15 Jun 2020
Words Chenoa Daniel

Conversations On The Couch: Are banks still lending on management rights businesses?

Chenoa Daniel:

Hi guys. I'm Chenoa Daniel from Resort Brokers Sunshine Coast, and I would like to welcome our first Conversation on the Couch with our industry colleague, Paul Grant. Today, we're going to be discussing how COVID-19 has affected our industries. So could you give us a bit of an overview on Phipps Finance, your role, and what it is that you do in our industry?

Paul Grant:

I'm a finance broker with Mark Phipps Finance. I'm based here on the beautiful Sunshine Coast. Our business helps clients buying into the accommodation sector, primarily management rights, but also motels et cetera.

We're always helping people out who want to buy into accommodation. We negotiate their finance package with the bank but at the outset, we give them a hand in terms of working out what their budget might look like. We do the ‘fun’ chats with the banks, and then help them get through to settlement and into one of these beautiful businesses.

Chenoa Daniel:

So ultimately, you're a very important part of buying management rights because without you, we couldn't get any money.

Paul Grant:

Unless you've got the cash in the bank - that's exactly why I'm here.

Chenoa Daniel:

We found that the spread of the coronavirus has really affected everything from the way that we live to our economy, and also the financial and social impacts that it's having within our industry. What are the effects on your industry and lending on management rights?

Paul Grant:

Good question. So I think March 13 was D-day for us. At that point in time, we had a number of contracts on the go and, unfortunately, a lot of those got terminated. So people who didn't have unconditional finance, most of them decided to put things on hold. Importantly, the feedback we've received is most people actually put their deals on hold and have said that they're going to come back.

In fact, the phones have now started ringing. There's the good news. And we're filming this in late May. Good news is starting to filter through. My phone started ringing again and a lot of those are the people who put things on hold. Obviously funding for short term complexes, well that was pretty tough given what's happened.

Chenoa Daniel:

Absolutely understandable.

Paul Grant:

Got to say one thing, the banks, people don't mind bank bashing, but the banks have been great. Supporting clients that needed a hand by interest deferrals or payment holidays, and they were really on the front foot helping people out. What we've seen is most of our clients, that's all they needed.

Chenoa Daniel:

That's fantastic. So no bank bashing. They're friends. Give them a cuddle today. That's very good to hear. Tell me what initial impacts the virus is having on the travel and holiday industries. Many managers are asking us all the time. Can we sell our business? Is it actually sale-able in this market from a lending perspective? What are your thoughts?

Paul Grant:

Well, it's hard. Don't get me wrong. It's very, very difficult, but every transaction we've got to look at on a case by case basis. There's good reasons why transactions are still going through. We're still doing deals at the moment. Don't get me wrong. It's not easy, but we've got clients that are buying businesses and they don't need the cash flow for the management rights to show the bank.

There're some challenges in terms of valuations. The message at the moment is that it’s a case by case basis. Don't throw any opportunity out. There might be a buyer and there might be a transaction to be done, even though parameters have changed slightly.

There's stories about, I won't name particular banks, but there's a lot of misinformation out there about what banks will and won't do. There's stories about particular banks that have shut up shop and are not lending. One in particular I can think of, but that bank gave me a quote for a short term management rights yesterday.

Chenoa Daniel:

So the tables are turning.

Paul Grant:

Well, not necessarily tables are turning, but the circumstances of that transaction worked and we were able to demonstrate to that bank why it was still a good idea.

Chenoa Daniel:

Again a pivotal point is making sure that your finance broker, that you're working with, has the relationships with the banks to show a bank that this transaction can actually work.

Paul Grant:

There will be transactions that don't work, that would have worked in February, that don't now. What we're saying to people in those instances are, ‘if you still want a sale, if you still want to buy, maybe it's worth putting the transaction off’. I can think of any number of transactions we've got at the moment that are simply on hold. Willing vendor, willing buyer, agents advised both accordingly. We've made an agreement that when we've got some great signs, some good crystallized bookings, and the P&L is starting to return back to normal, we'll pick up a deal. And off we go again.

Chenoa Daniel:

So hopefully this travel ban being lifted will help those transactions to continue to grow. Fingers crossed. With so many people out of work and the Premier of Queensland introducing new tenancy laws, current managers and potential operators are worried this virus may actually affect some of the permanent management rights. What are the banks' stance on lending for the permanent sector because it is quite different to holiday?

Paul Grant:

If a bank manager had a choice of a holiday resort or a permanent to look at they’re going to choose a permanent complex. You can't escape that fact. The good thing with permanents, and we've got clients all across the country, and obviously centralised in south east Queensland, we haven't seen the Armageddon in terms of rental arrears and vacancies that, perhaps, was thought might happen. Will it come when things roll off, bank holidays come off in September, and the JobKeeper and JobSeeker finish? I don't know. I really hope not. But all the steps we're seeing is that those are reasons vacancies are actually carrying in Sydney and Melbourne. These are very fundamentally different markets than south east Queensland. So the stats and the news were saying, it's good, permanent management rights are what, I think, is one of the more solid asset classes right now. We're still seeing deals get done and deals getting done without enormous discounts or sometimes are there any discounts to pre COVID levels.

Chenoa Daniel:

Moving forward. Can we expect different lending percentages be reduced? Just for security purposes?

Paul Grant:

I think very broadly, and you're going to get sick of me saying ‘case by case basis’, but again, case by case basis. We think at the moment, if we're talking to someone, we should start at 65% levels. That should be our baseline. They may be fundable. There may be great reasons why a deal works at 70%. We might get banks interested. We've got experienced core and some really strong facets to the deal. We might get financing approved at 70%. The flip side of that, deals might not work at 65. They might only work at 50, but boring, boring, case by case.

Chenoa Daniel:

That's okay. So tell me in the ‘case by case’, do you think that clients with experience are more likely still to get higher lending capacity? Because I wonder whether we will see more first time buyers enter the market with redundancy packages and so on. Will the banks still lend to first time operators?

Paul Grant:

I'm going to get a much better response than if I've got some really old financial statements, no forecast numbers, and a first time operator, who's never touched the business before. Not to say that I can't get that deal done.

Chenoa Daniel:

Don't forget Three Figures, or three years’ worth of P&Ls will help.

Paul Grant:

Our business has always been a fan of it. At the moment we've got an opportunity to present deals to banks. There's going to be a bleep on the radar. It's going to be a COVID blip. What I want to do when I take a deal to a bank is explain to them this business has been profitable for a number of years. Here's the evidence. Here's financials going back two, three years, that shows where it's at and why that profitability is sustainable. Here's a blip on the radar and here's our way we're going to claw our way back to what those numbers look like. You're  an accountant reviewing those P&Ls. You're going to feel confident with your bank looking at it. You're going to feel more confident on that than you are on a set of P&Ls for 12 months that might be three or four months old. If we don't get through threes, I still think we'll get deals done. But again, it's that risk assessment. What is a stronger proposition if you are looking at that to lend money.

Chenoa Daniel:

Do you think that the bank's position is that they still find management rights a secure business model?

Paul Grant:

Without a doubt? We’ve assisted so many clients, we've got hundreds of clients around the tracks. When the pandemic hit and really hit hard, we assisted a lot of our clients in getting bank deferrals. So they put their paying on commitments to their interests and commitments on hold for three to six months. The next stage of that was, ‘do you need a hand with some cashflow injection?’ Do you actually need some money in your business to get through this period. Of all of our clients I've only had one that said ‘yes’. The rest of those clients are able to combat the worst economic conditions in a hundred years without additional cashflow.

Chenoa Daniel:

That's amazing.

Paul Grant:

It’s the guaranteed caretaker’s salary that's really strong. It's helping them get by. If you're in permanent management rights, you might have a small blip on the radar, but they're trading really well from what we hear. The holiday guys are a bit of a ‘bunker down and get by’ based on what's coming through the door without needing additional capital. That point hasn't been lost by our friends at the banks. So, long answer to your question. Short answer is ‘yes’, strong business model for sure.

Chenoa Daniel:

Paul, thank you for being so positive today. It's really nice when everybody is going through a situation like this to have some bright light at the end of the tunnel when it comes to management rights.

So thank you for your honesty and for your time. I'm sure if anybody needs any finance or has any questions, be sure to give Paul a call.

Chenoa Daniel 

Chenoa@resortbrokers.com.au

0403 143 151

Take a look at Chenoa's videos and others from our video library.

Paul Grant

Mike Phipps Finance

0448 417 754