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Attractive position in the recovery phase

CEO comment from the Q1 2021 interim report.

Another restriction-laden quarter
The first quarter developed in line with Pandox’s expectations, following the same pattern as the previous quarter. Extensive restrictions in all of Pandox’s markets resulted in demand for hotel rooms remaining very low. Overall, Pandox’s total revenue and net operating income decreased in the quarter by 41 and 34 percent respectively. Thanks to recurring revenue from contractual minimum rent and fixed rent within Property Management, combined with good cost control in Operator Activities, EBITDA and profit before changes in value amounted to MSEK 350 and MSEK 23 respectively. Pandox’s financial position remains strong, with a loan-to-value ratio of 49.5 percent and cash and cash equivalents and unutilised credit facilities of MSEK 4,689 as of 31 March 2021.

A clear game plan in a difficult situation
Pandox works in a structured way in three areas in response to the difficult situation created by Covid-19:

Respond – Steps to help alleviate the acute crisis

Restart – Plan for recovery

Reinvent – Create insights into how the hotel market will change


Vaccinations bringing new hope of improved demand
As vaccination levels increase, there is new hope that society can get Covid-19 under control and that the restrictions can begin to be lifted gradually. The recovery in hotel markets around the world, in countries that are further ahead, clearly supports Pandox’s thesis that the underlying drivers of and the potential for post-Covid hotel market recovery is relevant in Europe as well.

We have previously described the positive development in demand for trips and hotel stays in China, India, Australia and New Zealand. In the first quarter, successful vaccination programmes and eased restrictions in the USA also resulted in a sharp increase in demand in the hotel market, driven by domestic leisure travel and local business travel. There are also signs in the USA of personnel at larger companies starting to travel, and the conference market is slowly starting to come to life. In the middle of April, the occupancy rates in the US hotel market were close to 60 percent with relatively good average prices, despite non-existent international demand and low demand for conferences and events. Like other markets, the market for resort hotels and hotels in domestic and regional hubs are also the winners in the USA.

In Europe the country making the most progress in its vaccination programme is the UK. Although some restrictions were removed at the beginning of April, there are still restrictions on domestic travel. Provided that domestic travel will be allowed, domestic leisure demand is expected to be strong during the summer months, particularly in attractive leisure destinations. It is hoped that similar progress may also materialise in other hotel markets of significance to Pandox, such as Germany and the Nordic countries.

Phased recovery process with different levels of progress
Pandox is expecting the hotel market recovery to take place in phases – provided that restrictions are eased and economic activity increases – with six levels of development and with various market segments gradually building up demand in the hotel market:
 

  1. Cities and countries open up and restrictions are gradually lifted
  2. Hotels open
  3. Domestic leisure travel with a growing high-paying segment
  4. Domestic business travel
  5. Conferences and international travel
  6. Group travel

Each level will help to raise occupancy and increase revenue, which in turn will create the conditions for higher average prices and increased revenue per room.

Pandox’s assessment is that in the fourth quarter of 2020 the hotel market in Europe was entering “Level 4” with good underlying demand from domestic leisure travel and some initial demand from domestic business travel. However, the positive development was broken by new restrictions. Once restrictions are eased again the hotel market should be able to return to the autumn levels relatively quickly and, supported by increased domestic business travel, be able to enter “Level 4”.

Revenue model which reduces volatility
Pandox works with several different operating and lease models, which together provide a balanced revenue stream. Measured in number of rooms, about 36 percent of revenues are fully variable (own hotel operations and revenue-based rent without a minimum guaranteed level) and about 64 percent are semi-variable/inert (revenue-based rent with a minimum guaranteed level and fixed rent).

For variable rent to materialise in lease agreements with a minimum guaranteed level, the accumulated total rent must exceed the accumulated minimum level during a certain period, normally a calendar year. The protection offered by minimum rent in a weak market can thus limit Pandox's revenue growth in an initial stage of a recovery from low levels.

The occupancy rates required for variable rent to materialise in Pandox's revenue-based leases, with a minimum rent, differ between markets but is lowest in the Nordic region.

Attractive position in the recovery phase
Pandox is in an attractive position with more than 80 percent of the total number of rooms in regional and domestic cities, and therefore has high exposure to domestic demand, which will lead the recovery of the hotel market. The recovery is, however, entirely dependent on when, and at what pace, the restrictions are lifted.

Based on the recovery we saw during autumn 2020 in Europe, and a strong increase in demand in large and relevant hotel markets outside Europe, the potential for increased demand in Pandox’s markets is considered to be good once restrictions are eased.

As long as restrictions remain in place at the same levels, contractual minimum rents and fixed rents are still expected to make up the majority of Pandox’s total revenue. Once demand picks up, the revenue increase, as a consequence of the combination of operational model and lease structure, will initially be most pronounced within Operator Activities as a whole and in Property Management in the Nordics.

Given the hotel market’s weak start of the year and the design of the rental agreements, only limited variable revenue is expected to materialise in lease agreements with minimum guaranteed rent in 2021.