Focusing on things we can influence
CEO comment from the Q3 2020 interim report.
Development in line with expectations
The hotel market in the third quarter recovered in line with Pandox’s expectations. The summer season was actually stronger than expected, driven by good domestic demand in the leisure segment in regional cities in all countries. Most of Pandox’s revenue in the third quarter still consisted of contractual minimum rents and fixed rents, but revenue from purely revenue-based leases and Operator Activities was higher than in the second quarter. Overall, Pandox’s total revenue and net operating income decreased in the third quarter by 54 and 47 percent respectively compared with the corresponding period the previous year, but increased sequentially by 5 and 36 percent respectively.
A clear game plan in a difficult situation
Pandox has continued to focus on 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
The focus is still mainly on issues relating to the acute crisis, i.e. Respond, with the following priorities:
- Cash is king! On 30 September 2020, Pandox had liquid funds and unutilised credit facilities of MSEK 5,348. All credit agreements maturing in 2020 have been refinanced
- Defend our profitability! Pandox’s costs are in line with our contractual minimum rents and fixed rents, amounting to around MSEK 2,000 a year. Moreover, revenue-based leases with no guaranteed minimum level are contributing positively to some extent to both revenue and profit
- Stay alive, stay open! Pandox has kept as many hotels as possible open throughout the crisis, which has facilitated both maintenance and start-up
- Protect the assets! Pandox is prepared to protect the value of the hotel properties and take over hotel operations if necessary
- Active leadership! Leadership that is open, active and present is more important than ever in the difficult situation presented by COVID-19
Clear trends in the hotel market
Within the framework of Restart Pandox is constantly focusing on various scenarios for the recovery of the hotel market. So far, the hotel market development is in line with the outlook we provided in our second quarter interim report. In the third quarter we also noted an intensification of the trends we identified in the second quarter.
The most obvious trend is that it is the restrictions that have lowered demand in the hotel market rather than behavioural changes. When restrictions are eased, demand increases and vice versa. This may sound trivial, but it is highly significant for how the hotel market’s potential for recovery is perceived when restrictions are actually eased. One example is that people not currently permitted to travel on business are still travelling within the country in their leisure time, and this has contributed to the strong comeback in the most important segment for the hotel industry – domestic travel, while international demand has remained low. Economy, mid-scale, and resort hotels and holiday apartment hotels in regional hubs and attractive leisure destinations – easy to reach by car or train – have been the winners. Those losing out are mainly premium hotels and large conference hotels with an international profile.
Room prices by segment have been relatively stable, but average prices have fallen due to mix effects explained by a lower percentage of international travel, fewer conferences and fewer compression nights*.
Recovering in phases with different development levels
Pandox is expecting recovery – provided that restrictions are eased and economic activity increases – to take place in phases, with six development levels where different market segments gradually building up demand in the hotel market:
- Cities and countries are opening up and restrictions are gradually easing
- Hotels open up
- Domestic leisure travel with a growing high-paying segment
- Domestic business travel
- Conferences and international travel
- Group travel
Each phase will help to raise occupancy and revenue, which in turn will create more compression nights* and lay the foundations for higher average prices and increased revenue per room.
The hotel market is currently in “Phase 3” with good underlying demand from domestic leisure travel and some initial demand from domestic business travel.
Phase 1 – Bottom
- Total lockdown in most countries
- Demand bottom at the end of April
- Weak recovery starting in May
- Occupancy in Europe around 5–25 percent
Phase 2 – Summer
- The easing of restrictions in May–June opened the door for domestic travel and in certain cases international travel as well
- Domestic leisure travel increased more or less right away
- Occupancy rose in the Nordics from around 20 to around 60 percent during the holiday period, which was higher than expected
Phase 3 – Autumn and winter
- Lower leisure demand during the week but good on weekends
- SMEs have started to travel, some demand for smaller conferences
- Initial occupancy in Germany around 40–45 percent, in the Nordics around 45–50 percent and in UK Regional around 50–55 percent
- Some increase in international markets from a low level
- New restrictions in October resulted in increased uncertainty and reduced demand
New restrictions are the biggest challenge
The biggest challenge facing the hotel market is new restrictions that limit various aspects of social life and result in a more drawn-out recovery. There is good basic demand in the hotel market and the conditions for a fast recovery are good once the restrictions are eased. In the fourth quarter rental income is expected to be stable within Property Management while Operator Activities is expected to weaken somewhat compared with the third quarter. Contractual minimum rents and fixed rents are still expected to make up the majority of Pandox’s total revenue in the fourth quarter.
Constant effort to understand changes
In the Reinvent part of the game plan, analysis and evaluation of the effects of possible structural changes in the hotel market are in progress. Certain behavioural changes cannot be ruled out, but when restrictions are eased and activity levels in society are normalised, travel will follow. So far, we have not seen any significant changes in guest behaviour. Changes we implemented in Operator Activities include enhanced cleaning and sanitising protocols in cooperation with certification company Bureau Veritas, accelerated digital investments to facilitate contactless check-in and check-out and the creation of multifunctional rooms that can better meet various types of demand and guest requests. At Pandox’s Hotel Market Day 2020 on 17 November we will look more closely at the effects of COVID-19 on our society, our minds and naturally the hotel market too. I can venture to promise an interesting and action-packed programme. You can read more about the event and register to attend at www.pandox.se.
* When occupancy rate in a market is above 90 percent