Langton Capital – 2016-03-04 – Daily Wrap: Hotel capacity, High Street rents, CVAs & other:
Leisure Wrap & Other:
So the trading day is grinding to a close. We’re another day older but are we any wiser? After a day of intensive head-scratching, pen flipping and gossip, we have been considering the following. As always, contact us if you’d like further details:
• See yesterday’s email and 60 Seconds article for our take as to how the cycle will pan out.
• We believe that the HOTEL CYCLE IS PAST ITS PEAK. Both in the US and in London but perhaps less so in the UK’s regions.
• CAPACITY STILL GOING ON IN LONDON. Today (see earlier email), we have the news that Accor is spending £160m on new hotels in the UK
• This spend will include a 39-storey Novotel at Canary Wharf. Three of the five planned hotels will be in London.
• Accor has said it would continue to look for further opportunities in the UK. It says ‘whilst focusing on the Asset Management of our hotels, we continued working on development opportunities and are adding great hotels in exceptional locations to our portfolio.’
• NEW ENTRANTS. Pubs are also putting on capacity. Shepherd Neame recently reported stellar accommodation numbers, GNK, JDW, MARS and others are all putting on rooms via lodges and as a part of existing pubs. Others, such as Tune, EasyHotel etc., are also putting on rooms.
• Overall, we believe the (downward) momentum in the hotel cycle will be hard to avoid. Whitbread may likely ‘have more information’ by the time of its FY numbers in April – but that information needn’t be good.
RETAIL (INCLUDING LICENSED RETAIL) RENTS:
• Landlords are fat cats who do nothing for their money.
• At least that’s one theory.
• WHAT GOES UP, MUST COME DOWN. BUT NOT RENTS.
• Operators are understandably frustrated that, when business models evolve, for example when the internet takes trade from the High Street, rents do not adjust accordingly.
• Now’s not the occasion to precis property law but they tend to be upward only.
• Rents are sticky on the way down. In fact they only tend to move down when there’s a disruptive event. DISRUPTIVE EVENTS CAN RESET RENTS.
• Property Week suggests ‘struggling department store BHS has said it will enter into a company voluntary arrangement (CVA) in an effort to revive the business.’
• BHS says ‘it is essential it resets its costs in order to achieve a successful turnaround of a business that has been loss making for many years’.
• This could involve giving the keys to a number of stores back to their landlords.
• It says these stores are ‘over-rented’.
• BHS says ‘the CVA proposal that we have announced today is a necessary milestone…Some of our stores are loss making as we are being charged rents that are too high relative to today’s market. The CVA will address this issue.’
• Dumping toxic rubbish is hardly a new idea but, in some instances, the actuality or the threat thereof is the only way in which an operator can get his landlord’s attention
• Should this go ahead it might engender a feeling of realism in some landlords but what it will do is potentially leave another sad hole in the High Street.
• RE WHITBREAD. And the above, incidentally, wouldn’t do wonders for footfall and for Costa’s coffee sales.
• Oil up, gold up. What’s going on? Gold certainly breaking new ground at over $1270 per ounce.
• Oil price holding just below $37 per barrel. Not bad but the gold/oil ratio is at 34.45. That is, it takes 34.45 barrels of oil to buy an ounce of gold, not far off the all-time peak of around $36 hit last month. The longer term average is around half that.
Random information, hopefully not all of it useless:
• Bad day for leisure on the markets yesterday, particularly travel. Top ten losers in the FTSE100 and FTSE250 included Whitbread, Carnival, TUI, Merlin, IAG, Thomas Cook & Paddy Power.
• Whitbread down on Q4 update but the others impacted by oil price & betting worries.
• Whitbread down another quid today (at the time of writing). Now looking quite reasonably priced – except for the concern that earnings forecasts may come under downward pressure of the hotel cycle continues on its downward path
• Sterling picking itself up off the canvas.
• ECB meets next week. Observers seem to agree that M Draghi has to do something, disagree as to what
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. Whitbread shares down 6.2% as market digests numbers. Shares lurched & then lurched again as forecasts & rating tweaked
2. Burger chain Five Guys is on track for 30 openings in the UK this year and is close to its first opening in France.
3. BHS has said that it may close 40 of its 164 stores unless landlords “reduce the rents substantially” on half its stores.
4. The UK services sector weakened in February with a Markit/CIPS PMI reading of 52.7 marking the slowest rate of growth in c3yrs
5. Dart (Jet2) updates on trading for year to 31 March, says operating profit will be ‘slightly ahead of current market expectations’.
a. Dart says ‘forward bookings in the Leisure Travel business for summer 2016 are promising’.
b. Dart concludes ‘Board expects operating performance for the year ending 31 March 2017 to be broadly in line with the current year.’
6. European hotel transaction volume totalled €23.7 billion in 2015, a record level and an increase of 66% on the previous year.
7. AccorHotels will spend more than £160m on five new hotels in the UK, including a flagship Novotel at Canary Wharf which will be tallest in the chain.
a. STR reports on US hotel industry for week to 27 Feb. Says occupancy down 0.2pps with rate up by 3.3% and REVPAR +3.1%.
8. House prices in the UK continue to rise at a ‘robust pace’ according to lenders Halifax and Nationwide, with values up 9.7% YoY in February.
9. Oil price maintaining higher levels. Trading at around $37.15 per barrel. Price is now almost 35% up from its mid-Feb lows