Travelodge - Staying Power - Initiation
All,
Please find our new analysis here.
Travelodge has grown rapidly since COVID in terms of scale and profitability. The industry in the UK is mature, and higher taxes and wages will crimp further growth, but Travelodge is looking to Spain for expansion. As an asset light business, fixed rentals represent a significant proportion of overall costs, but as proved in the past, landlords can be flexible if the threat of administration suggests hotels being handed back. GoldenTree will need to manage the timing of its refinancing well. We still expect an equity cushion under the bonds, but this will be volatile.
Investment Discussion:
- We are not becoming involved with Travelodge at this time.
- The 10.25% 2028 GBP SSNs are callable at 102.563 now and at par from April 2027. The EUR FRN is callable at 100.5 now and Par from June this year. Trading at 96%, upside in the GBP SSNs is 7 points, and downside is 4 points (trade out to 15%). The Sonia +3.75% 2030 FRN trades at 92 and has 8 points of upside and 10 points of downside (trading out to c12%).
- Travelodge will wait until they think they get a lower coupon before refinancing the £415m April-28 SUNs. Getting a better deal on the 2030 FRN margin is unlikely in the current environment, so it will be left in place for now.
- Travelodge performance will be driven by the UK economy (the Irish/Spanish businesses are small), and whilst we expect some margin contraction due to higher tax (staff and rates), and staff costs, even with a recession in H2 26 baked in, Travelodge has sufficient cash and RCF availability to fund itself.
- Our model assumes is stressed for a 10% reduction in Occupancy in Q3/Q4, our forecast is that liquidity is sufficient, there are also some Freehold assets that Golden Tree could raise cash on to plug the gap.
- In a severe downturn, landlords would almost certainly want to negotiate rental reductions or holidays rather than see hotels returned under a court process.
- In a restructuring, any return for creditors would be capped at par, as Golden Tree has a par take out; if they were able to negotiate sufficient rental reductions with landlords, they could take out the notes.
Current Trading:
Q4 25
- Weak H1 in London, but stronger H2: FY Revenue was up 0.7%; a weak H1 (-3.2%), driven by an underperformance in London, was predominantly recovered in H2 which was 4.2% higher (2.3% LfL). RevPar ended 1.8% higher at £61.69, recovering well from -1.9% in H1, Occupancy in was 0.7% up, both of with added to the Revenue recovery. Food and Beverage growth of 3% also contributed as Travelodge wrings as much revenue as possible from its estate.
- FY EBITDA fell £39.5m to £161.2m: reflecting c.£40m of underlying cost inflation dominated by the annualisation of National Living Wage increases (c10% April 2024, c7% April 2025), employer National Insurance contributions from April 2025, and uncapped five-yearly rent reviews now cascading through the portfolio. Cost discipline and in-sourcing initiatives helped mitigate; however, the structural magnitude of these regulatory and inflationary pressures means EBITDA absorption was substantial.
- Strong occupancy maintained well ahead of market, occupancy recovered in H2, driven by the improvement in the London market. Overall, it fell 1.8% in the year, but by Q4 it was showing YoY growth.
- 21 UK hotels opened in 2025 across leasehold and freehold models: four traditional leaseholds (lower than historical 15–20 due to real estate market challenges), five leasehold rebrands, and twelve freehold acquisitions (rebranded and refitted). Two office-to-hotel change-of-use projects at St Paul's and Liverpool Street advanced through planning. Spain doubled footprint since 2023; two freehold contracts exchanged for Bilbao (April 2026 opening) and Madrid (2027).
- Free cash generation of £49.7m before development capex, with year-end cash of £113.2m, reflecting EBITDA-driven cash flow partly offset by capex including the refit programme (two-thirds of estate upgraded to new look and feel, delivering positive commercial benefits). Refit programme delivering customer quality uplift (369 hotels received Tripadvisor Traveller's Choice Awards, up 45 on prior year; >93% rated 4 or above on TripAdvisor).
- Q1 2026 trading solid with total revenue c.3% ahead of 2025 levels (1 Jan–18 Mar 2026 vs same 2025 period), driven by new hotel maturity, continued Spanish strength and outperformance against MSE segment on occupancy (c.9pts ahead). London faced headwinds from fewer events and softer corporate demand; regions more resilient with rate in line with 2025. Booked revenue ahead of prior year with encouraging long-lead patterns despite economic uncertainty. To test business resilience, we have deliberately modelled the impact of a recession in Q3/Q4 26, with recovery coming in 2027. Our forecast show Travelodge can ride it out.
Key Conclusions:
- As the company section highlights, Travelodge is the #2nd largest player, with an overwhelmingly leasehold portfolio. Growth is slowing as the industry matures and the UK economy is stalling. Travelodge is looking to less developed budget markets like Spain to boost future growth.
- For the industry, higher taxes (corporate and business rates) will hurt margins; staff reductions will lessen the impact of these costs, but we have seen the high point in for margins in the UK.
- Travelodge has no debt amortisation until the GBP maturity in April 2028 (followed by the EUR 2030 notes). GoldenTree is not going to call this capital structure any time soon. The power of the sponsor in this is significant; they have the relationships with the landlords, who will not want to see hotels returned as part of a CVA.
- The second half of 2025 saw strong RevPar recovery (+2.3% LfL), the H1 weakness in London meant that FY revenue was up only 0.7%
Cost control meant the EBITDA fall was in line with the £40m of cost headwinds
- As our Recent Trading section shows, H2 was stronger than H1 (-3.2% vs +4.2%), as a result FY revenue was 0.7% higher. H2 LfL revenue growth was 3.2%, as a result of a stronger performance in London. FY 24 EBITDA margin fell from 19.4% to 15.4%; the £39.5m fall largely through £40m of additional wages (national minimum wage increase, and National Insurance increases). There will be further cost increases next year with higher business rates and higher wages again. Management expects to be be able to continue to reduce costs, but a net increase of £5m+ is likely in our calculations.
- In our model, we stressed Travelodge's results for 2026, and the company can still meet its cash flow obligations using cash and undrawn RCF. The balance of power between landlords and Travelodge gives GoldenTree plenty of leverage. Most landlords will want to avoid getting a lot of hotels back in a CVA. We are not very worried about a UK recession happening, but are encouraged by the resilience of Travelodge to a jolt if it comes.
- Our DCF shows that Travelodge is overleveraged relative to cash generation ability. As an asset light hotel operator, this can be sustained due to the length of leases, but creates a very high level of fixed costs (rent). Lease rental commitments are around £260m a year, so FCF coverage is barely >1x. To get its refinance done, Travelodge will need to get its margins back to 16% - 17% over the next couple of years.
I look forward to discussing this with you all,
Aengus
T: +44 203 744 7055