For anyone investigating this one, here are some thoughts in...

For anyone investigating this one, here are some thoughts in more detail.

To my mind, leasehold from freehold is a type of derivative. In boom times, most couldn't afford the freehold. But thanks to the banks and boomtime cashflow projections, buyers lined-up and geared-up to purchase leaseholds. As proof, look at the huge debts wrung up by the listed leasehold players, eg NLG

But to be a long-term going concern, leaseholders must ensure that by the end of the lease they have:

- Repaid all the purchasing debt from after tax profit
- Stayed current on the lease and interest
- Generated a real return commensurate for the daily grind and capital involved


Say trading conditions tighten from a smoking ban or general economic contraction. With fixed and high leaseholder obligations, they may progressively struggle to meet the above requirements of a going concern. The bank is in a bind too. They are loath to put leaseholders into receivership. Unlike freehold valuations which decline, leasehold valuations can drop to almost nothing. If the bank does instigare receivership, they must keep the lease live by making all the due payments. It they don't, the leasehold reverts back to the freehold hotel owner (for free) - and the bank has no business to sell. To make matters worse, leases typically have a ratchet clause. Thus the contracted rental may be above market rates - so no one wants to buy it. There is only one potential buyer - the freehold property owner. To the freeholder, with the leasehold's debt written-off by the bank, the amalgamated trading and property business has greater value than each individual business on the site.

Imo, that's what Torchlight wants to achieve, coupled with some operational benefits from scale and lower interest cost over time.

IEF has nearly settled the Icon leaseholds. For the Courthouse Hotel Cairns, we've instigated the receivership and the leasehold will return to us. With the Lawson Park Hotel, it looks like a negotiated settlement that allows the leaseholder to walk and the leasehold revert to us.

Up until now, the forced deleveraging of leaseholders has been painful for freehold owners too. Freehold prices have fallen 40% from their peak, far greater than other property types. Assuming a 9c NTA at 30 June 2012, I calculate IEF will have written down its directly owned hotels (excl NZ ones), to 65% of their cost and 62% from their peak valuation. That can be broken down into a reduction in rent of 22% and an increase in the cap rate from 7.7% to 9.75% (a 27% increase, which also reduces the valuation). On top of that, there's the margin of safety from buying at a 54% discount to the much written down value.

The big unwind of many overleveraged positions, at once, causes prices to drop very steeply. Assets will slowly move from weak to stronger hands, and then prices will rebound somewhat. Some high profile businessmen think the timing is right to jump in. A well known syndicate, including Gerry Harvey and Geoff Dixon (ex CEO Qantas), are doing this. Woolworths has been a large buyer via ALH.

For IEF, I think the first $10m of the Panthers money will likely be spent of deferred maintenance - essential. I suspect the rest ($77m) will be spent on cherry picking more hotel purchases. Also suspect the c/flow from the amalgamated sites, will nicely service our debt. In this sector where banks have been clobbered, it's reassuring that our prime lender will likely increase their loan (to refinance the maturing loan from another bank). In this risk averse environment, they would only do this if they're confident of the trading performance. IEF will know the trading performance of our leaseholders in some detail, as their gross turnover is taken into account for rent reviews. I'm confident that IEF and Torchlight have a firm handle on what our owner operated results will be. We'll also be using the same firm that the receiver's been using to run the Icon Hotels since Jan 2011.

Torchlight has put one heck of a lot of effort into accumulating this one at 4.1c – just look at the list of announcements. Their average holding cost is much higher. Being a little cynical, I wouldn't be surprised to see the SP under pressure until 5pm 31 May. And maybe to 30 June re small holder tx selling. An opportunity or concern depending on the underlying knowledge/beliefs.

As always, only my opinions and dyor.