City Lodge Hotels: Oh won’t you stay just a little bit longer?
Squeezed economy has caused occupancy levels to drop, but any recovery will see a swift uptick in fortunes
City Lodge is a high-quality business and has been ever since inception in 1985, when it was formed by Swiss hotelier Hans Enderle. The recent interim results to December were disappointing, but largely reflect the poor state of the SA economy in which fewer business people are travelling, and for shorter periods of time.
Ventures into the rest of Africa have been reasonably successful, but here too, subdued local economies have depressed occupancy levels. Once the SA economy turns, City Lodge is poised to benefit. The group is very low-geared and when room occupancy levels improve, so too do rates. For the interim period, the average group occupancy level fell to 58% from the comparative 63%, with the SA segment falling from 64% to 61%. Occupancy levels are critical in analysing hotel performance, as moving above break-even level translates almost directly into bottom-line profits because many costs are fixed.
City Lodge break-even occupancy levels vary according to the formats of the Road Lodge, Town Lodge, City Lodge Hotel and Courtyard Hotel brands. They tend to be between 35% and 45%, which is very low for the industry, with most full-service hotels placed about 60%. This is due mainly to the group not having to pay franchise fees and owning most of its properties. “We build well, and we maintain well,” says group CEO Andrew Widegger.
Staff ratios also tend to be much lower and people are trained to work across several areas. A typical City Lodge employs one person per every four rooms and Road Lodge is even lower at around one per eight rooms. This compares with one person per room at a full-service hotel. “Our people don’t work in silos,” says group COO Lindiwe Sangweni-Siddo. “They move within the business.”
The group’s hotels in the rest of Africa have had mixed results recently but a good base has been set for future growth. The occupancy rate at the Fairview Hotel and Town Lodge Upper Hill in Nairobi, Kenya, rose by 4% during the period. Botswana occupancy levels were three percentage points lower. Town Lodge in Namibia made its first full period contribution.
Doing business in Tanzania has become difficult in recent times, especially with the relocation of government offices from Dar es Salaam to little-known capital Dodoma. As a result, occupancy rates in Dar are under pressure. “But we take the long-term view”, says Sangweni-Siddo. Echoing her sentiments, Widegger says “the rest of Africa is in a consolidation phase for us now”.
The next couple of months should be testing for SA hotel groups, thanks to Easter and the May general election. The weeks Monday April 15 to Friday May 10 are all four-day periods, which is bad for corporate travel. “One midweek holiday is equivalent to losing 10 normal trading days,” says CFO Alastair Dooley.
Foreign investors understand the worth of City Lodge as a long-term investment. Ten years ago, foreign shareholding was small. Today it is 36%, including 5% held by the Norwegian government’s sovereign wealth fund.
The share price has been in secular decline due to flat corporate travel and disappointing foreign tourist numbers, coming off the high of R171 in February 2018. Currently trading at around R125, it sits on a rolling price:earnings ratio of 17 times with a dividend yield of 3.4%. When the imminent disruptive period is over, and now that the Cape Town water crisis out the way with a return of foreign tourists, City Lodge should see improved occupancy levels.