• Pandox hails the rebound

Swedish hotel owner and operator Pandox says European markets are rising once more, at a pace higher than it initially expected.
The improvement comes off the back of a second quarter which saw the group bumping along financially, as hotels languished with minimal occupancy. Comparable revenues for property management were down 42% at SEK527m, while net income from operator activities was a SEK85m loss. A net cash return for the quarter represented a 1.6% return on equity.
During the period, the company took over operation of two hotels in Copenhagen, with the total portfolio numbering 156 properties across 15 countries, under 24 brands. Of that number, 20 properties are directly operated.
CEO Anders Nissen, himself a veteran of previous downturns, said the remarkable coronavirus pandemic had presented the company with an opportunity to reinvent itself. “In my close to 40 years in this industry, I have never seen something similar,” he remarked. “Every crisis is unique. We changed our model overnight, to more a workout company focused on secure liquidity, and conversations with banks.”
The company insists it will not be reducing rents for tenants – if they can’t pay, then Pandox will simply take over properties. But CFO Liia Nou said there has been some forgiveness, moving rental payments from quarterly in advance, to monthly in arrears. “We have strengthened our financial position since the start of the crisis,” insisted Nissen, with current liquidity of SEK5.5bn. Looking ahead, there are a modest number of rental renewals in 2021, while the company will refinance a tranche of maturing debt during the third quarter.
Most of Pandox’s leased properties are rented on a hybrid lease. The first quarter of 2020 saw base rents largely covering corporate outgoings, a position from which subsequent quarters will build.
Nissen hailed a strong uptick in demand. “April to May, we saw total lockdown and the demand bottomed out in April,” with 5-20% occupancy, depending on location.
“You saw a strong pick up in leisure spending – and that trend is strong. If you look at the Nordics, it is now more than 40%.” Pandox is now seeing the trend in Germany, and is confident of seeing the same in the UK. “We will see a good domestic leisure pick up, but we will also see domestic business return – we see that now in China. That gives the reason we think occupancy will grow more than we did in Q1.”
“We don’t see any new consumer trends, it is more or less as it has been – what is holding things back is government restrictions,” said Nissen. With around 84% of revenue coming from domestic and regional markets, he insisted Pandox is well placed for an early return to more normal business.
“Most hotels will have a positive cashflow at the end of 2020.” He revealed that the break point for moving into profit, or the flexible rental element is around 50% in Europe, 55% in the UK.
Robin Rossman, managing director of STR’s international business, said markets were recovering around the globe, with the US a month behind China, and Europe a month behind the US. But he warned: “There are certain types of demand that are not going to come back to hotels, until there is a cure for coronavirus.”
In China, STR has tracked a three-month recovery cycle until mid-June, when occupancy reached 50%. Since then it has faltered due to local resurgence of covid-19, and has settled at 20% below previous year levels of occupancy.
At operator Scandic, sales revenues were down 86% in the second quarter, with occupancy rising from a historic low of 6% in April. With the company still exposed to rental commitments on its properties, ebidta fell to a SEK1,138m loss.
A rights issue, and extension of credit agreements, pumped SEK2,850m into the company in June, to cover liquidity issues. All non-essential costs were stripped back, and staff have been both furloughed with government support, and some permanently laid off.
“Even if we can say that the worst period is probably now behind us, we face huge challenges,” said CEO Jens Mathieson. “With available liquidity of 3,600 MSEK, a strong cost focus and a powerful market position in the Nordic region, Scandic is well-equipped for a market recovery, which is a prerequisite for becoming profitable again.”
He said negotiations were ongoing with landlords: “In the longer perspective, we also need to ensure that our lease terms are adapted to market variations and enable acceptable profitability at lower occupancy levels than earlier. I am convinced that in time, we’ll be able to exceed our EBITDA margin target of 11 percent despite a market with lower RevPAR levels than last year.” But, Mathieson acknowledged, profits depend on the return of business travellers. Occupancy in the first half of July averaged 35% with the company expecting no higher than 40% through the summer.

HA Perspective [by Chris Bown]: The contrast in fortunes between these two Scandinavian hotel operations could not be more stark. With a strong asset base, and prudent borrowing, Pandox has been able to weather the storm and cope with a drop in revenues. Meanwhile Scandic, one of the hotel groups built on a portfolio of entirely leased properties, has – in common with others such as Travelodge, Deutsche Hospitality and Staycity – been caught between a rent bill and landlords reluctant to yield, and a revenue stream that dropped by 80% or more.
Pandox has long extolled the merits of hybrid leases, and coronavirus has given plenty more tenants and landlords the opportunity to review their benefits. Sure, it has lost the upside flexible element to its income – but it has maintained largely good relationships with tenants, and maintained enough income to cover bank interest. Now, with lockdowns eased, the landlord has a clear incentive to work with tenants to get that variable element flowing once more, as quickly as possible. And, with its own properties in operation, Pandox has valuable practical knowledge to feed into the process.

Additional comment [by Andrew Sangster]: The trouble with leases is all too apparent with the results from Scandic. While just 16% of its portfolio is fixed lease, another 65% is variable with a minimum guarantee. Those guarantees will be hurting right now.
Breakeven for EBITDA is 40% occupancy and the group is cashflow positive at 50%. The pain of the rents can be seen with breakeven occupancy for EBITDAR (the R being the excluded rent) set at 20%.
Given this level of pain at Scandic, the optimism at Pandox is a sharp contrast. While Pandox also makes extensive use of variable leases it too has in place minimum guarantees. And it is these guarantees along with fixed rents that is keeping the money flowing in.
The money is sufficient for Pandox to have remained cashflow positive in Q2. And lays the ground for its optimistic read of future quarters.
It listed a number of trends: local and regional demand was driving recovery; hotels accessible by car or train were stronger; leisure matters most in the early phase; economy and midscale are most resilient; premium hotels and those with significant conference activity and international demand take longer to recover; markets with supply increases are most vulnerable.
But the threat of a second wave of virus infections is now all too real. And Pandox acknowledged this was the biggest potential challenge in the recovery.
There is a clear mismatch between the outcomes of landlord and tenant in Scandinavia, a mismatch that is being repeated globally. The depth of the current downturn is such that landlords may yet be suffering more pain if tenants prove unable to cope.
Pandox is a smart and sharp owner but it is far from out of the woods just yet.

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