• Investors ready for busy ’21

Hotel investors have declared themselves ready for action, expecting 2021 to see a range of opportunities as distress hits the more stressed businesses in the European hotel sector.
Panel members at the Hospitality Tomorrow – Episode 2 virtual conference appeared excited by the opportunities presented off the back of the coronavirus shutdown. Anders Nissen, CEO of Pandox, Cody Bradshaw, global head of hotel asset management at Starwood Capital and Frank Croston, are all looking forward to what the next year or so will bring.
All three spoke from a situation where many of their European properties are either closed, or operating at levels that are below break-even. While there are inevitably parallels with the situation in the last downturn of the financial crisis, there are clear contrasts with the scenario then.
“I think the pandemic will create opportunities, once the winners and losers emerge,” said Croston. At that moment, he said 80% of his hotels were closed, but “we have hotels in Europe that are within two weeks of reopening.”
Bradshaw said the big difference this time around would be financial firepower: “A number of the larger players are well capitalised” after a long positive run, and have already shifted their portfolio weighting into other assets. “Our exposure is relatively limited. It’s the calm before the storm – 2012 will be a busy year, with a lot of activity.”
“I think there’s going to be bargains to be had. The opportunity we see, is for great real estate that never really stood for much.” He expects to see opportunities including take-private deals for troubled listed companies, while those with pressing credit issues may be forced to make asset sales.
At Pandox, Nissen said that early 2020 had proved a challenge, with too much capital coming into the hotel marketplace, driving up competition for deals, and suppressing yields. Most of that competition has evaporated. “It’s super exciting – it will be a very busy 2021. It’s a great future!”
Croston said he could already see the first opportunities becoming visible. “I think the first phase is likely to be lease structures that are under stress. Then I think the more traditional landlord/borrower issue will not come to the fore until next year. There’s a lot more to come – a lot of operators are going to face liquidity problems. The challenge is how you underwrite well, when the immediate future is uncertain.”
All three were confident of the sector’s long term viability. “I think the math is on our side from a macro perspective,” said Bradshaw, looking at growth of travel, and growing middle classes in emerging nations. He also expects to see development activity dry up, which will mean that current oversupply in key markets, notably German cities, will be a short term overhang. “I think it bodes well.”
But at the same time, there will be challenges in the shorter term. “The biggest unknown to me, is how we restore consumer confidence in travel,” said Croston. “I would be surprised if we’re back to 2019 levels by 2023.”
Nissen said the next year will all be about growing local demand, as international travel remains compromised. “The most important demand is domestic demand,” and he noted that makes up 80% of overall demand in Germany, 75% in UK and Scandinavia. “The winner will be the midmarket hotels – I’m quite optimistic. At the end of the year, we will reach 40-50% occupancy across Europe.”
Bradshaw declared himself ready for the fight. “I’m actually quite excited about the challenge of reopening these hotels – there’s a great opportunity for our industry to innovate,” and work out how to turn a profit in constrained circumstances.

HA Perspective [by Chris Bown]: In every adversity is opportunity – and these three, sitting on the side with comfortable debt positions and firepower behind them, are ready for the upturn. As they have acknowledged, there will be operational challenges in the short term. But here we have another shock that will find out those under financial stress – and that means another sector restructuring.

Additional comment [by Andrew Sangster]: Hilton CEO Chris Nassetta this week told the US press that he expects the recovery to take three to four years. He described an environment of emerging from a health crisis into an economic crisis.
While everybody grasps the health crisis, the depth and impact of the economic crisis is still not being factored in by a significant proportion of people. By this autumn, however, the real devastation will be clearer. Unemployment will be in double digits in the UK and similarly elevated globally.
In the US, unemployment is heading for 25% according to Nobel laureate economist Joseph Stiglitz. Two economists at the Federal Reserve said this week that they too expected high unemployment throughout 2021.
This week, the UK finance minister (Chancellor of the Exchequer) Rishi Sunak said: “We are likely to face a severe recession, the likes of which we haven’t seen. It isn’t obvious that there will be an immediate bounce back.”
Further evidence of a spreading belief in economic gloom came with the news that for the first time the UK Government has issued bonds that are negative yielding. The three-year gilts were sold at a yield of -0.003%; the only other time UK Government debt was sold on a negative yield was for one-month bills in 2016.
This is already a financial environment that is worse than the Global Financial Crisis, an event that saw the biggest GDP drop globally in the post-war era. Economic indicators are set to get much worse over the coming months.
Digging into hotel specifics, the notion of “breakeven” occupancies is illusory. HotStats reckons that European hotels breakeven at 34.5% occupancy. But this is a breakeven at the Goppar (gross operating profit) level. This is certainly better than only considering revpar but fails to account for expenses such as franchise fees, rent or finance costs.
Rent cover on fixed leases can be as low as 70% of EBITDA. The operating leverage within the average hotel means that significant revpar drops will put leased hotels under huge pressure with many failing to pay rents.
Pandox has many variable leases but collars mean that there is a minimum rental payment and many hotels will be under water. In its sensitivity analysis, Pandox shows that a one percentage point shift in revpar causes a SEK27m shift in revenues for investment properties. For hotels it directly operates, it is SEK22m.
At 40% to 50% occupancy, the pain remains very substantial, (depending of course on the rate obtained but this is unlikely to be materially higher). Pandox is one of the most astute operators and will most likely get through this period. But the fact that the environment looks so challenging for even the best owners and operators suggests there will be many casualties in the months ahead. Next year may well prove the start of many opportunities.

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