22 Jun 2020
Words
Nathan Eades
Key considerations for buying & selling in the motel & accommodation industry
Nathan Eades:
We haven't had a motel catch-up for quite a number of weeks during the COVID period. It's all unfolded in each state at different rates. We haven't really been in a position to give anyone any ideas on where the market is at. So, today we thought we'd get together. We've got an expert panel, a solicitor, accountant, and a finance broker to give everyone a bit of an update if they were looking to buy or sell a motel anywhere across the country, how we'd go about it and find out what the various different experts within the industry are seeing.
Whilst it's probably a little bit too soon to tell exactly what's going to happen and how we're going to come out the other side. And certainly from a broker that specialises in the accommodation industry, we're starting to get asked the same questions most weeks and most days now. I thought no better way to answer those questions than to get the experts involved to give us some insights as to exactly what's going on. Firstly, we've got three experts within the industry, all specialised in the accommodation industry. So firstly Paul Grant from Mike Phipps Finance, who specialises in getting our clients the lending and the financial requirements they need to buy these properties. We've got Rob McAdam, who's a partner at McAdam Siemon. He not only prepares the financial statements for these properties, but also from a buyer's perspective sets up the company trust and also verifies that income during the due diligence period. Welcome Rob. And David Adolphe from Hillhouse Legal Partners, who is special counsel specialising in the motel industry. We might just kick straight off, the million dollar question: “If I do decide to put my property on the market or I am looking to buy a property, what's the bank's position at the moment? Are the banks lending on motels, and if they are, what will they be looking for now that's different to pre-COVID days?” So probably Paul's the best to start off with this.
Paul Grant:
It is a million dollar question, and I suppose there's a lot of misinformation out there right now. It depends who you speak to, you will get a different answer. Banks certainly are not closed, but don't get me wrong, but it's very, very difficult to get deals across the line right now. If we want to get something funded and settled in the next week, it really needs to be an absolutely compelling case. And compelling can mean all sorts of things. But really, a borrower's ability to carry whatever debt they're trying to take out from income sources we know that aren't going to be effected. By its very nature, that's very tough right now. What I can see happening post-COVID, or on the way out, when we do start to see more transactions come through is, banks really looking at recovery for motels. Particularly, when are they going to get back to pre-COVID levels? Getting some comfort on what pre-COVID levels were like. So really, really interrogate, or getting accountants to interrogate historical financials. But probably more importantly, getting industry specialist accountants to give us forecasts, whether that be 12 month forecasts, or even out to 24 months depending on what's available. Showing random periods, showing when they're going to be able to meet full rent commitments. And more importantly, for us, see the finance work showing when they're going to be able to make their financial commitments as well. I think that for me is the crucial part right now.
Nathan Eades:
That makes for a good segue across to Rob. Even if we were to be in a position where a vendor has put a property on the market, we found a buyer, and then we get through to a verification period. Obviously the financial statements that we've used to sell the property are probably reflecting a pre-COVID profit. How would you treat that verification period in due diligence, Rob? Or if you're preparing a profit statement for a new listing site and it's going on the market, how would you treat those months leading into and coming out of COVID?
Rob McAdam:
Let’s look firstly starting at the profit and loss for the sale. Obviously, anything going past April you just can't, you really have to ignore. So at this stage I would be looking at taking the numbers up to 31st of March, 2020, going back to the last quarter of 2019. And probably even looking at 2018 to see if they are realistic, to see if we've got some consistency. Picking them up and dumping them against the nine month numbers. That should give you a realistic bottom line adjusted P&L for sale bottom line. It's just in relation to the verification. As Paul said, I think the key is going to probably be doing a bit more digging down. So if I'm making assumptions in my report that the bank, firstly, the purchasers are comfortable with it.
So it's really important for people that are looking to sell to have all their information probably going back realistically from 1st of July of 2017, all the way through, up to date and as accurate as they can possibly get it. Because we will need to be able to justify what is a realistic post-COVID position. Taking that, using if we'll say from April, or sorry, the projection needed to be done from October-November, ramping that over six months up to what it should be. The banks may even require 24 months. If it's a bigger motel, I guess we just have to play it by ear. But it's trying to get some normality. What is a normal bottom line going to look like in the next 12 month period? So as Paul said, they can pay the rent, the full rent. And from the bank's point of view, can they can meet all their loan repayments, their loan commitments?
Nathan Eades:
I suppose it all depends on the type of business as well. A regional motel in a mining area is very different to a corporate motel in Brisbane, or a holiday business on the Gold Coast.
Rob McAdam:
I guess each month that goes by we're going to get more data. So as the borders are opened, hopefully soon, restrictions are eased and people can start traveling, we're going to get what the new norm is. And if there is pent up demand, hopefully that will start reflecting in the numbers, in occupancy percentage. And also another thing is obviously room rates and making sure that they haven't dropped away to get those occupancy percentages up too high. The longer it goes, the more months that go by, I think the easier it will be to put those numbers together. But I guess the key, from a verification point of view, is making sure that the sellers have good information. That they're keeping their reports on their systems, financials, et cetera, et cetera.
Nathan Eades:
Probably from a legal perspective, we'll jump straight over to David now. Obviously rather than looking forward at transactions and how they're going to be traded, one of the biggest conversations in your world, David, is around landlord and tenant relationships and how we're treating rent reductions.
David Adolphe:
I think that putting it in the context of what overall we've been discussing in terms of looking at future sales, I think it's important at this stage with landlords and tenants to be working to get recovery sorted now. So you're looking at, as you say, lease negotiations, trying to deal with the issue of these accumulating rents that tenants would be facing with a downturn in their profits. GST turnover downturn. So it's really that negotiation that we're trying to work on. And that's really what the role of the code that came in. That's that national cabinet mandatory code of conduct on commercial leasing. That came in on the 3rd of April. And then it was up to each state then to implement the provisions in the code into their state legislation. And it is quite timely that we're doing it today on the 29th May, because yesterday on the 28th Queensland finally passed their legislation. Both New South Wales and Victoria had done so earlier. New South Wales had passed legislation on the 24th of April and Victoria on the 1st of May. So all three of those states now have legislation in place.
And what it seeks to do is to try to implement some of those leasing principles that were in the code. And they do it in different ways across the different pieces of legislation, but they're all very similar in how they do it. In terms of Queensland, they're looking at, all three of them use the JobKeeper test to work out whether you've got an eligible lease. So that's looking at that 30% GST turnover reduction, and the other SME provisions as well. So once you have that, you've gotten yourself satisfied there, then it's a matter of trying to work out some disclosure of financial information. I know it's in Queensland legislation there now as an obligation on the landlord to provide some financial information as well. And that the parties enter into a good faith negotiation for the reduction of rent. There's varying degrees of how the principles are to be applied. Some are more strict in the legislation than others. Others just simply refer to the code itself as a bit of a fallback for the parties to look at. Once the parties get to an agreement on what that rent reduction will be, then it should be formalised by way of some sort of agreement. That could then have the parties moving forward from a position that they know what their rights and obligations are. And that will be really the roadmap to recovery, getting that business back onto its feet and ultimately in a position to sell if that's what they are looking to do.
Nathan Eades:
Obviously the banks will then be interested in how long that rent load is going to be in place for, in terms of the future of the loan. It's really important for all of our clients at the moment to speaking with the experts. If you do have any questions at all, these are the guys that are obviously the ones to speak to. If you are lucky to have any questions at all, you can get the contacts at the end of this video, for Paul, Dave, and Rob, they'll be listed at the end of this video. Please pick up the phone and get some good advice. We're not out of the woods yet, but we're all starting to see some really good green shoots in the marketplace. We're really hoping for the end of 2020 and 2021 and beyond to be really good years for your business and ours. So we'll sign off now. And we will be back with another update when more news is to hand. And until then, take care of yourselves, and good health to all. Cheers.
Nathan Eades
0448 339 920
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Paul Grant
0448 417 754
Rob McAdam
David Adolphe
