Empty hotels only have unwelcome debt as a guest

● The coronavirus pandemic has hammered the whole travel industry, but SA’s highly geared hotel chains have been particularly hard hit by having to close their properties during the lockdown.

Analyst Anthony Clark predicts a grim future for the hotel groups, noting that they have incurred billions of rands in debt — through buying assets or making additions to existing properties — which they now need to service with almost no cash flow.

He says hotel revenue was already declining due to the weak economy pre-Covid, and then operations ground to a complete halt with the lockdown.

To avoid defaulting on their debts, hotel groups will need to go cap in hand to banks to renegotiate terms that may not be favourable, or approach their shareholders for more money.

City Lodge and Sun International have embarked on rights issues to raise R1.2bn each.

City Lodge has R1.2bn in debt, Tsogo Sun R11bn, and Sun International R13bn.

To compound the problem, Clark said, investor confidence has plunged, as reflected by share prices in the sector, which have declined 70%-90% in the past year.

“Confidence in these companies and their management is starting to erode.”

New regulations that ease the lockdown by allowing 50% occupancy have created the assumption that guests will return to hotels and gambling venues, but Clark is sceptical.

City Lodge has started generating some revenue by offering hotels as quarantine sites.

Lindiwe Sangweni-Siddo, COO of City Lodge, said in a statement that the chain had identified specific hotels that would be opened because they were likely to attract significant numbers of business travellers.

Clark said City Lodge was in serious trouble, with the share price having fallen about 70% over the past year. “It’s a calamity; they were stupid enough to guarantee the debt of R750m for their BEE partners.”

This, Clark said, would add to the group’s already strained balance sheet. The debt is part of the reason for the rights issue.

City Lodge declined to respond to questions from Business Times.

Sun International this week had to slap down an unexpected move by its Chilean partner, Nueva Inversiones Pacifico Sur (IPS), to acquire a 50.1% stake.

“It is surprising and unfortunate that IPS chose to go public with an unsolicited announcement that is neither an offer nor a firm commitment to make an offer,” said Sun International CEO Anthony Leeming in a statement.

Asked about the future for the group,

Leeming said it was tracking business levels closely to see when it could open properties for business travellers, but it was unlikely to reopen Sun City while the ban on interprovincial travel remained in place.

He said Sun City could reopen if it seemed likely to achieve 30% capacity.

Tsogo Sun is not seeking additional funding at the moment. CEO Marcel von Aulock said the company was focusing on reducing its cost structure and using cash reserves.

He said the group had suspended contracts with suppliers, applied for support under the government’s temporary employer/employee relief scheme and negotiated concessions with landlords.

“I even got a 60% discount on my salary,” he said.

Von Aulock said that while the group had debt, it had adequate cash and credit facilities. “We are liquid and solvent for the foreseeable future.”

Tshifhiwa Tshivhengwa, CEO of the Tourism Business Council of SA, said the tourism industry was losing about R748m a day and had run out of time.

“It is illogical — why can I go to a shop full of people but not go to a quiet lodge and spend time with my family?” he said.

Clark said that for properties like Sun City to even break even, they needed to attract a critical mass of patrons.

“Gambling, as an example, is profitable because of a mass market of punters,” he said.

But this critical mass might not be achieved, not only because of the government limit on guest numbers but because people will be cautious about risking contagion.

Punters might also feel the experience will be disappointing and thus not bother to undertake the trip to a distant casino or resort, he said.

It is illogical — why can I go to a shop full of people but not go to a quiet lodge?

Tshifhiwa Tshivhengwa CEO of the Tourism Business Council of SA