Fitch Ratings has assigned One Hotels GmbH (Motel One) an expected Long-Term Issuer Default Rating (IDR) of 'B+(EXP)'.

The Outlook is Stable. Fitch also assigned it an expected senior secured debt rating of 'BB-(EXP)' with a Recovery Rating of 'RR3' to the proposed EUR800 million term loan B (TLB).

The company plans to use proceeds from senior secured debt, including proposed TLB, to refinance bridge facilities obtained to finance the buyout of a minority shareholder's 35% stake. The assignment of final ratings are subject to final documentation confirming to information already received.

The 'B+(EXP)' rating reflects Motel One's moderate business scale and diversification balanced by superior profitability and expected positive free cash flow (FCF) generation. It also assumes the company will deleverage over the next three years as post-transaction leverage is high and outside of the range that is commensurate with a 'B+(EXP)' rating. This is based on our expectation of a smooth execution of Motel One's growth strategy and continuation of strong performance of the existing asset base.

Key Rating Drivers

Moderate Scale and Diversification: We assess Motel One's business profile as being in line with the low 'BB' category rating in view of its business scale and diversification. It operates primarily under one brand, with some diversification across western Europe, although the main German market accounted for 65% of revenue in 2023. The room system size of 26,470 rooms in 2023 is more in line with the 'B' category median but our scale assessment benefits from superior EBITDAR margin, which translates into EBITDAR of more than EUR400 million, close to the 'BB' category median.

Material Business Growth: Pro-forma for the carve-out of its real-estate assets, we estimate that Motel One's revenue grew by a third and Fitch-adjusted EBITDA increased to more than EUR230 million in 2023. This was driven by a post-pandemic business recovery, pricing power and hotel network expansion. We believe that growth will decelerate from 2024 but remain high versus other western European peers' due to new hotel openings and our assumption that Motel One will retain its ability to price rooms above inflation.

Further, we expect a positive impact from international travel to Germany, which has been lagging behind other markets in 2023 and is likely to benefit from the European football championship competition in 2024.

Manageable Strategy Execution Risks: Motel One's strategy relies on the expansion of its hotel portfolio through leasing new properties, which does not require upfront capex unlike asset-heavy operators that invest in hotel construction. Our rating case assumes an increase in the number of hotels to 117 in 2027 (2023: 94), in line with the company's secured pipeline, which bears limited execution risks as contracts with property owners are already signed. Motel One has a record of new hotels quickly reaching profitability and the pipeline does not consider any large assets in new markets. We also assume that hotels will be opened on time as delays have mostly been contained to within three months in the past couple of years.

Superior Profitability: Motel One's EBITDAR margin of around 50% is the highest in Fitch's global lodging portfolio, with the exception of Wyndham Hotels & Resorts Inc. (BB+/Stable) for which fully franchised operations lead to around 80% EBITDAR margins. Motel One's superior profitability in comparison with asset-heavy peers results from its prime locations, standardised rooms and operating efficiencies. We expect high profit margins to translate into positive pre-dividend FCF, despite higher interest payments for the new debt.

EBITDA Margin Improvement: Our rating case assumes a gradual EBITDA margin improvement over 2024-2027 due to pricing actions and increase in the number of fully ramped-up hotels relative to new openings. We also expect margins to benefit from portfolio composition changes towards markets with higher rates and occupancies, such as London and Paris. These strong and mildly growing operating margins are critical to the company's deleveraging trajectory, underpinning the 'B+(EXP)' IDR.

Positive FCF, Self-Funded Growth: The 'B+(EXP)' IDR reflects Motel One's sustained positive FCF, supported by strong operating margins, and its ability to self-fund its medium-term expansion. This inherent FCF generating capacity balances its limited scale and diversification, and differentiates it from lower-rated sector peers. Deteriorating FCF would signal structural weaknesses of Motel One's operating risk or a more aggressive financial policy, and would put pressure on the rating.

No Dividend Commitment: The company's intention is to operate with EUR100 million-EUR150 million of cash on its balance sheet, with excess cash potentially used for bolt-on M&A, investments in new hotels or dividends. Such capital allocation would generally be neutral for the ratings as we consider gross leverage in our analysis, although dividend distributions would affect FCF.

Motel One has been paying dividends from internally generated cash but has no dividend commitment to its shareholders. Our analysis assumes some recurring dividends from 2025, subject to the limitation provisions of the financing documentation, as well as taking into account a measured financial policy of the company's shareholders.

Strong Deleveraging Capacity: Motel One's 'B+(EXP)' rating is conditional on rapid deleveraging over the next three years. We estimate EBITDAR leverage at 6.3x in 2024, which is high for the rating, but we expect the rating headroom to increase substantially over 2025-2026 as EBITDAR growth will lead to organic deleveraging.

Derivation Summary

In terms of room system size and business scale, Motel One is significantly smaller than higher rated globally diversified peers such as Accor SA (BBB-/Positive), Hyatt Hotels Corporation (BBB-/Stable), and Wyndham Hotels & Resorts Inc. (BB+/Stable). It also has a weaker financial structure, with higher leverage and more limited financial flexibility. This results in significant rating differential with these peers.

We see NH Hotel Group S.A. (BB-/Stable) as the closest peer of Motel One, in view of its predominantly European operations and similar scale in EBITDAR, despite larger room system size. Motel One is rated one notch lower than NH Hotel, which reflects NH Hotel's lower financial leverage and stronger pre-dividend FCF generation.

Motel One is rated two notches above Greek hotel operator Sani/Ikos Group Newco S.C.A. (B-/Stable) due to its larger scale, better diversification, stronger FCF profile and lower leverage.

Motel One has the same rating as Dubai-based operator FIVE Holdings (BVI) Limited (B+/Stable), despite being larger, more profitable and better-diversified. This is because we expect stronger deleveraging for FIVE.

Key Assumptions

Sales growth CAGR of around 12% for 2024-2027

Organic growth is supported by a steady improvement in occupancy rates, alongside above-inflation growth in the room night daily rate

EBITDAR margins steadily improving towards 51.6% in 2027 from around 50% in 2023, supported by a strong focus on cost management, fast turnaround of new hotels to profitability and improving occupancy rates at existing sites

No significant working-capital outflows to 2027

Capex at 6%-10% of revenue per annum, for maintenance of existing sites including redesign and new site openings

Annual dividend payments of EUR75 million in 2024 (already paid) followed by assumed payout at 50% of consolidated net income

Recovery Analysis

We assume that the company would be reorganised as a going-concern (GC) in bankruptcy rather than liquidated. In our bespoke recovery analysis, we estimate GC EBITDA available to creditors of around EUR180 million. This reflects Fitch's view of a sustainable, post-reorganisation EBITDA level on which we base the enterprise valuation (EV). Distress would likely arise from an erosion of the brand value leading to a loss of market share in an inflationary cost environment. At the GC EBITDA, the company will generate reduced operating cash flow that would provide limited room for investments in growth capex.

We have applied a 6.0x EV/EBITDA multiple to the GC EBITDA to calculate a post-reorganisation EV. This multiple reflects the company's strong brand and business model concept, prime inner-city locations and high profitability. This is 0.5x higher than International Park Holdings' (Portaventura) given the latter's single-location asset and lower diversification.

Motel One's envisaged EUR1.3 billion senior secured debt (including its EUR800 million TLB) ranks equally with its envisaged EUR100 million revolving credit facility (RCF), which we assume to be fully drawn in a default. Our waterfall analysis generates a ranked recovery for Motel One's senior secured debt in the 'RR3' band, indicating a 'BB-(EXP)' instrument rating, one notch above the IDR. The waterfall analysis output percentage on current metrics and assumptions is 69%.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Successful execution of the growth strategy translating into double-digit revenue growth and EBITDAR expansion

EBITDAR leverage below 5.5x on a sustained basis

EBITDAR fixed-charge coverage above 1.8x on a sustained basis

Consistently positive FCF

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Material slowdown in revenue growth, with EBITDAR margin remaining flat or decreasing

EBITDAR leverage above 6x on a sustained basis

EBITDAR fixed-charge coverage below 1.5x on a sustained basis

Neutral-to-negative FCF

Liquidity and Debt Structure

Comfortable Liquidity: Pro-forma to the upcoming transaction, we expect Motel One to have cash on balance sheet of around EUR130 million at end-2024, together with an undrawn RCF of EUR100 million. This, combined with a highly cash generative business model, is sufficient to support the company's expansion plans and cover financing costs without external funding. Motel One also has a negative working capital position, which allows it to typically generate cash as it expands.

Fitch restricts EUR20 million of reported cash for the minimum cash required for day-to-day operations, and to cover intra-year swings in working capital.

Issuer Profile

Motel One is a hotel operator with a growing market position within its niche 'affordable design' segment in western Europe.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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