Calls for an initiative to tackle rent bills across the hospitality space are growing. The substantial, and accumulating backlog comes as ever more companies move closer to a fight for survival.
One of the latest to kick back at landlords is Scandic, which like Travelodge in the UK, operates a leased hotel portfolio and so has been hard hit by enforced coronavirus closures. The company used its third-quarter results presentation to declare it will stop paying rents on several key city centre hotels, where it needs landlords to cut the company some slack.
Elsewhere, in the UK Kate Nicholls, chief executive of trade body UKHospitality, is leading lobbying of the UK government to commit to further help for the sector, after a temporary protection to prevent landlords evicting businesses runs out at the end of 2020.
Speaking at an online industry event, Nicholls said: “We’re working hard with government to see if we can get it addressed – it is the single biggest issue which faces us and it will cripple us going forwards unless we get some action. We’re working very hard to try and resolve that one.”
The worry is that accrued rent liabilities could hit restaurants, cafes and hotels as they start readying themselves for the spring.
Scandic has 268 hotels, of which 244 are leased, and averaged 36% occupancy in the third quarter – still less than half of normal levels, but about at a level that allowed the company to operate, currently in the black, supported as it has been by government subsidies.
“We have now decided to pay reduced rents until new agreements – on reasonable terms – have been reached,” declared CEO Jens Mathieson. “It will take several years before occupancy returns to the levels we used to see as normal. Our leases must therefore ensure profitability at lower occupancy levels, and provide a reasonable risk sharing during periods of low demand.”
In 2019, the company said rents equated to around 27% of revenues, and this year the expense has been close to half of revenues. “We need to come down to a number which starts with a two here, that would be a reasonable risk sharing – so we need to find terms together with the landlords to keep us floating,” said finance director Jan Johannson.
The company said it is burning through SEK175m per month. And while Scandic has liquidity of SEK3.2bn, it is facing SEK0.5bn of deferred rents, along with SEK250m of deferred VAT and social security charges, all due to be settled in Q1 of 2021.
As a clear indication of the direction of travel, Mathieson announced the company had signed to take over management of a 150-room hotel at Stockholm Arlanda airport. Originally built in 2015, the property has been closed since its operator went bankrupt, and Scandic will relaunch it in January 2021.
“This is a contract with a fully revenue-based lease agreement, with a very fair risk sharing and a very low break-even point for Scandic. I believe we will see more agreements with this type of a structure in future.” He also warned that other planned openings in the 5,500-room pipeline may be postponed.
“We have quite a broad mix of contracts, we do have quite a lot of hotels that are not an issue, due to the fact that it is turnover based, and even some without any guarantees. The major problem right now for us is the large hotels in big cities, where we have fixed leases or very high guarantee levels.”
“With some landlords we have had conversations around this for quite some time. Many have a long-term view on this, they have low interest rates right now, and we can find solutions to take us through the coming years. We are willing to look also at how we can secure the contracts long term. We need to find a solution short term, to have a long-term relationship. We are pretty well into that discussion.”
“We have actually paid up til now, and we have paid for November. What we have decided, with these hotels that have unfair lease levels, then we have confirmed today that we will pay a part of that turnover in rent.”
Johannson would not reveal the landlords it is at odds with, but did confirm it had no issues with Pandox, landlord of around 50 of its hotels. “Pandox is the least of our problems – in the current situation, we have a large portion of variable leases with them, even a large portion without guarantees. The most important point now is that we find an agreement that is mutually acceptable. We see these as long-term relations and partnerships.”
Mathieson indicated that it was time to get tough on costs: “A rights issue is not a topic for us right now. We expect to get continued governmental support, so long as we see restrictions on the industry. We are definitely willing to walk away from a hotel, if we don’t get long term solutions that are sustainable.”
Also seeking rent deferrals in Europe is Huazhu, which is experiencing contrasting fortunes as its core Chinese business recovers, while acquisition Deutsche Hospitality continues to struggle. Announcing third quarter preliminary results, it said: “We are taking further cost and cash flow measures, such as deferred rental payments, reducing or eliminating discretionary corporate spending and capital expenditures.”
While DH performance improved from mid-July to September, it noted a reversal in fortunes as second wave Covid-19 restrictions hit European markets. Revpar for the quarter was down 52.2% with occupancy averaging 37.9%, almost exactly half the level of the same period in 2019.
HA Perspective [by Chris Bown]: In typically Scandinavian style, the demand from Scandic’s management was delivered calmly. Simply put, it can’t carry on paying high fixed rents on city centre hotels – so it won’t; landlords need to come to the table, or else.
The approach is considerably softer and more measured than that adopted by Travelodge, the other major leased property operator in the European hotel space.
But Scandic, boxed into a corner by the Covid-19 downturn, has nowhere else to go. Its cash pile is diminishing – and landlords need to give. Many have already made concessions, rolling on contracts in return for reduced payments in the interim; the rest need to follow, for Scandic to survive.
In the previous downturn, it was Rezidor that got burned, holding too many fixed leases at rents that were unsustainable. They’ve been wary of signing similar contracts since. Expect Scandic to follow the same path – its new contract at Stockholm airport is indicative of the direction of travel.
Additional comment [by Andrew Sangster]: Leases. An issue that has the capacity to divide any room at a hotel investment conference. A lot of smart people think hotels, and wider operational real estate, should avoid such contracts. Other, equally smart people, believe leases structured in the right way are the most sensible solution for such property segments.
Scandic is certainly not talking about switching out of leases. But it rightly points out that with rent costs currently accounting for half of group revenues, landlords have to be more flexible.
Such flexibility is going to come at a cost. If you raise risk to an investor, she expects to be suitably compensated.
The negotiations are going to be interesting. What will owners want in return for giving concessions? Some are in it for the long haul and will be interested in gaining exposure to the underlying operating business. For others though, the may not be able to or want to do this.
Scandic said that 15% of its leases expire by the end of 2022 and that 25% before the end of 2025. The not so subtle implication is that the company will simply close the doors on these properties and walk away if a suitable agreement cannot be reached.
CEO Jens Mathiesen said: “As the clear market leader with a strong, proven operational and commercial model and a leading customer offering, I’m convinced that Scandic will continue to be the best long-term partner for hotel property owners in the Nordic region.”
The answer for Scandic looks unlikely to be a switch into fee-based agreements. Rather turnover-related rents will be preferred. Perhaps the cannier landlords will seek to have a profit share as well.
Separate to this is the push by Scandic into other area of operational real estate. It is creating the largest network of coworking spaces in the Nordic countries and it is beginning to offer student accommodation. Anna Spjuth joined as chief commercial officer at the start of October to bolster such initiatives.
Sensible, negotiated restructurings need to be the ambition of operators and owners alike. Calling on governments to ban evictions or force landlords to cut rents will ultimately damage the interests of everyone in the market, including operators.
Certainly, government help should be forthcoming in the form of either tax breaks or grants given that it is government decree that has damaged these businesses but landlord bashing is no long-term solution.