European General Qualitative Hotel Outlook - 5/12/20
Fitch Credit Ratings is out with a general note on the European Outlook. They have a baseline Occ%, ADR, RevPAR forecast for Europe - which we find as optimistic ourselves. Irrespective, as a big fan of Fitch, some key takeaways from the note below, and almost all applicable to the U.S. Lodging Sector. We believe that the Lodging Credit Downgrades will begin with either 2Q Earnings (July-August) or if companies are forced to draw on their Revolvers or issue Debt prior to then - at which point their equity prices will get smoked through year-end (our view). We continue to build a list of names to short in this sector including $WH. We find that $MAR s earnings were more accurately reflected after the announcement than $WH - showing the depth of stupidity of non-sector buy-side specialists (beta boys). Further, we find that $MAR's factoring of gift cards at 80 cents on the $1 an act of financing desperation and the anecdote that tells you how to read this sector right here right now (as a start).
Fitch Ratings assumes the coronavirus pandemic will cause a 60% drop this year in European hotels' occupancy rates, which will not recover until at least 2023. All ratings in the sector have Negative Outlooks or are on Rating Watch Negative (RWN), with smaller high-yield companies most at risk of downgrades.
Virus spread and lockdown measures have drastically reduced business and leisure travel, and led to severe operational disruptions in the lodging sector. Occupancy rates have more than halved and our rating case is for a slow recovery with 2019 occupancy levels only reached by 2023. Our stress-case forecasts show occupancy not recovering until 2025.
Sector will continue to face adverse conditions when the lockdown measures are gradually lifted
Borders may continue to be closed in some countries, limiting international tourism
People may simply prefer not to travel overseas.
Some forms of government-imposed social distancing will continue to be in place, which may lead to only selected hotel re-openings
Stringent compliance cost requirements could add to hoteliers' costs.
Hotels' bars and restaurants may have to stay closed for a longer period and conditions for their re-opening may severely reduce their profitability
Corporate travel will take longer to resume as video-conferencing could be viewed as a suitable substitute for face-to-face meetings by recession-hit businesses
Competition from private lodging assisted by online market places, such as Airbnb, will be intense, given the increased privacy they allow
Hotel operators with management and franchise business models (asset-light) are not safeguarded from the market stress. Their revenue and fees are typically linked to revenue or profits of hotel properties, although their cost structures benefit from a lower number of employees and no rents
Asset-heavy hotel chains are also reviewing and cutting their capex plans. Only minimum maintenance capex is contemplated with all new developments, expansions and major refurbishments being postponed until at least 2021 or cancelled
There have been ten rating downgrades in the global lodging sector since March 2020, and all European hotel ratings now have Negative Outlooks or are on RWN. Investment-grade companies, such as Accor and Whitbread, have higher financial flexibility and stronger liquidity positions, and are therefore better placed to sustain their ratings, although the downturn in the sector will delay their deleveraging. High-yield hotel operators have lower rating headroom and face more liquidity pressures, which raises the risk of further downgrades.
We NAILED $DDOG - didn't we? We're encouraged by a review of $CPS, still near 20% of B/V - and tuck this one away until 2022 (notice $CPS did not have to draw on their revolver, and then have to tap the bond market to shore up the revolver and take duration in at lower coupons here while many expect the long end to steepen. Also note that they are circa 3.5x Debt:EBITDA)