Positive market signals
CEO comment from the Q2 2021 interim report.
Sorrow and determination
I have had the privilege of working with Anders Nissen for over 14 years as CFO of Pandox. It makes the sorrow over Anders extra severe. I have respect for the assignment as acting CEO and I am very motivated to continue to develop this strong company. Together with a close-knit organisation with competent, entrepreneurial employees and a clear game plan, I feel - despite the difficult situation - optimism for the future.
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
Eagerly-awaited growth and strong financial position
Hotel demand increased in all markets in the second quarter, but the development in April and May remained weak due to extensive restrictions remaining in place and delayed reopening in many markets. However, supported by a strong recovery in the UK and improvement in other markets – particularly in June – Pandox saw positive growth in the quarter in both business segments. Altogether, Pandox’s revenue and net operating income increased by 19 and 32 percent respectively, compared to the second quarter 2020. For comparable units the increase was 25 and 39 percent respectively, adjusted for currency effects. The comparison quarter was, however, very weak.
The majority of Pandox’s revenue was made up of contractual minimum rents and fixed rents within Property Management. In addition, a gradual increase in occupancy during the quarter provided an increased contribution from pure, revenue-based rent in the Nordics and revenue from Operator Activities.
Pandox’s financial position remains strong with a loan-to-value ratio of 49.7 percent and cash and cash equivalents and unutilised credit facilities of MSEK 4,377 as of 30 June 2021.
Increased hotel demand and rising occupancy
Positive RevPAR growth was reported in the second quarter in all of the countries where Pandox has operations, partly explained by increased demand due to eased restrictions, partly a weak comparison quarter. Occupancy remained higher in regional cities than in larger cities with an international profile. However, towards the end of the quarter there were clear signs of improved demand in larger cities as well.
In terms of individual countries, the UK was clearly the bright spot during the quarter. Hotel demand improved significantly after restrictions were eased on 17 May. At the end of June occupancy* for UK Regional was around 67 percent and for London around 45 percent. It is encouraging that the plans for full reopening on 19 July remain in place.
Germany has adopted a more cautious reopening strategy and the restrictions there are more extensive than in the UK. Despite this, a relatively strong increase in demand was noted in June, albeit from a lower starting point than in the UK. At the end of June occupancy** was around 37 percent for Germany as a whole, compared with around 15 percent in May.
Hotel demand also improved in all Nordic countries in the quarter. At the end of June occupancy*** was around 50 percent for the Nordics as a whole and around 60 percent for regional Nordic cities.
Phased recovery with various levels of progress
Pandox is expecting the hotel market’s recovery to take place in phases – provided that restrictions are eased and economic activity picks up – with six development levels and with various market segments gradually building up demand in the hotel market:
- Cities and countries open up and restrictions are gradually lifted
- Hotels open
- Domestic leisure travel with a growing high-paying segment
- Domestic business travel
- Conferences and international travel
- Group travel
Each phase will contribute to raised occupancy and increased revenue, which in turn will create the conditions for higher average prices and increased revenue per room.
The hotel market is currently at “Level 3” with elements of “Level 4” in individual markets that have a higher proportion of blue-collar business travel. Based on Pandox’s own analysis of corporate clients within Operator Activities, the Company expects a cautious transition to more white-collar business travel in September/October of this year. Company decisions are mainly influenced by infection rates, restrictions and vaccination rates. Internet searches for air travel and hotels during the work week in September/October have increased and Pandox’s hotels within Operator Activities are gradually receiving more requests regarding small conferences. One conclusion indicated by the analysis is the possibility of business travel involving fewer trips, but compensated for by people staying more nights than before.
Good underlying growth potential
Demand in the hotel market is entirely dependent on the extent of restrictions. The easing of restrictions in the second quarter resulted in significantly higher hotel demand. The impact of new virus variants on restrictions and hotel demand is hard to assess. The European Commission has announced that sufficient doses have been delivered to fully vaccinate 70 percent of the EU’s adult population before the end of July. The Commission has also confirmed its goal of delivering sufficient vaccine to vaccinate 100 percent of the adult population by the end of September.
Economic recovery in Pandox’s markets is currently strong. This, combined with increased vaccination rates and eased restrictions, is creating good underlying growth potential in the hotel markets. Progress in Europe and other large hotel markets, such as the USA, indicates that there is considerable pent-up desire to travel, which is quickly converted into demand once restrictions are reduced and travel becomes easier.
Pandox is in an attractive position as around 80 percent of all rooms are in regional and domestic cities and therefore have high exposure to domestic demand, which will lead to recovery in the hotel market.
Currently, contractual minimum rents and fixed rents are expected to make up the majority of Pandox’s total revenue.
Once demand in the hotel market picks up, the revenue increase – thanks to Pandox’s operating model and contract mix– will initially be most obvious within Operator Activities as a whole and within Property Management in the Nordics.
Due to the structure of leases, variable revenue under leases with minimum rents are only expected to materialise to a limited extent in 2021.
Liia Nõu, CFO and acting CEO
Source: *STR, **Fairmas and ***Benchmarking Alliance. Figures rounded off.