No silver linings for hard-hit hotel industry

City Lodge was founded in 1985, with the opening of its first hotel — City Lodge Randburg (or City Lodge Bryanston as it is now known).

The group listed five years later on the JSE. Since then it has grown acquisitively and organically in both the upmarket and budget hotel categories. In 1995 it acquired 50% of the upmarket Courtyard Suite Hotel (acquiring the other 50% in 2015), and also opened the budget-conscious Road Lodge. In 2013 the group started its African expansion by acquiring a 50% stake in two hotels in Kenya (subsequently taking full ownership). Since then, it has ventured into Namibia, Tanzania and Mozambique, but its SA operations remain dominant in its portfolio.

Today the group consists of 62 hotels (with 7, 902 rooms) throughout SA and selected African markets. The portfolio has a suite of brands such as the Courtyard and Fairview hotels, catering for the upmarlogistics

ket segment, and City Lodge and Town Lodge brands in the mid-tier segment. The Road Lodge brand caters for a more budget-conscious traveller.

The hospitality sector was particularly hard hit by the Covid-19 shutdowns and restrictions, and the impact will be felt for a while longer. City Lodge recently released results for the year ended June 2020 and — though it was already operating in an environment of low growth and lacklustre consumer confidence before the pandemic — the numbers show how extreme the impact of Covid-19 was on the group. The pandemic affected the majority of the final quarter of the financial year. Total revenue decreased by 25% to R1.16bn and the group reported a loss of R487m, as against a profit of R206m in the previous year. No final dividend was declared to preserve cash.

After its year-end, the company raised R1.2bn through a rights issue. The proceeds were in part used to pay down debt as well as to improve liquidity and assist the group’s working capital in preparation for a relaxation in restrictions.

The results provided colour on just how decimated occupancy levels were by the lockdown, with negligible occupancies in the last quarter of the 2020 financial year as the majority of its hotels were closed. Though travel has recently improved slightly with the lifting of intra- and interprovincial travel restrictions, City Lodge has historically been reliant on business travel, which has been slow to pick up. Occupancy levels increased only marginally from 4% in June, to 7% in July, then only 10% in August. This metric should continue to improve on the back of further relaxation in lockdown levels and a pick-up in economic activity and mobility.

For the 2020 financial year as a whole, occupancy levels were 38% relative to 55% for 2019, with break-even occupancies closer to 40%.

City Lodge is a well-run business with a history of proactive management adapting the business to external issues.

Next year will remain challenging for any business linked to the travel industry, with the possibility of a second wave of outbreak and potential stricter lockdowns being reimposed remaining a material risk.

City Lodge management expects the environment to remain tough until at least the fourth quarter of the current financial year. Addressing the question of how much of the negative environment is reflected in the current share price is challenging for the City Lodge investment case as, if the environment takes longer than expected to improve, the company may need to come back to shareholders for more cash.