Leaner, ¢leaner City Lodge gets th€ booking$

City Lodge Hotels is no longer in survival mode. After weathering the Covid storm, group occupancy has climbed back above 57%, average daily rates have risen by 10% year on year, and earnings before interest, tax, depreciation, amortisation and restructuring or rent costs (ebitdar) margins are steadily recovering towards their pre-pandemic range. The company has emerged leaner, with a clean balance sheet, a refreshed portfolio of refurbished hotels, and the ability to generate consistent free cash flow.

Yet despite this progress, the market continues to value City Lodge at just four times ebitdar and about 1.2 times revenue — a valuation more fitting for a distressed asset than a revitalised hospitality group with national reach and strong brand equity. While global peers trade at multiples of six to nine for similar economic profiles, City Lodge appears frozen in a post-Covid shadow that no longer reflects its fundamentals. The story has changed, but the valuation hasn’t.

At current trading levels, City Lodge looks like one of the last true value plays left in South African equities. The group has invested R408m over the past 30 months in revitalising its hotel portfolio and plans to invest an additional R20m over the next six months. These upgrades have transformed the estate from a deferred capital expenditure liability into a commercial asset capable of commanding stronger rates and guest retention.

At the interim results presentation in February, CEO Andrew Widegger noted that the group’s extensive modernisation programme was progressing at pace and that on conclusion of this phase it would have completed refurbishments to 21% of the portfolio.

The results are already visible: average room rates are climbing, food and beverage revenue is gaining share and free cash flow is building. With capex normalising and no debt weighing down the balance sheet, the operational foundation is in place. Yet the stock continues to trade as though these improvements haven’t occurred. On a replacement cost or asset-by-asset basis, the market is assigning a surprisingly conservative value to prime-located, income-generating assets — a disconnect unlikely to persist if institutional interest continues to build.

In September 2024, hedge fund manager Peregrine Capital disclosed a 5.3% stake in City Lodge. The timing is unlikely to be coincidental. Peregrine’s track record is built on finding dislocated value with a margin of safety — and its bet on City Lodge reads like a high-conviction call on a rerating. This isn’t passive ownership; it’s smart capital signalling a belief that the market is missing the structural progress under way. When high-performance funds deploy capital with clarity, it often forces the broader market to take a second look. It’s worth noting that Tsogo Sun, the Hosken Consolidated Investments-controlled gaming group, has also accumulated a 10% stake in City Lodge — though the intention of this sizeable foray has not yet been openly elaborated on.

City Lodge has long been a fixture in South Africa’s business and government travel ecosystem, with a footprint concentrated in Gauteng and administrative nodes such as Pretoria and Bloemfontein. But the travel landscape is evolving, and the company is adapting with it. From the tourism-rich V&A Waterfront to fast-growing coastal towns like George, Gqeberha, and Umhlanga, City Lodge is shifting its weight towards South Africa’s most vibrant leisure corridors.

In the interim presentation, Widegger pointed out that City Lodge was partnering with provincial and municipal governments as well as travel and tourism industry bodies to “activate positive public relations and identify and pursue solutions for the upliftment and safety within our tourism hubs in KwaZulu-Natal and Gqeberha”. He added that City Lodge continued to “seek and pursue” selected opportunities for new hotels in high-growth areas around South Africa.

The post-pandemic traveller wants more flexibility, longer stays, and a blend of work and rest — and City Lodge is leaning into this new reality. Food and beverage revenue now makes up 20% of the top line, while refurbishments have refreshed not only the rooms but also the experience. What began as a defensive strategy post-Covid has evolved into a considered repositioning of the portfolio, rebalancing away from government-heavy nodes and towards lifestyle-orientated locations that offer pricing power and broader demand resilience.

Beneath the surface of City Lodge’s recovery lies a more provocative question: should the group separate its operating business from its real estate holdings? The OpCo-PropCo model — used by global hotel majors such as Hilton and Accor — has allowed companies to unlock value by becoming asset-light while still retaining brand control and management economics.

In this scenario, City Lodge’s physical hotels would sit within a property company, potentially structured as a real estate investment trust, while the operating entity would earn management fees and leverage its brand to scale. The benefits are tangible: enhanced return on invested capital, access to differentiated investor pools, and the ability to monetise real estate without giving up operational control. But the trade-offs are real too — tax triggers, loss of balance sheet flexibility, and long-term lease commitments that could dampen margin agility.

It’s not a short-term fix, but as the company looks for ways to unlock trapped value, this strategic lever remains one of its most intriguing long-term options.

So, what could spark a rerating in City Lodge’s share price — remembering the final results for the 2025 financial year are imminent? Momentum is building beneath the surface, but the market has yet to adjust its lens. Widegger has already suggested that the G20 summit in November, as well as associated events and activities, would create opportunities for hospitality and provide a boost to consumer and business spending and result in elevated investor interest.

City Lodge doesn’t need reinvention. It needs recognition

Then there are a few well-timed catalysts that could change investor perceptions. A return to 60%-plus occupancy — still below pre-pandemic highs but well above current levels — would materially lift margins and reset earnings expectations. A formal dividend resumption, or even a modest special dividend, could attract income-focused funds back into the name.

City Lodge’s food and beverage segment, growing faster than room revenue, offers a path to reframe the business as a broader hospitality platform, not just a place to sleep. Institutional buying interest, as already signalled by Peregrine Capital, could create further momentum, particularly if paired with renewed analyst coverage or corporate action. And any step towards unlocking its real estate value — whether via sale, joint venture or structural separation — would shine a spotlight on just how underappreciated the asset base really is. City Lodge doesn’t need reinvention. It needs recognition.

For all the upside potential, one material risk lingers. City Lodge’s legacy strength in government and parastatal travel — particularly in cities such as Pretoria, Polokwane and Bloemfontein — also represents a vulnerability. South Africa’s fiscal position remains deeply constrained, with the debt-to-GDP ratio above 70% and little room left for discretionary spend.

Travel budgets for public servants are likely to come under pressure in the years ahead, especially if austerity takes hold. While the company is actively diversifying its demand mix towards leisure and international guests, government-linked demand remains a meaningful contributor to occupancy in inland regions. Should fiscal tightening escalate, City Lodge could see softness in precisely the nodes it’s trying to rebalance away from. It’s not a deal-breaker — but it is a dynamic that investors need to keep front of mind.

Ultimately, City Lodge’s turnaround is more than a narrative — it’s visible in the numbers. Occupancy is rising. Rates are climbing. Free cash flow is back. Food and beverage is no longer an afterthought but a meaningful growth vector. The balance sheet is unburdened, and institutional capital is quietly accumulating. Still, the share price lingers in a valuation zone that no longer aligns with the company’s fundamentals.

The mispricing isn’t about performance — it’s about perception. If earnings deliver another clean beat, if management resumes dividends or signals a corporate action, and if investor sentiment finally shakes off its post-pandemic hangover, City Lodge could rerate sharply. The question is no longer if the market will catch up — only when.