One of the key questions for owners and potential investors after the sanitary crisis with Covid-19 will remain: « what is the best value for asset? »
For the last 30 years, Hospitality and more globally Tourism industry enjoyed a flourishing cycle almost all over the world. A positive trend of revpar was spotted despite conjunctural events with substantial ebitdar increase. New territories were explored with bubbling brands; Co-working, co-living, new technologies were implanted to maximize top and bottom lines. Hotel industry was one of the fastest growing, generating billions of revenues, employing thousands of people worldwide. However, with the current sanitary crisis, Tourism industry is severely hit. Airplane companies are struggling and hopefully will benefit from government loans to avoid bankruptcy. Nevertheless, many have to take some rigorous decisions in firing thousands of employees. Boeing and Airbus faced serious distress during Q1 2020, they reduced dramatically their production to secure their cash. Concerning the Hospitality sector, this unsafe environment required most of the hotels to close down. In Europe, occupancy landed to less than 12%, in US activity is dropping to 23% while in China we can notice a slight increase at 29% (STR data March 2020).
Single owners, franchisees and independents made the wise decision to close their premises. It was hard but necessary to protect teams and guests against the virus. In the best-case scenario, hotels will be closed for three months representing ¼ of the year and subsequently an automatic -25% drop of their revenue. How will be the summer period? Harsh for sure as far as governments did not clearly mentioned what will be tolerated or not. Circulation between territories and countries will be challenging for tourists (business & leisure) for weeks and even months. MICE venues will encounter some distressing periods as their segment should not be back to normal before 12 months. Luxury hotels will struggle even more than the economics because of their dependency of international markets. Hospitality is going to unpleasantly change.
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Investors do not like uncertainty and yet nobody can predict how the Tourism industry is going to evolve. It is merely impossible to forecast a trend, an occupancy or which segments are going to start up and which one will fail. Before the crisis, we noticed a high interest from investors in Hospitality. Hotels were often overvalued, ebitdar multiples progressively soared from 8 to over 30 in some cities, creating a deep pressure on the market and a total disconnection between value and result. This unbalanced situation combined with low interested rate generated hazardous financial arrangements with less equities and more debts. With no revenue for weeks and months, some hotels owners and big investors will have no choice but to sale a part of their asset. In this circumstance, valuation for a property is fairly complex. On one hand, investor is looking at the current ebidta but on the other hand the ability of the property to make cash in the future. You immediately appreciate the complexity of this equation with far too many unknown KPIs! In the coming months following the lockdown, very few deals are going to be signed as most of the operators will only focus on the reopening. Nevertheless, we should see an increase of deals by the end of the year with a more pragmatic tactic. Due to a better vision of the future activity, it will be easier to predict the landing and cash forecast.
I suspect ebitdar multiples will be back to a much reasonable level and exciting deals will appear. Then Hospitality valuation will progressively move from a sale to a buy market.