A challenging quarter

Listed hotel groups around Europe nursed themselves through a quiet first quarter, as they looked forward to a busier summer.  

A combination of expectation and hope – depending on the specific territory – mean most are factoring in a strong return of domestic leisure business. Some are also predicting the meaningful return of business travellers, later in the year.  

For most, the quarter was dominated by enforced lockdown closures of European hotels, resulting in minimal levels of business from travelling essential workers. Jan Johannson, CFO at Scandic, summed the situation up: “It was a very complicated and difficult quarter.” With minimal revenues, cost cutting remained high on the agenda, alongside the claiming of government grant monies, and further negotiations with landlords 

Whitbread CEO Allison Brittain announced a major marketing campaign for its Premier Inn brand, and a new push into business bookings. “We’re already seeing the staycation bounce in terms of forward bookings,” she declared: “I also think people are planning ahead. But the recovery requires more than just a good summer.” She said a return to weddings, concerts and largescale sporting events were all needed to provide drivers for broader demand. “We’re expecting that leisure recovery to take place over a longer period of time.” 

And to ensure Premier Inn gets a larger slice of the returning business traveller, the group has signed deals with travel management companies – a channel they had previously ignored. This, Brittain said, was a defensive move, but one that opened up potentially larger corporate bookings. “Given that we won’t come out of lockdown until 21 June, then I would expect office workers not to go back to the office in earnest until after the summer.”  

Also eyeing the return of UK hotel business was Pandox CEO Anders Nissen. “I see business on the books starting to come up – and summer is looking very promising. I believe today it is tough to get a hotel room in Brighton in July – as it looks now, the UK looks to be the one that will take the lead of recovery in Europe.” 

He also took heart from the US, where he said occupancy “is sensational” at 80% of normal in some markets, despite the fact that business and conference demand has yet to return. In one or two quarters, he suggested occupancy could be back to 2019 levels. 

Nissen delivered his first quarter numbers under the banner “patience is a virtue”, noting that   

“the negative trends from Q4 continued.” But he confirmed: “We are still profitable, and we still have a strong financial position.” 

At Accor, quarterly revenues were down 48% at EUR361m. CEO Sebastien Bazin commented: “There were no surprises in our first-quarter performance. Global business trends are improving slightly and the ramp-up of the vaccine rollouts bodes well for a particularly strong rebound.” 

Globally, northern Europe was the weakest performer due to lockdown closures, while other parts of the globe saw less precipitous falls, and business in China rebounded.  

Scandic, which has been hit harder than most due to its leasehold hotel portfolio, put a positive spin on its outlook. “We expect to reach positive cashflow in the third quarter,” predicted CEO Jens Mathieson. “This summer, occupancy is expected to be higher than last year, driven by demand in the big cities. And we expect more business activity from the autumn.” 

In the shortterm, however, Scandic continues to lose money, and recently tapped investors with a further SEK1,609m fundraise using an issue of convertible bonds, as well as negotiating a further extension of banking arrangements. The bonds mature in 2024, while the company admitted it would pay a higher interest rate for its banking facility.  

Scandic puts its ebitda break even at 40% occupancy, which it is confident will be breached during the summer. It is confident that sports groups and business travellers will return, too. Among other options being pursued, to strengthen margins in future, is bringing in external food and beverage brands to its hotel facilities.  

Whitbread is continuing to push its growth in Germany, where it has a mediumterm target of 60,000 rooms. “We’re really pleased with having made the leap this year, to get into multiple cities,” said Brittain. “To build a platform business, to market in-country, you need to be in multiple cities.” The group has 30 hotels to reopen imminently, with 42 already signed into the pipeline. One constraint to growth, she said, was the lack of large hotel businesses to acquire 

At Pandox, one topic for questioning from analysts was the value of the group’s portfolio. The group downvalued the portfolio by SEK351m in its books – but with precious few deals at distressed prices, felt the current market view on values is somewhat out of line.  

“External valuations are on average about 5% below internal valuations,” said CFO Liia Lou. “My personal view is that valuers are cautious people, and they are taking a more realistic longterm view on longterm yields. There is no reason why there should be a big yield gap between hotels and other property.”  

Nissen said the market remained robust. Taking a look at the 15 major single acquisitions relevant to Pandox over the quarter, he noted: “We don’t see any distressed prices, or any distressed assets as we speak.” 

HA Perspective [by Andrew Sangster]: There is an interesting dichotomy in Whitbread’s results. The company has benefited from its vertically integrated structure and its ownership model but it is increasingly looking at leaseholds as the way forward.  

New rooms are 80% leasehold in the UK and 75% leasehold in Germany. This contrasts with the current situation in which 61% of the estate is freehold (the rest leasehold). 

This is important because, over time, the company will transform from a specialist propco into a specialist opco. It will begin to look more like its smaller rivals Scandic, Motel One and Travelodge. 

Whitbread suffered more than Pandox during the pandemic, as the latter managed to maintain positive cashflow, but it has not seen the same level of pain as Scandic and Travelodge (and I suspect Motel One) 

The asset backing of the Premier Inn business has enabled it weather the pandemic restrictions and come out looking capable of taking advantage of opportunities as they arise. 

What, then, lies behind the switch to a lease model? One answer could be that Whitbread is now going for growth, particularly in Germany. Its capital will go a lot further with leases than freeholds. 

The UK network is currently 79,000 rooms with another 12,000 committed in the pipeline. The “additional potential” that Whitbread sees in the UK of 19,000 contrasts with the 47,000 rooms it thinks it can add in Germany, on top of the 13,000 it has open or in the pipeline. 

The stated ambition is to be the number one budget hotel operator. It is currently only just behind Motel One and Deutsche Hospitality which both have 14,000 rooms. It wants to roar past these and catch market leader Ibis (20,000), Best Western and Marriott (both 19,000) and IHG (18,000). 

The next few years are going to be a significant test of business models. The global majors – Marriott, Hilton, IHG and Accor – are committed to the franchise model for growth in the midscale and economy segment.  

Whitbread has GBP2bn in liquidity and CEO Alison Brittain is bemoaning the lack of acquisition targets. It is possible that a swoop on Scandic, Motel One or even the economy bits of Deutsche Hospitality will be made. 

Most likely, however, it will be much smaller deals and steady organic growth. In this case, it will be a head-to-head fight with the global majors. Leasehold or franchise? I suspect the German market will continue to favour the former. 

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