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We are preparing for a brighter future

CEO comment from the year-end report 2020.

Stable earnings despite new restrictions in Q4
The hotel market weakened again in the fourth quarter due to increased virus transmission and new restrictions. Overall, Pandox’s total revenue and net operating income both decreased in the quarter by 53 percent respectively compared with the corresponding period the previous year. Supported by 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 378 and MSEK 62 respectively. Pandox’s financial position is strong, with a loan-to-value ratio of 48.7 percent and cash and cash equivalents and unutilised credit facilities of MSEK 5,221 as of 31 December 2020.

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

Respond is a constant theme in Pandox’s daily operations, but the Company has now intensified its focus on Restart. Vaccination is under way around the world, bringing with it hope that we can finally get COVID-19 under control and gradually lift restrictions. Pandox is therefore working intensely on building knowledge and insights into what the recovery of the hotel market in Europe could look like. It is particularly important to study markets in other parts of the world that are further along in their progress.

Phased recovery with different levels of development
Pandox continues to expect the recovery of the hotel market – provided that restrictions are eased and economic activity increases – to take place in phases at six development levels, where different market segments gradually build 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 lay the foundation for higher average prices and increased revenue per room.

At the beginning of the fourth quarter the hotel markets in Europe were entering “Level 4” with good underlying demand from domestic leisure travel and some initial demand from domestic business travel. But from mid-October restrictions increased again and demand weakened as the fourth quarter progressed.

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” again.

Support from trends outside Europe
The recovery has been relatively fast in hotel markets outside Europe (China, India, Australia and New Zealand) with lower virus transmission and eased restrictions, supported by strong domestic demand where certain submarkets reached occupancy rates almost on a par with the previous year. There is a clear pattern, for example in China, where a large portion of previous domestic international demand (outbound) has been converted into pure domestic demand (inbound) and the domestic segment is now larger than before. The recovery for international destinations has, however, been slow.

Overall, this trend supports Pandox’s theory that the underlying drivers of and the potential in the hotel market’s recovery post-COVID-19 are relevant in Europe as well. It is mainly the restrictions that are keeping demand in the hotel market at a low level, not behavioural changes. When restrictions are eased, demand increases and vice versa. The demand is domestic and it is economy, mid-scale, resort and apartment hotels in regional hubs and attractive leisure destinations – easy to reach by car or train – that are the winners. Premium hotels and large meeting hotels with an international profile are mainly those losing out.

Room prices are also stable by segment, but average prices are decreasing due to mix effects explained by a lower percentage of international travel, fewer meetings and fewer compression nights*.

Attractive position in the recovery phase
The hotel market is complex and demand is driven by a combination of factors. What may at first seem simple becomes significantly more complicated upon further analysis. The reason is that there are multiple subsegments and destination-specific factors at play.

For Pandox, motels and hotels in domestic cities and hotels close to cities have consistently done the best throughout the pandemic, while hotels in international cities have fared the worst, explained by the domination of domestic demand.

Pandox is in an attractive position as 84 percent of the total number of rooms are in regional and domestic cities, and therefore have high exposure to domestic demand – the area that will lead the recovery of the hotel market.

Brighter times ahead, but timing depends on restrictions
Although we are starting to see the light at the end of the tunnel, the hotel market’s recovery is entirely dependent on when, and at what pace, restrictions are lifted.

There is basically good underlying demand in the hotel market as well as significant pent-up demand for travel among both companies and individuals. Based on the positive market trend we saw during the summer and early autumn of 2020 in Europe, combined with the clear improvement we are seeing now in many large hotel markets outside Europe, we believe there is good potential for strong recovery in Pandox’s markets once restrictions are eased.

In the short term, however, demand in the hotel market is expected to remain low, which means that contractual minimum rent and fixed rent are still expected to make up the majority of Pandox’s total revenue in the first quarter of 2021.

Due to the extraordinary circumstances that COVID-19 has caused, the Board of Directors is proposing no dividend payment for 2020.


 * When occupancy rate in a market is above 90 percent