CAPITAL MARKETS DAY 2017 DALATA HOTEL GROUP PLC CLAYTON HOTEL CHISWICK, 7 NOVEMBER 2017
AGENDA 8.45am Welcome & Overview Pat McCann 9.00am Impact of IFRS 16 Carol Phelan 9.45am Overview of UK Operat ions Emma Dalton 10.15am Coffee Break 10.45am Overview of Revenue Management Richard Noake 11.00am Overview of UK Corporate S ales Richard Coupland 11.15am UK Growt h S t rat egy Dermot Crowley 12.15pm Guest S peaker – Robin Rossman, S TR 12.30pm Lunch 1.00pm Q&A – Pat McCann & Dermot Crowley
LEASE ACCOUNTING | IFRS 16 CAROL PHELAN Group Head of Financial Reporting, Treasury and Tax
DISCLAIMER The presentation contains forward looking statements. These statements have been made by the Directors in good faith based on the information available to them up to the time of their approval of this presentation. Due to inherent uncertainties, including both economic and business risk factors underlying such forward looking information, actual results may differ materially from those expressed or implied by these forward looking statements. The Directors undertake no obligation to update any forward looking statements contained in this presentation, whether as a result of new information, future events or otherwise.
LEASE ACCOUNTING | AGENDA Context Key Points Key features of standard Impact on Dalata In summary
CONTEXT
IFRS 16 | CONTEXT Dalata t oday has c. €0.9bn of propert y, plant and equipment, a limit ed number of leases and c. €0.2bn of net debt This very st rong balance sheet gives us t he flexibilit y t o take on further leaseholds which are becoming a bigger feat ure of our port folio The changing account ing requirement s for leases under IFRS 16 are t herefore relevant for Dalat a This presentation will seek t o address some of t he changes, t he impact , or not, t hereof and the remaining work t o be complet ed ahead of implement ation Effect ive from 1 January 2019 As at 31 October 2017 Leased Owned No. of rooms 1 2,233 5,097
KEY POINTS
IFRS 16 | KEY POINTS IFRS 16 will see leases t reated as financing the “ acquisition” of asset s and t his “ financing” must no longer be off balance sheet. To this end it will bring a lease liability (and a right of use -“ RoU” - asset) on balance sheet Income st atement will be impacted due t o re-categorisation of rent int o interest and depreciation with increased lease expenses in early years due t o t he front-loaded finance charge versus t he current st raight line rent expense IFRS 16 will have no impact on cash flows IFRS 16 will have no impact on st rategy or commercial negotiation, Dalata have always considered leases as anot her form of financing Dalata current ly has, and will continue t o have, plent y of capacity t o take on new leases and grow the business
KEY FEATURES OF STANDARD
IFRS 16 | BALANCE SHEET IMPACT BALANCE SHEET OVERHAUL Leases will now come ont o t he balance sheet in t he form of a: 1. Lease liabilit y: based on discounted lease payments to the expected end of the lease likely discounted using Dalata’s incremental borrowing rate at lease inception/ transition Borrowing rate for a “ loan” with similar term and security in a similar economic environment (e.g. 30 year lease borrowing rate for 30 year loan secured on a hotel lease and assuming 100% debt financing) 2. Right of Use “ RoU” asset : As we enter leases, the asset value will be based on the amount of the financial liability plus any lease payments made before or at commencement date
IFRS 16 | INCOME STATEMENT IMPACT INCOME STATEMENT: INCREASED EBITDA BUT FRONTLOADING OF INTEREST COSTS WILL REDUCE PROFITS EARLY ON: Rent expenses, ot her t han variable rent (e.g. t urnover based rent), will no longer flow t hrough operating expenses and hence EBITDA There will however be an annual interest charge on the lease liabilit y. Part of the rent payment will be allocated t o this and part t o the “ repayment ” of the lease liabilit y and so interest will be at it s highest at lease incept ion and decline as t he lease liability is “ repaid” Int erest is calculat ed using t he discount rat e and fact oring in compounding and act ual rent payment s Depreciation will flow st raight line t hrough t he P&L as t he RoU asset is depreciat ed over t he t erm of t he lease This combination of st raight line depreciat ion of the RoU asset and the effective interest rat e method will result in: higher t ot al expenses in early years t han rent would have result ed in pre IFRS 16 a decreasing “ t ot al lease expense” t hrough t he lease t erm as int erest decreases – “ front -loading”
IFRS 16 | CASH FLOW IMPACT NO CHANGE TO CASH, PRESENTATIONAL CHANGES IN FINANCIAL STATEMENTS No impact what soever on act ual pre-t ax cash flows The cash flow st at ement will have rent re-cat egorised int o int erest and “ liability repayment” so operat ing cash flow will increase and be offset by financing charges
IFRS 16 | DISCOUNT RATES Discount rates will be applied t o t he rental payment s t o create t he lease liabilit y and are the main area of significant j udgement and est imat ion The estimation of t hese are the biggest challenge current ly for all those impacted, in particular t hose wit h long t erm leases It is expected that , in line with standard, in most cases est imated incremental borrowing rate will be used t o est imat e discount rat e as near impossible t o det ermine int erest rat e implicit in t he lease “ Incremental borrowing rate” will be an estimation as companies t ypically can not borrow for this t erm or wit h t his t ype of securit y Under implementation approach select ed, the discount rate t o be used is t he est imated rate at date of t ransit ion (1 January 2019) so discount rat es up cannot be finally est imat ed unt il t hen New leases will be capit alised at discount rat es which depend on market rat es/ dynamics at t hat t ime
IFRS 16 | DISCOUNT RATES Once set on t ransit ion or upon ent ering a new lease, discount rates are not amended , unless t he lease t erm changes or t he lease is modified Companies will t herefore have different discount rat es because of timing differences in when leases are ent ered The better a credit risk and the more benign the market is, the higher a liabilit y you have on balance sheet as lower “ incremental borrowing rat e” ---> higher liability following discount ing So you will be penalised from a balance sheet perspective the more credit worthy you are and the better quality your underlying assets Therefore, users of financial st atement s will need t o look t hrough t he numbers and understand how the asset and liabilit y are being calculat ed
IFRS 16 | DISCOUNT RATES Incremental borrowing rat e must reflect a : Financing spread adj ustment – to reflect term, level of indebtedness, lessee entity, economic environment Lease specific adj ustment – for the “ secured” asset – the lease and the underlying asset to which it applies FOR EXAMPLE Hotel Operator A Hotel Operator B Highly leveraged on existing business Low levels of leverage in existing business 25 year lease, £2.5m rent p.a. 25 year lease, £2.5m rent p.a. S ay incremental borrowing rate – 8% S ay incremental borrowing rate – 5% Balance Sheet (£m) – Year 1 Post IFRS 16 Balance Sheet (£m) – Year Post IFRS 16 1 Lease Liabilit y (28.0) Lease Liabilit y (36.3) RoU Asset 28.0 36.3 RoU Asset Income statement: Income statement: Depreciat ion of RoU Asset (1.12) Depreciat ion of RoU Asset (1.45) Int erest on lease liabilit y (2.11) Int erest on lease liabilit y (1.74) Lease “ expense” (3.23) Lease “ expense” (3.19)
IMP ACT ON DALATA
IFRS 16 | IMPACT ON DALATA CHANGES IN KEY FINANCIALS As Dalat a is a very st rong credit (new leases have Group guarantee) and invest s in leases on high qualit y asset s, discount rates are expected t o be lower which will lead t o higher lease liabilities t han others with poorer quality balance sheets or lease asset s Given Dalata is a relat ively young company with essentially all material long term leases at the start of t heir life, there will be no “ averaging” due t o lease age profile so t he IFRS 16 “ front-loading” effect will be pronounced This will affect EPS EBITDA will effectively be what is current ly EBITDAR as rent is removed, apart from t urnover related rent which will remain as rent hence all EBITDA relat ed met rics change Existing debt covenants are based on frozen GAAP so no impact
IFRS 16 | IMPACT ON DALATA COMMERCIAL IMPACT ON LEASES This will not impact on how we st ruct ure leases: We have always viewed leases as a form of financing which increases our long term financial obligat ions As always, financing for each potential opportunit y will be assessed in light of market dynamics, overall capit al st ruct ure of t he Group, cash flow proj ect ions and st ress t est ing It will not influence lease terms sought or not such as variable element s, lease terms, break clauses et c
Recommend
More recommend
