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On steadier ground

CEO comment from the Q3 2021 interim report.


Good recovery in earnings and revenue
Hotel demand increased in all of Pandox’s markets in the third quarter, supported by strong domestic leisure travel and increased business travel. The underlying drivers of the increase in demand were higher economic activity, lifted government restrictions and increased vaccination rates.

All in all, Pandox’s total revenue and net operating income increased by 18 and 17 percent respectively compared with the third quarter of 2020. For comparable units the increase was 25 and 24 percent respectively, adjusted for currency effects. The majority of Pandox’s revenue was made up of contractual minimum rents and fixed rents within Property Management. The amount contributed from revenue-based rents and revenue from Operator Activities increased as occupancy strengthened.

Occupancy for comparable units in the Property Management and Operator Activities business segments amounted to around 55 percent (37) and 39 percent (22) respectively in the third quarter.

Active ownership and strong financial position
Pandox is an active hotel property owner that is involved throughout the value chain. In line with our active ownership strategy, on 31 August Pandox took over operation of the former Maritim Hotel Nürnberg when its lease expired. A renovation programme has begun and it will cost around MEUR 20 to upgrade and reposition the hotel with the aim of creating significant value growth. Another example of this strategy is h27 in Copenhagen, a hotel that Pandox has renovated and repositioned. As of 1 October it has been leased to Motel One under a new, attractive revenue-based lease agreement with a minimum guaranteed rent. These examples demonstrate how our business model can create value, even during a pandemic.

Pandox’s financial position remains strong with a loan-to-value ratio of 49.6 percent and cash and cash equivalents and unutilised credit facilities of MSEK 4,202 as of 30 September 2021. Refinancing transactions equivalent to MSEK 1,920 were completed during the quarter and remaining facilities maturing in 2021 are expected to be refinanced in the near future.

A hotel market on steadier ground
The hotel market in domestic and regional cities developed the best in the third quarter as well. In terms of country performance, the UK is again the brightest shining star, but the Nordic countries – in particular Denmark – also developed well, with occupancy in Nordic regional cities close to 2019 levels*. Towards the end of the quarter, occupancy in Danish regional cities was even higher than the corresponding period in 2019. Although development was also positive in Germany, the country’s more cautious stance on restrictions limited the increase in demand compared to many other countries. However, attractive leisure destinations such as Lübeck saw record demand.
In October leisure demand in the hotel markets as a whole, in particular at weekends, remained at a good level, while business demand on weekdays increased further. One important explanation for this is that workplaces and offices started to reopen, another is the easing or removal of restrictions on the public/participants at sporting events, conferences and other events. This benefits larger cities in particular. All in all, the hotel market is now on steadier ground.

Phased recovery with various levels of development
As previously communicated, 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:
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 phase will help to raise occupancy and increase 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 increased elements of “Level 4” in individual markets in the form of domestic business travel. As more and more businesses are now reopening up their offices more fully and internal travel restrictions are gradually being eased, the conditions exist for continued recovery in business travel. It also appears that the conservative attitude many businesses adopted at the height of the pandemic regarding future travel is now becoming more nuanced and there is increased demand for physical meetings again.

Improved conditions for growth
Demand in the hotel market is highly dependent on the degree of restrictions. The easing of restrictions that took place in the second quarter and went further in the third quarter has resulted in a clear increase in hotel demand in all Pandox’s markets. It is difficult to assess how any seasonal variations in the spread of the virus and new virus mutations may be expected to impact restrictions and hotel demand.

The positive development in the hotel market shows that there is a substantial pent-up desire for travel, which is quickly converted into demand once restrictions are reduced and it becomes easier to travel. Willingness to pay for hotel accommodation is high, as illustrated by the average price development in attractive leisure destinations in the third quarter, with RevPAR in some cases significantly higher than in the corresponding quarter in 2019.

The level of economic activity in Pandox’s markets is good and personal finances are strong. Vaccination rates are high and many restrictions that impact travel, conferences and events have been eased considerably or lifted altogether in most countries. Companies have also started to return to their physical workplaces, laying the foundation for more conferences and increased domestic business travel alongside continued active domestic leisure travel.

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 is the main driver of the hotel market recovery.

Currently, contractual minimum rents and fixed rents are expected to make up the majority of Pandox’s total revenue. Only limited variable revenue under leases with minimum rents is being generated in 2021. Given the continued recovery in hotel demand, variable revenue is expected to materialise in 2022 in most leases that have minimum rent provisions.

Thanks to Pandox’s operating model and contract mix, once demand in the hotel market picks up the revenue increase will initially be most pronounced within Operator Activities as a whole and within Property Management in the Nordics.