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Major hotel landlord warns of 'steep crisis' in sector, but sure of recovery

The European hotel sector should recover over the next two years from the severe contraction it has experienced as a result of the coronavirus pandemic, the CEO of major European hotel property owner Covivio said.

Speaking during a first-half earnings call for 2020, Christophe Kullmann said his company continued to have confidence in the sector, despite seeing a more than 50% plunge in like-for-like revenue in the first half of the year.

"Hotels are facing a steep crisis, but people will always want to travel and to meet," said Kullmann. "It will be progressive, but activity will come back."

Covivio owns about 40% of a hotel portfolio valued at €6.22 billion as part of Covivio Hotels. Hotels make up 15% of the €25 billion property portfolio in which Covivio is invested, of which its share is €16.7 billion. Office properties account for 60%, while residential makes up 24%.

Kullmann emphasized his confidence in the sector's prospects by highlighting the €573 million acquisition of a portfolio of eight prime European hotels by Covivio and its investment partners, which is set to close in September, he said.

About 80% of Covivio hotels closed during lockdowns across Europe aimed at delaying the spread of COVID-19. Revenue per average room fell by about 65% on Covivio variable leases and management contracts. By the end of June, 65% of hotels were open, but occupancy remained low at 10% to 20%.

Negotiations have been finalized with operators representing 66% of leased hotel revenues. AccorHotels, NH Hotel Group SA and Meliá Hotels International SA are among Covivio's hotel tenants. Covivio has help operators with short-term liquidity, such as switching to monthly payments and granting rent-free periods. In return, Covivio has secured future cashflows by agreeing to lease extensions with hotel operators that have seen its hotels' firm lease length increase by four years. Firm lease length on average for hotels in lease now stands at 14.7 years.

"These are win-win agreements," said Kullmann.

Covivio's hotel portfolio in the U.K., which represents 2% of the company's total property portfolio value, is the most severely impacted by the coronavirus crisis. All of the assets, which are let to InterContinental Hotels Group PLC, have been closed since the country imposed its lockdown in late March, resulting in no rent being received in the first half of the year.

"This is where the impact is the strongest due to a longer and stricter lockdown period, and reopening phase that is not yet certain," said CFO Tugdual Millet. "Due to this unprecedented situation, the [material adverse change] clause that we have in our lease fully applies, and we should not receive any rent this year."

Covivio's hotels that operate under variable leases, which are mostly in France and make up 4% of the company's total property portfolio value, saw a 67% fall in rental income in the first half of the year compared to the same period in 2019. The company's hotels that operate under management contracts, mostly in Germany and comprising 3% of its total property portfolio value, experienced a 78% drop in rental income.

The remaining 6% of the company's hotel portfolio is based in other European Union countries. Leases for these assets saw a 1.9% fall in rental income. The company said it is "accompanying [these] operators through the crisis" after reaching agreements with eight of them.

Covivio's hotel portfolio suffered a 3.1% decline in valuation in the first half of the year, with its U.K. assets recording the largest fall of 7.6%. Those assets operated under variable leases and management contracts fell by 3.3% in value. The hotel portfolio's valuation performance compared with a 4.2% increase in the value of the Covivio's German residential portfolio, a 1.4% increase in its French office assets, and a 0.3% decline in its Italian office portfolio.

Responding to a question from an analyst about why hotel valuations had not fallen further given the plunge in income, deputy CEO Dominique Ozanne said there was a sound basis for the valuer's estimates.

"The valuation has been comforted by the appetite [for hotels] in the last month because a lot of new funds raised some equity in the hotel sector," said Ozanne, citing equity raises by Brookfield, Primonial and Starwood Capital as evidence. "And [since then] we have had a lot of transactions [in the market], even very recently, which confirm our valuations."