The compelling Lantern Hotel Group has put to market one of its final non-core hotels, as it asks shareholders to ponder selling up the lot.
The 150-year-old Commodore Hotel – originally the First Old Commodore, and rumoured favourite haunt of Henry Lawson – is a modern two-level pub in McMahon’s Point, beside the bustling North Sydney metropolis.
Despite its 1138 m² site with large licensed outdoor area, strong food & bev trade and 17 gaming machines, it was categorised as ‘non-core’ to Lantern, as it did not fulfil the criteria of hotels that are “gaming-led, scalable and offer a multi-faceted and diverse range of leisure and entertainment”.
This mandate, emanating from the Board’s formal ‘Transition Plan’ voted on at the end of 2015, has seen the systematic sell-off of five pubs since the plan began, bringing an average premium to book value of 14 per cent, and as high as 28 per cent.
The recent ASX-announcement for the listed Group on its results for FY16 cited the non-core sell-off as “nearing completion” – but accompanying today’s news of the Commodore sale was an invitation to shareholders to vote on selling the complete portfolio at the upcoming AGM, on 25 October.
In keeping with ASX requirements, Lantern (ASX: LTN) must seek shareholder approval by vote for the sale of its “main undertaking” – being the six remaining Core hotels; the Ambarvale Hotel, Crown Hotel, Five Dock Hotel, General Gordon Hotel, Uncle Bucks Hotel, and Waterworks Hotel.
The Board is fulfilling its duty to shareholders by advising that – given the current market conditions, being a distinct shortage of premium assets available – and the demonstrable upside legacy of Lantern’s assets – given they are traditionally under-capitalised and ripe for growth – under the circumstances, the best return for investors may be to sell the lot.
Until now, LTN has spoken of re-structure, re-capitalising of debt and appropriate assets, and eventual expansion. This brought about significant turnaround in the past set of results, and led to the company’s recent first-ever payment of dividends to security-holders.
The Commodore is being marketed by Ray White Hotels, which poignantly notes the prevalence of capital “looking for yield” and the Hotel’s recent jump 130 places in the State gaming rankings in Q1FY17.
“Hotels like the Commodore are very rare in that they enjoy the potent mix of historically strong cash flow generation, as well as being situated on very valuable parcels of premium commercial land holdings – providing the potential, indexed to approvals and investment cycle chronology, for downstream development of both a mixed and alternative use basis,” explains Ray White Asia-Pacific director, Andrew Jolliffe.
Furthering the upside, head of research for Ray White Group, Vanessa Rader, predicts development projects will increase in the area once the Baird Government’s transport strategy is implemented. The North Sydney area already enjoys solid high-end residential and commercial populations.
LTN’s board expects a complete sell-off of the portfolio to be executed within 12 months, and says security-holders will be provided distributions progressively, funded from the net proceeds.
The Board, which strongly endorses a vote in favour by the stakeholders, lists advantages to the complete sell-off as:
- The Group is too small to support its current corporate and listed structure
- Due to historical under-investment, substantial capital would be required to make significant improvements to the Core properties, returns on which cannot be assured. Even if done, the Group would still be sub-scale
- Hotel assets meeting the strategic criteria are both rare and expensive. The directors believe growth via acquisition at suitable yields would be difficult
- The Core properties are highly prized and may achieve significantly above book value
- Dividends from the sales may exceed the current share trading price
The Board does, of course, also offer the potential disadvantages:
- Reinvesting in the Core properties could return a superior net yield to the Sell Down Strategy
- The value of the Core portfolio could increase above what can be achieved by selling now
- Another option for the Group may yet come to light that is better than current options
- If LTN sells most or all of its six remaining ‘main undertaking’ assets, it risks suspension or de-listing from the ASX, which will likely render securities unable to be traded
The Board makes special mention of the fact that execution of the Sell Down “does not meant that the Group will wind up its operations”, but will seek further shareholder advice on how to proceed – up to and including de-listing from the ASX and winding up the business.
The Sell Down resolution itself is intended to give the Board optimum flexibility to pursue the best interests of shareholders – including potential offers for all the Core properties.
Should the Sell Down not pass, the Board will continue its current divestment plans, but may also entertain sale of one or more Core properties anyway, pending offers “the directors believe are in the best interests of the group”.
The Expression of Interest campaign for the Commodore Hotel will set sail next week, closing Wednesday 12 October, 2016.