The pandemic has delivered a sharp contrast in the way different hotel operating models have been able to cope with a massive drop in demand.
Aside from the purely asset-light brand groups, it has been the exposure of those with highly leveraged investment in hotels, and those with heavy property lease exposure, who have been most exposed.
Of the leasehold-driven businesses, Travelodge in the UK was an early actor in making a controversial move to protect its business. Now, Nordic operator Scandic is planning a fresh move, to help ensure it stays afloat.
Meanwhile hybrid operation Hyatt, which has continued to plough its own furrow through the last cycle, has declared its model fit for purpose. Its cash burn has been within bearable limits, while plans for 2021 predict a strong 5% net unit growth – with the group’s presence in Asian and European markets accelerating.
Speaking as he revealed year–end figures, Scandic CEO Jens Mathiesen teased a restructure to come – but then failed to deliver any detail, as he said it is still in negotiation. “We have today announced that we soon will present an owner-backed solution to strengthen our financial position.” Whether a fundraise or fresh equity issue, Mathiesen promised the move would be “balanced” across both small and large shareholders. Those shareholders previously contributed SEK1.75bn in a May 2020 rights issue.
“I want to be sure that we have enough liquidity, even if, let’s say, restrictions are continuing a few months further ahead. That’s why we work with different scenarios to do this in good order and in good time and not in a stressed situation. So it might be a situation that also secures that we have strong liquidity or good liquidity when the market now is recovering in order to act in such a market situation.”
Scandic declared an ebitda loss of SEK282m for the quarter, a figure buttressed by state aid and rental rebates, with net sales down 71% year on year. The group ended the period with liquidity of SEK1,900m.
Mathiesen said he was convinced the worst was now over and that the hotel business in the Nordics will recover through the year. “There is obviously still some uncertainty on how fast the market will pick up as it is so dependent on external factors, such as infection and death rates, how fast the vaccinations are carried out, etc. But we do see light at the end of the tunnel.”
And he said Scandic, which has slimmed down its cost base out of necessity, will return leaner, and capable of generating positive cashflow “at an occupancy rate around 50%.”
The company has also been able to negotiate SEK900m of rent rebates from landlords. Most of these reductions are in the next two years, in the form of straight reductions or reductions in fixed elements of hybrid deals. And some have been at the expense of agreeing to lengthen leases: “The total duration of our hotel portfolio has increased by one year from around 11 to 12 years.”
Next year, there may also be the opportunity to renegotiate the leases on some of the portfolio altogether: “At the present, some 15% of our lease contracts expire by the end of 2022 and 25% by the end of ’25. This will give us the opportunity to renegotiate, of course, the terms, and we could potentially even also exit a few of them if we don’t come to the right terms.”
In contrast, Hyatt’s operating model uses capital to support hotel development, with some directly backed projects in strategic locations. Many of these are then sold with a back–to–back operating agreement, once stabilised.
CEO Mark Hoplamazian hailed the success of this strategy, plus the successful integration of recent acquisitions, for “a 20% year-over-year increase in rooms in the pipeline due to strong signings”. The company hit a 5.2% growth in the portfolio for 2020, and has promised 5% again for 2021.
The company declared a USD203m loss for the fourth quarter. Despite total debt of USD3,244m, the group said its strong liquidity position means it could withstand 36 months of business at Q4 of 2020 levels.
CEO Mark Hoplamazian said the strategy to “optimize capital deployment” is behind the group’s long–term growth. “Our commitment to dispose of owned and leased real estate is an important driver of this objective. We’ve achieved considerable success executing asset sales, demonstrating the value of our owned real estate portfolio and redeploying that capital to enhance our managed and franchise fee growth.”
The business is currently on track to hit a March 2022 target of disposing of USD1.5bn of assets, but Hoplamazian said there is no rush to sell: “We have been very measured about our approach to engaging with third parties about selling hotels over the past two quarters because underlying our approach is a belief that asset prices are going to improve over the course of this year. And I have already seen firming of the market. I think some of the trades that occurred in the second and third quarter of last year that were reported to be somewhere between 20% and 30%, say, below pre-COVID levels, I think those kinds of discounts are quickly evaporating.”
Hoplamazian said the group, through being pushed to improve efficiencies, had become much leaner. “Our historical breakeven levels on an occupancy basis were in the range of 40% to 45% for full-service hotels. Earlier in 2020, we indicated that we had brought breakeven levels down to the low end of that range. Through additional efforts to drive efficiency, we believe we reduced those breakeven levels below the low end of that range. And we have certain hotels, which have achieved positive earnings at much lower occupancy levels.”
The pandemic has also forced internal changes that will benefit property partners permanently, said Hoplamazian: “As we went into 2020….we were coming together in a hyper cross-functional way and operating more like you would see an agile software development activity occur. And we’ve applied that now, in some really important areas. We revamped and restructured how we actually engage, provide and receive reimbursement and compensation from our owners with respect to system services. We’ve done the same with respect to an owner platform that we’re standing up this year to provide much more flexibility and customization ability for our owners in terms of gleaning information out of us that will help them understand and assess the value that we’re providing to them.”
HA Perspective [by Andrew Sangster]: The big question right now is where are the opportunities? Looking at Scandic’s results gives some idea. The big pain was in the big cities. During the fourth quarter, the market occupancy in Stockholm was 23% and just 16% in Oslo, Helsinki and Copenhagen. Ouch.
Assets in these cities are unlikely to come to market in a fire sale and even if they do, there are so many potential buyers that distressed pricing is unlikely. But what seems certain is that there are many asset owners who need to revisit their capital structure. This creates an environment for deals in markets that are usually hard to enter.
Rather than bargains, investors need to be seeking opportunities. Creativity is all and spotting market shifts that offer the opportunity of above market rates of return is what counts.
With urban centres, yields look set to remain rock bottom even when normalised to 2019 trading figures. It is only by repositioning and pivoting into growth niches can outsized rewards be obtained.
Hyatt CEO Mark Hoplamazian in his opening remarks on the analysts’ call quoted a company president who said the pandemic “broke our muscle memory” and he added: “I’m not sure there’s a better characterisation of what this challenge has afforded us by way of opportunity”.
Hoplamazian went on to reference digital strategies, f&b changes, staffing approaches and more as having been restructured. Many of these shifts to drive operating costs lower will be kept as the recovery kicks in.
And Hoplamazian was optimistic about the pace of this recovery. He believes group has “the potential upside surprise” and that “we might see group come back in a more purposeful way, in a more significant way”.
Hoplamazian was notably bullish about how fast China had come back. He said: “The kind of group business that we saw in China over the course of 2020 was what you would have seen pre-Covid: new product launches by car companies, a lot of new line introductions by luxury brands.”
Hyatt is making a big play on its hybrid meetings. Whether these prove sustainable as full face-to-face again becomes possible, remains to be seen.
Also still to be determined is the outcome of the portfolio of 22 hotels Hyatt has with SVC. Discussions about the 2,700 rooms remain ongoing and Hoplamazian said he was “hopeful we will find a path forward with them”.