Europe’s slow recovery

Hotel companies with a substantial exposure to Europe are suffering from a relatively slower improvement to their business, as country governments squabble over travel restrictions.  

The last few weeks have seen British, French, German and Spanish governments swapping their restrictions and advice for travellers, around concerns over Covid case numbers. Where travel has been opened up, there remain restrictions in the form of testing and quarantining, expensive additions for those who might be planning a fortnightly summer family holiday.  

The result has left leisure travellers – apart from those with spare cash and an appetite for risk – taking trips within their own countries. While this has favoured some hoteliers, others – notably those in Spain reliant on strong inbound footfall – facing a second summer of disappointing business.  

“We’re still in a bit of muddy water in terms of navigating through different countries and different rules,” said Accor CEO Sebastien Bazin. But, he said, things were getting better: “For the last three months in a row, we’ve been improving revpar by exactly 500 basis points – and this is probably likely to be the case and maybe even better for the month of August.” 

The improvement has yet to lift Accor back into operating profit, but at least cash burn is dropping ever closer to zero, month by month. Revpar is still 60% off 2019 levels.  

Markets remain distinctly uneven. “In places in which you go above 85% to 90% occupancy, as on the Mediterranean shore, you get a better pricing that you had in 2019 because you’re full and you have pent-up demand. In other places, urban cities in Europe when you reach a 30% occupancy of course your price is still way, way below what you could have seen in 2019.” Germany, he added, had suddenly picked up in recent weeks, “and Brazil is a big surprise”. 

Accor’s Asia Pacific business is hobbled by Covid restrictions there and a slow vaccine rollout, but CFO Jean-Jacques Morin said government-mandated hotel quarantine was keeping the tills ringing: “In Southeast Asia, it is probably 30% of the business, in Singapore, 80% of our business is quarantine business.” 

Spanish operators Melia and NH have both continued the process of deleveraging their businesses – and both are now above operational breakeven.  

“We achieved our objectives of generating positive EBITDA and positive net cash in June,” said CEO Gabriel Escarrer. “Our revenues doubled in the second quarter compared to the first, although they are still far from the levels seen in 2019.”  

Escarrer said the pandemic had “shown the differential strengths of our group, and fundamentally our leadership in resort hotels, where the recovery is expected to be strong in the second half of 2021, and our digital and distribution capacity, which gives us an extremely important competitive advantage”. Caribbean resort properties, Mediterranean holiday hotels and those in China were the best second quarter performers in the portfolio.  

Melia has continued to push ahead with the business, opening ten new hotels in June, and in August revealed a commitment to brand four hotels in Albania, another emerging European leisure market.  

At NH, CEO Ramón Aragonés said July was the month the company stopped draining cash, as hotel performance improved month on month. The company reported first half revenues of EUR215.9m. The group has also taken steps to reset its balance sheet, with the issue of new senior notes, and agreement on an extension of credit facilities.  

““We have a solid financial foundation, with no relevant debt maturities until 2026, to face the imminent sector recovery from the best financial and capital structure position. This, coupled with the efficiency measures rolled out, will allow us to recover sooner and with greater strength.” 

In July, Melia revealed it had agreed a deal with lender BankInter to set up a new hotel asset company, Victoria Hotels & Resorts. The bank, and its clients, have acquired 92.5% of the EUR200m vehicle which acquired eight Melia branded hotels – and will allow Melia to continue to operate the properties. The move delivered a capital gain, and reduced liabilities for Melia, as well as providing a path for considerable investment in upgrading the properties.  

At NH, a sale and manage-back agreement saw two Tivoli branded properties in Portugal’s Algarve region sold to Spanish investor Azora. The EUR148m deal for the two realised a EUR26m gain on sale for NH, which has committed to an initial 20-year management contract with option to extend. “Asset rotation continues to be a part of our long-term strategy,” said MINT CEO Dillip Rajakarier, “and we will continue to look for opportunities to execute this strategy going forward.” In June, NH sold its NH Collection Barcelona Gran Hotel Calderón to LaSalle Investment Management for EUR125.5m, again achieving a capital gain and agreeing a 20-year management deal.  

HA Perspective [by Andrew Sangster]: NH summed up the horror show afflicting operators when it trailed among its top “positive” news that it was losing EUR15m a month in Q2 compared to the EUR29m it was losing a month in Q1. Occupancy stood at 45% at the end of July, meaning that the critical Q3, when most cash is made, looks set to be the best quarter since the pandemic began back in March 2020. 

But a proper recovery is about more than losing less money: making a bit would be useful. And for some operators this looks like being well into 2022 before it happens. 

For many current owners, that may prove too long to hang on. Already, even in territories that are now beginning a full recovery, the debts accumulated during lockdowns mean many businesses will never fully recover. 

UKhospitality said at the end of July that in the UK, hospitality business had suffered a GBP100bn drop in sales in the 15 months since the start of Covid restrictions. A recovery is well underway – Q2 2021 saw GBP18.4 bn of sales against GBP4.6bn in Q2 2020 – but there remains the serious overhang of debt. 

Unpaid rent on commercial premises in the UK totals GBP6.4bn according to Remit Consulting and there are mixed responses from landlords and tenants. Some tenants are taking advantage of the moratorium on evictions and are not paying rent even if they have not been badly affected. On the other side, there are landlords who are pursuing tenants for full rent even if the occupying business has been closed by Government restrictions. 

Similarly, financiers vary in their responses, although most have been relatively forbearing. But the holes in capital stacks will need to be filled. 

The biggest problems will be in regions like Spain, where the pain will extend beyond two years, or in sub-sectors like conference hotels, which again will take two years plus to regain full profitability. 

As we have said before within Hotel Analyst, there looks unlikely to be many bargains given the weight of capital available to deploy in the sector but opportunities for consolidation and business expansion should be plentiful provided buyers have sensible and rational post-purchase plans to grow the business. 

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