From zero guests during Covid, plus an existential debt burden, City Lodge has recovered to serve up a 55% rise in revenue, headline earnings of 30.3c a share (up 42%) and an 8c a share dividend for the year ended June. The FM spoke to CEO Andrew Widegger
Do you feel like you suffered a near-death experience?
It certainly was. It was a perfect storm for us: we had the BEE transaction, [which] had a pile of debt that we had guaranteed and we relied on the share price that could have been sold had Covid not happened. The BEE deal was actually in the money, so we could have repaid all the debt. But day one of Covid meant zero revenue, and owning 63 properties is an expensive business with enormous overheads. Ultimately I guess it was [thanks to] lots of work with our funders, our banks and our shareholders that we managed to pull through and transform in the last year to an ungeared balance sheet — in fact, to net cash of R28m.
There’s some lingering doubt among investors given how badly the BEE deal went and the fact that you seemed to be on the slide even before Covid …
2019 is used as a reference point for so many businesses and I guess it really was the last “normal” that we had. But 2019 for us was in fact the bottom of the cycle; having gone through a period from 2011, after the hangover of the 2010 Soccer World Cup, every six months we had improving occupancies, until Nene-gate. And thereafter, every six months was a drop in occupancies. Ironically, going into January/February 2020 we thought we’d come to the bottom of that downcycle. Since October 2022 we’re ahead of 2019 numbers from an occupancy point of view. Where we’re lagging is in the room rate. We’ve also had nearly four years of cost inflation so margins need to play catch-up.
It sounds like we’re tainted by that BEE deal, but our intention is not to do another BEE deal of a similar nature. We do have our treasury shares that we still hold and there’s no immediate need to do a transaction. We currently sit at a level 3 and it’s a vast improvement from where we were.
What’s more important to you — occupancies at a certain level or room rate?
It’s really both. The equation is revenue per available room — or Revpar — which is getting the balance between price and occupancy right. Every extra room we sell [there’s] a variable cost portion that covers fixed cost, so every rand that you bank extra goes straight to the bottom line. And the two work together — which is why downcycles are particularly damaging. It’s the balance as opposed to one being more important than the other.
Are you at a disadvantage that you’re not a pure tourist operator — you were built around the business traveller. Do you think the slowdown in business travel is a permanent shift and does it mean you have to change your identity?
No, I don’t believe so. I hear you on business travel but I still think it’s more temporary than permanent. Sandton may be a ghost town but, around the country, appealing to the business traveller makes us more resilient. For four days out of seven, every week, we reach the business traveller — with the exception of long weekends and of course December.
But the pattern has changed for weekend occupancies, from domestic leisure travellers. For instance, there’s payday weekend. As much as consumers don’t have money, they still want to get out and Covid made it that way. And more importantly we’ve seen the phenomenon of a whole new kind of traveller who emerged from Covid: the black middle class frequenting hotels, for short or one-night stays from around the corner from where they live. It’s a very big market and means the hotel user base has increased. So structurally, perhaps, the hotel industry has changed a little bit.
And you saw the GDP numbers — there are some sectors that are performing well. Corporates have woken up from Covid and that entails travel, and in smaller towns and around mines, companies servicing the mines are doing plenty of travel. In fact, [on Monday] night the group ran at 70%, which was very good for a Monday night. And in August we had our highest occupancy on a Wednesday — it happened to be Brics — but that was only in Sandton and we ran at 90% across the group.
You don’t feel under pressure to change City Lodge to appeal more to tourists, for example by investing in locations that are more touristy?
It’s a bit of a mixture; the locations that cater for both business and leisure are [what] we would be after.
Now that your balance sheet has been repaired are you going to invest in sites like that or are you just going to work the property portfolio that you already have?
The near-term growth is going to come from improvement in occupancies and room rates. We are reinvesting the cash now and making up for cash we didn’t spend (or have!) during Covid, so we’ve got 10 refurbishments marked for this financial year. But if there are opportunities, given the right site at the right price, we would in all likelihood push the button on new builds.
Should we infer anything from Tsogo Sun’s 10% stake in City Lodge?
We haven’t had contact with them so I guess the question is best asked of them. I don’t know their reasoning.
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