Ending Cash Balance 209 1.608 1.460 1.397 1.285 1.110 944 1.036 1.123 1.206 1.288
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Asset Sales Page
Assumptions Page 6 - Asset Sales Hotels
Transaction Net Net book G.Book Acum Capital Aditional
Sold Date Proceeds Value Value Dep Prov Gain Leases
Tangible Fixed Assets 2012 1.869 3.310 1.221 220Percentages to use 56% 100% 37% 7%
Past Transactions Krasnapolsky 2013 142 100 177 65 12 42 0
Proposed Transactions Scenario 1 2014 1.545 1.620 2.868 1.058 191 -75 93FA Page
BS
ISCFS
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Valuation Methodology:
The company has two distinctive business segments: Hotel Business. Sotogrande.
We use SOTP method to valuate the group: DCF method to valuate the Hotel Business.
This valuation changes with the proposed transactions. Perpetuity:
We use g = 1,5% for both cases. We use FCF of year 10 as normalized FCF for the calculation.
GAV method to valuate Sotogrande. The value of Sotogrande is static in our simulations.
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FCF before S&LB:
Valuation Hitorical Period Projected Period
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9Year
10
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Hotel Business EBITDA 161 120 115 135 172 214 221 230 234 237 240 244 247
Tax rate 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%
Taxes -40 -30 -29 -34 -43 -54 -55 -58 -58 -59 -60 -61 -62
Depretiation 119 116 116 125 152 178 198 211 185 159 135 117 105Depreciation * t 30 29 29 31 38 44 49 53 46 40 34 29 26
Changes in Working Capital -53 -9 -5 3 2 1 1 1 1 1 1
Capex -71 -137 -129 -100 -72 -10 -10 -10 -10 -10 -10Aditional Cash from the sale of Assets 100 0 0 0 0 0 0 0 0 0 0
FCF for valuation 92 -13 32 107 145 216 212 209 205 203 203
Discounting Factor 1,00 0,92 0,84 0,77 0,71 0,65 0,60 0,55 0,50 0,46 0,42Discounted FCF 92 -12 27 83 102 141 127 114 103 93 86
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FCF After S&LB:
Valuation Hitorical Period Projected Period
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9Year
10
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Hotel Business EBITDA 161 120 115 -33 76 117 122 129 131 132 133 134 136
Tax rate 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%
Taxes -40 -30 -29 8 -19 -29 -30 -32 -33 -33 -33 -34 -34
Depretiation 119 116 116 125 13 83 103 116 90 65 41 23 10Depreciation * t 30 29 29 31 3 21 26 29 23 16 10 6 3
Changes in Working Capital -53 -9 -5 3 2 1 1 1 1 1 1
Capex -71 -137 -129 -100 -72 -10 -10 -10 -10 -10 -10Aditional Cash from the sale of Assets 100 1.620 0 0 0 0 0 0 0 0 0
FCF for valuation 92 1.480 -74 11 47 117 111 106 101 98 95
Discounting Factor 1,00 0,92 0,84 0,77 0,71 0,65 0,60 0,55 0,50 0,46 0,42Discounted FCF 92 1.358 -62 8 33 76 66 58 51 45 40
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Valuation until 2023e WACC 9,01%NPV 863,2
Perpetuity Period Year 10g 1,50%Perpetuity Value 2.740,2 Discounted Perpetuity 1.156,4
Total value for Hotel Business (EV) 2.019,6
Sotogrande EV GAVReal Estate inventories 215,9Other Tourists Assets 41,2Sotolindo 88,4Sotogrande at Cap Cana 31,5Donnafugata Golf Resor & Spa 16,7
Pre-tax GAV 393,7Sotogrande's Book Value 251Capital Gain 142,7Tax rate 30%Tax charge 42,81After-tax GAV 350,89
NH group valuation NH hotel business EV 2.019,6 Sotogrande 350,9
Total EV 2.370,5 Net Debt 31/12/14 730,7Minorities 31/12/14 159Total Equity 1.480,9 Shares outstanding 308,27Price per share 4,8
Valuation until 2023e WACC 9,01%NPV 1.673,3
Perpetuity Period Year 10g 1,50%Perpetuity Value 1.290,0 Discounted Perpetuity 544,4
Total value for Hotel Business (EV) 2.217,6
Sotogrande EV GAVReal Estate inventories 215,9Other Tourists Assets 41,2Sotolindo 88,4Sotogrande at Cap Cana 31,5Donnafugata Golf Resor & Spa 16,7
Pre-tax GAV 393,7Sotogrande's Book Value 251Capital Gain 142,7Tax rate 30%Tax charge 42,81After-tax GAV 350,89
NH group valuation NH hotel business EV 2.217,6 Sotogrande 350,9
Total EV 2.568,5 Net Debt 31/12/14 -762,9Minorities 31/12/14 159Total Equity 3.172,5 Shares outstanding 308,27Price per share 10,3
Value Before S&LB: Value After S&LB:
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WACC Calculations:
We compile the data of a peer group to calculate the company’s WACC.
Data used: Levered Beta. Market value of Equity. Market Value of Debt.
We calculate the Unlevered Beta of each peer:
We assign the average to our company.
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WACC Calculations:
Peer Group Predicted Debt/ Marginal Unlevered
Levered Beta Equity Tax Rate BetaACCOR SA 1,0878 41,04% 30% 0,8451REZIDOR HOTEL GROUP AB 0,9206 4,82% 30% 0,8905MILLENNIUM & COPTHORNE HOTEL 0,8132 19,06% 30% 0,7175INTERCONTINENTAL HOTELS GROU 1,0274 16,93% 30% 0,9185STARWOOD HOTELS & RESORTS 1,4504 13,00% 30% 1,3293MARRIOTT INTERNATIONAL -CL A 1,2104 24,98% 30% 1,0303WYNDHAM WORLDWIDE CORP 1,2452 60,92% 30% 0,8730HYATT HOTELS CORP - CL A 1,1948 19,41% 30% 1,0519CHOICE HOTELS INTL INC 0,8794 32,62% 30% 0,7159PIERRE & VACANCES 0,8766 327,78% 30% 0,2661MELIA HOTELS INTERNATIONAL 0,9514 168,99% 30% 0,4358
Mean 1,0597 66,32% 0,8249Median 1,0274 24,98% 0,8730
NH Hotels Relevered Beta Unlevered Debt/ Marginal Relevered
Beta Equity Tax Rate BetaNH HOTELES SA 0,8249 69,57% 25% 1,2553
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Capital Structure:
Capital Structure
Market Value of Equity 1.214,58
Price of the share 3,94 28/11/13
Nº of Shares outstanding 308,27 28/11/13
Book Value of Debt 844,98 BS end of 2014
Total Capitalization 2.059,56
Debt/Total Capitalization 41,03%
Equity/Total Capitalization 58,97%
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Cost of Debt:
Cost of Debt
Cost of Debt 6,8750% 6y HYB Coupon
Tax rate 25% Used by Banesto
After tax Kd 5,16%
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Cost of Equity:
We use CAPM.
Cost of Equity
Risk free rate 4,16% YTM 10y Spanish
Sovereing Bond
Market risk premium 6% Pablo Fernandez Survey
Levered Beta 1,2553 Peer companies
Size Premium 0%
Cost of Equity 11,69%
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WACC:
Formula:
How Ke and WACC changes with debt.
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Lease Valuation
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Lease Valuation:
Important part of the model.
NH provided me with the following information: Latest valuation. Net book value.
We need to calculate the Lease payments that would arise as a result of transactions.
These lease payments are put through the income statement in our model, impacting our EBITDA.
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Lease Valuation: Assumptions
Assumptions: We fix the value of the assets, using the value given by
NH. We use a constant annual adjustment for our lease
payments. We assume no terminal value of the assets beyond the
lease term: Not entirely accurate. Long lease terms, which means that CF beyond the
lease are heavily discounted. Conservative assumption. We could actually pay lower rents.
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Lease Valuation:
0 The value of a S&LB Asset is equal to:
Then:
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Lease Valuation:
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Lease Valuation:
Lease calculation CPI 2%IRR 7%Term 30 years
Constant 0,95Sum 16,55
Total value of all Hotels 1.544,9
Initial lease payment 93,4
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Lease Valuation:
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Lease Valuation:
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Results
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Scenarios:
Scenario 10: Status Quo.
Scenario 1: S&LB of All Hotels.
Scenario 2: S&LB of Hotels with Market Value > Net Book Value.
Scenario 3: S&LB of Hotels with positive 2012 EBITDAR.
Scenario 4: S&LB of Hotels with positive 6y avg EBITDAR.
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Scenarios:
Scenario 5: S&LB Hotels with EBITDAR > Proposed Lease payment.
Scenario 6: S&LB Hotels with 2012 EBITDAR > Avg 2012 EBITDAR of all Hotels.
Scenario 7: S&LB Hotels with 2012 EBITDAR < Avg 2012 EBITDAR of all Hotels.
Scenario 8: S&LB Hotels with Market Value > avg Market Value.
Scenario 9: S&LB Hotels with Market Value < avg Market Value.
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Results:
Sensitivity Analysis Price/share Upside480,39%
1 € 10,3 114% 2 € 7,3 53% 3 € 10,2 112% 4 € 10,2 111%
Scenario 5 € 9,1 90% 6 € 8,6 78% 7 € 6,6 38% 8 € 8,7 82% 9 € 6,5 34% 10 € 4,8 0%
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Results:
Sensitivity Analysis Price/share Upside After tax
480,39% cash inflow 1 € 10,3 114% 1564 2 € 7,3 53% 725 3 € 10,2 112% 1526 4 € 10,2 111% 1525
Scenario 5 € 9,1 90% 1216 6 € 8,6 78% 1052 7 € 6,6 38% 511 8 € 8,7 82% 1107 9 € 6,5 34% 457 10 € 4,8 0% 0
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Sensitivity: Scenario1Independent variables: IRR and Lease Term
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Operational Profile:Scenario 10: Status Quo vs. Scenario 1: S&LB All Hotels
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Sensitivity: Scenario 5Independent variables: IRR and Lease TermScenario 5: S&LB Hotels with EBITDAR > than proposed Lease
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Sensitivity: Effect of Capital Gains (Losses)Independent variables: Market Value and Net Book Value
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Conclusion
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Conclusion:
According to the results obtained, S&LB transactions do create value for the shareholders of our target company.
There is limited influence of Investor IRR and term lease, meaning that there is value creation for a wide range of values for this variables.
The most important determinant in the value creation process of these strategies is the after tax cash inflow. Capital gains or losses have limited influence.
Capital losses are actually a value creator in our simulation, because they create tax shields, giving us a higher after tax cash inflow.
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Conclusion:
It is hard to extrapolate the results obtained for NH to other companies, but the data seems to land overwhelmingly on the side of S&LB transactions.
There seems to be great leeway to accommodate the particular circumstances of any company and still create value with the transaction.
More research should be conducted in the following areas: S&LB transactions in more Hotel companies, and in other industries. Sale and Management back.
More flexible. Better alignment with Asset light strategies.
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Thank you