Hostels hunker down in hope

Hostels continue to face a further few months of tough trading, even as lockdowns ease and hotels reopen across Europe.  

With many hostel businesses based around offering budget accommodation featuring shared facilities, they will still face government restrictions around social distancing. As a result, occupancy in shared dormitories will be compromised, limiting revenues.  

While some more modern hostel portfolios feature a mix of accommodation that includes en-suite rooms, those hardest hit will be the properties at the lower cost end of the market.  

At UK listed hostel operator Safestay, a major asset sale was announced in March, giving the group substantial headroom to further wait out the pandemic. The disposal of the group’s Edinburgh hostel will deliver a GBP16m cash boost. Peer company a&o has agreed to acquire the property, with the sale price representing a 22% premium to Safestay’s book value of GBP13.4m for the Edinburgh property.  

“This transaction will facilitate a 35% reduction in group borrowings as well as give us the cash balance to re-engage as restrictions lift,” said chairman Larry Lipman. “It is a very positive solution which provides a solid foundation to not only restart but also to have the option to invest at a time when many of our competitors will not.” 

Safestay has reduced monthly cash burn to GBP0.35m, but continues to worry about the pace at which it will be able to reopen its hostels across Europe. Several key executives have undertaken to take some of their remuneration in shares, underlining confidence in the business.  

Other hostel operators have also had to shore up finances, to maintain their businesses. In March, Queensgate, owner of Generator hostels, revealed it had agreed a EUR600m refinancing of the brand that comprised a refinancing of EUR500m of debt with existing lenders HSBC, Société Générale and Aareal Bank, plus an additional EUR100m of lending provided by Apollo Global Management. “With the Millennial and Generator Z customer base, we are confident of a rapid and resilient recovery once travel restrictions are lifted,” said Queensgate chief executive Jason Kow 

Conversely, a&o has the backing of private equity investor TPG, which acquired the business in 2017 and has the means to continue to support its expansion.  

Elsewhere, the sector’s niche OTA, Hostelworld, revealed its 2020 revenues fell 81% to EUR15.4m, resulting in a loss of EUR48.9m. In summer 2020, Hostelworld was reckoned to be burning through EUR1.9m of cash per month, but with enough in reserve to last to the end of 2021 without revenues returning.  

“We experienced a small uptick in bookings during the summer season, but trading deteriorated significantly from the end of August onwards as global lockdowns and travel restrictions came into force,” said chief financial officer Caroline Sherry. 

“We remain convinced that when travel restrictions are lifted we will be well positioned to benefit from the recovery in demand driven by our improved platform and loyal customer base.” 

Forecasts from analysts for Hostelworld provide an insight into the likely recovery of the sector. Averaged out, they estimate Hostelworld’s revenues will return to the tune of EUR23m in 2021, EUR60m in 2022 and back to the 2019 figure of EUR81m by 2023.  

Meanwhile in the UK, the Youth Hostels Association, with more than 150 properties, will start to reopen from 29 April, when its small hostels suitable for single households will be re-opened to hire on an exclusive hire basis. From 17 May, its hostels with private rooms, and camping and cabin facilities will relaunch, followed by a more extensive opening up on 21 June. Premises will, however, still be subject to some occupancy restrictions around use of shared spaces. YHA chief executive James Blake commented: “In line with government’s roadmap, our proposed re-opening plan for the network is phased to allow us to get furloughed staff back to work and get the network ready to welcome back guests in a safe and secure environment.” 

The YHA, which had prior to the pandemic been planning further expansion of its portfolio, has had to trim plans. In Cardiff, it has accepted an offer from the city council to sell them its hostel, returning GBP6.4m to the organisation. The hostel, having been rented to house the homeless during the pandemic, will now be used by the council as part of its long term homeless support plans. YHA has said it will look to find another suitable property in the Welsh capital.  

HA Perspective [by Chris Bown]: The pace of return of leisure travellers is much talked about, with worries that families won’t book summer holidays abroad, once they reach a certain point, perhaps a couple of months in advance, where they need to commit and book.  

Not so the hostel world, where a much younger, more flexible demographic is sure to be whipping their phones out, booking a low-cost flight and transiting into a hostel, just as soon as government restrictions are lifted. And this is the generation that has far less to fear from Covid-19, too – for those with symptoms, it will likely be nothing more inconvenient than a brief loss of taste. So hostels ought to see a far quicker ramp-up of revenues, as soon as free to do so. But they’re desperate for that day to come.  

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