The hotel business is all about occupancies. That’s one of the reasons booking aggregators like Agoda and Booking.com exist. Airlines will schedule flights according to demand, so the cheapest seats are those sold earliest. But hotels will discount rooms at the last minute if they are in danger of not making room occupancy targets in order to generate as much revenue as possible, until midnight on any given day.
That is why there have been such great deals for travellers during the Covid crisis. Property owners have been willing to release inventory for considerably less than they would have two years ago, just to survive. This is brutally evident in City Lodge’s occupancies.
Traditionally the refuge of the business traveller market, it’s seen occupancies collapse from a muted 55% (amid low business confidence pre-Covid) to 38% in 2020 and just 19% for 2021. Its annual loss nearly doubled to R846m for this year. It cut rates by an average 13% and mothballed rooms (in some cases, entire properties) simply to survive the global travel crisis.
But, there are signs of a pulse.
July occupancies, affected by continued lockdowns and widespread riots, came in at 16%. August was better at 24%. Much now depends on the success of the vaccine rollouts. This will influence travel plans as well as the return of foreign travellers, who’ve been largely absent from this market for the past 18 months.
So what does this all mean for investors in City Lodge — both those who bailed as the share started unravelling, and those who’ve bought in recently, in the expectation that a rebound is surely on the way?
For a start, says Andrew Joannou, a portfolio manager at NinetyOne, "a well-run and correctly positioned hotel like City Lodge would need an occupancy rate that is greater than 40% to generate cash, but with just 51 out of 56 hotels operational, the operating environment is not good enough for City Lodge to generate a profit."
Thankfully, the group has a solid-enough balance sheet, due in large part to its decision in August 2020 to raise R1.2bn via a cut-price rights issue. Some current and planned asset sales across other African markets should help reduce its debt level to about R300m. But Nomtha Ngumbela, a portfolio manager at Umthombo Wealth, says City Lodge needs cash beyond the sale of its East African business, "which will now need to stretch from debt repayments to much-needed support of its working capital".
Joannou believes City Lodge has a net replaceable value per share of R10.44, implying a R6bn valuation for the company as a whole. Once debt is removed, the group’s assets are worth around R9 a share. That’s more than double City Lodge’s present levels of around R4, despite a 56% spurt in its share price this year. However, just three years ago City Lodge stock was north of R30.
Joannou believes the group should be able to rebound fairly quickly if it is able to raise occupancies. But he questions when the group will be able to get back to 55%, considering just how many business meetings have probably moved into the digital realm, making face-to-face meetings largely defunct.
Keith McLachlan at Integral Asset Management is also concerned about how strong the business-travel rebound will be, given how much business is now conducted virtually, and from home at that.
"My base case is that this sector will be one of the last to recover post-Covid and, indeed, there may even be excess capacity that needs to be refurbed or repositioned, as they have done with their #YourPrivateOffice initiative."
This led to the group renting out its rooms, already equipped with office desks and chairs, for use as private workspaces — away from home-schooling and domestic distractions — for R495 a day.
City Lodge’s bankers have also been forced to be more understanding than usual about the industry’s predicament. No financial services group wants to assume liability for a network of hotels, many of which are in need of modernising and refurbishment. McLachlan is more blunt: "the group is currently trading at the mercy of creditors", he says.
Small-cap specialist Anthony Clark at Small Talk Daily suggests City Lodge needs to do more to attract domestic leisure travellers. This has always been a big weakness of the group which historically had strong bookings in the Monday to Thursday business trade. But because most of its properties are best suited to the corporate traveller on business, very few occupy especially attractive settings.
"City Lodge may stay as a ‘recovery stock’ for far longer than many expect," warns Clark.
"How long that takes is unknown due to a combination of economic, political and, more importantly, consumer psychology."
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