Chairman James Canavan Case Study - The Regency Group - Management Assignment Help

Assignment Task:

The Regency Group

Chairman James Canavan founded the Regency Group 38 years ago. Starting out small, he and a small team of staff conducted deal after deal, each time learning from their mistakes and growing the portfolio of properties. Today, having successfully built and owned several shopping centres, office buildings and residential apartment blocks, he had always dreamt of owning a hotel. One of the first deals he made more than 30 years ago involves a 4000 square meter piece of land with a warehouse he built in Rothbury. James had purchased the land for only $350,000 those days. Since that time, Rothbury has evolved from being a light industrial location to now a hip and happening residential and highly sought-after lifestyle suburb. Just 10 minutes from the CBD, the land has appreciated in value over the past few years and due to the positive gearing nature and steady repayments, the asset has been discharged from its mortgage. While demand for warehousing in the area has decreased, James was still receiving up to $25,000 per month in rent for the warehouse property and associated land. Conservative valuation on the land today would estimate the price per square meter in Rothbury to be $1,200 - land value only. The warehouse building that was constructed in steel is starting to show its age, rusting in large areas and showing general wearing and tear. The building is also not aesthetically pleasing to fit with the surrounding modern town houses and luxury apartments. Most of the other warehousing and light industrial land and properties have all been sold or redeveloped leaving this property one of the last large parcels of potential development land. Recently a company Argon Developments made an unsolicited offer to purchase the land from James for $5 million. Alex Deale VP of Acquisitions inferred the vision to develop the land into 2 luxury apartment blocks with shared facilities including pool, gym, car parking, tennis courts, café and 2 retail stores. James engaged Sophie Lonsdale of Jacaranda Hospitality Consulting, an Asset Management company and Hotel Development Specialist to conduct a market study on the area to determine the feasibility of developing a hotel in that space. The report of the findings were quite positive showing growing demand, 3% year on year growth in RevPAR, with two other new hotels in the pipeline (a 120 room Allwood Styles due in 2020 and another 80-room hotel rumoured to be a 4-star MuMu Hotel due early 2021). The new hotels are within the CBD area. The threats identified by the report indicated that Council Approval for a full-service hotel in the residential suburb could be tricky and the location slightly away from the CBD to be a disadvantage (although James reminds Sophie that it is just a 10-minute car or taxi ride away). The Regency team have identified that a 110 room 4 star serviced apartment style hotel would meet a gap in the market and perhaps cater to the mid to long term stay guest market segment. Their intention is that since they are slightly further out from the CBD, the hotel would appeal to the corporate clientele with lengths of stay of 3 nights or more. Proceeding with some concept plans and designs, James engaged a Quantity Surveyor to provide a preliminary estimate of the cost of construction. The cost reported was in the vicinity of $180,000 per room. James’s initial intention is to independently brand and operate the hotel, after all “how hard can it be?”, a comment he is often heard saying around the office. Ivy Coutts from Empire Finance has been the financial broker for the Regency Group over the past 15 years. As with all the property in James’s portfolio, the deals have been made using leverage at an Average Cost of Capital of 5%. As his broker, Ivy would shop around to all the financiers to seek out the best deals available to fund the cost of construction in order to gain favourable lending terms. The following are the two best deals on offer for the proposed deal: • Allstar Bank has offered 60% LVR with an Interest Rate of 7.5% for a 20-year term using a personal guarantee from James and security from his other assets.

• Eastpac Banking has offered 55% LVR with an Interest Rate of 7% for a 25-year term with no early repayment possibility and secured against the development and two other additional assets. Both lenders have indicated that the risk associate with a non-affiliated brand and the inexperience of operating a hotel by the group have resulted in the lower LVR and higher interest rate. Both lenders have also required a Debt-Coverage Ratio of no less than 1.5 times the EBITDA. James was not impressed by the offers as he is used to LVRs in upwards of 70% and much lower interest rates on his many other development projects. He is not a fan of providing a personal guarantee to the deal and is reluctant to accept that term. The biggest challenge in the deal is that he can only afford to put in $4,000,000 in equity on top of the 4000sqm freehold land. He will have to raise additional equity at very high cost of capital between 15-20% or seek a joint venture partnership which he is also reluctant to do.

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