Integrated Report 2020
The tourism and travel industry took a major blow. What was the impact of COVID-19 on operations and performance?
In the latter half of 2019 the group's occupancy levels slipped by 4%, largely due to the moribund South African economy that was already entering recession before the pandemic arrived. During 2019, the board and executives had taken major steps to restructure the group for low occupancies and take full advantage of the likely economic cycle upswing.
In early 2020 occupancy levels stabilised and our management forecasting showed that the group may have commenced the early stages of that long-awaited upswing.
Our optimism proved short-lived as gathering alarm about a fast-spreading coronavirus began dampening travel plans around the world. Occupancies slid from 53% in the first half of March to 17% in the second half following President Ramaphosa's announcement of a National State of Disaster on 15 March 2020.
South Africa's 'hard' level 5 lockdown, commencing on 27 March 2020, closed all but four of the group's hotels. These four hotels accommodated government authorities and essential and critical business continuity services. They also provided quarantine facilities on a limited basis to repatriated citizens.
COVID-19 lockdowns have decimated the travel and tourism industry, in Africa and across the world. Many hospitality-related businesses, including airlines, hotels and restaurants, have shut their doors or introduced mass retrenchments. The South African air travel industry came to an almost complete standstill, with South African Airways (SAA) and Comair/Kulula entering business rescue and grounding their fleets. Business travel ceased almost entirely, and the peak mid-year holiday season never left the ground.
With lockdown and travel restrictions easing considerably from August 2020, we look forward to gradually reopening all our hotels and a reviving occupancy rate. Many families are keen to get out of the house after lockdown, especially as the weather warms into a glorious African summer. The fast-approaching December holiday period should deliver a welcome resurgence of demand, especially in the coastal regions.
The reopening of international borders and travel should help stimulate and enable the long road to recovery of the travel and hospitality sectors. CLHG anticipates that it will reach breakeven earnings before interest, taxation, depreciation and amortisation (EBITDA) levels in the second quarter of 2021, with steady increases in occupancies as travel improves following the easing of lockdown measures.
CLHG's existing cash facilities and the R1.2 billion rights offer, which was fully subscribed, ensures at least a year's grace for the group to trade back into profitability. The board intends to use the net proceeds of the rights offer to repay a portion of amounts owing under its secured facilities, retain on deposit an amount equal to, and set aside for the settlement of, the company's guarantee of the black economic empowerment (BEE) interest-bearing borrowings and the BEE preference shares and accrued dividends liability to settlement date. This cash will improve liquidity and ensure that the group is well positioned from a working capital perspective to fully resume operations as COVID-19 lockdown measures are relaxed. These proceeds will support the working capital requirements until the group reaches breakeven.
The R1.2 billion rights offer will enable the group to trade back to profitability, while settling the BEE liabilities and a portion of the interest-bearing borrowings.
How did CLHG respond to mitigate the health risks of COVID-19?
CLHG was unexpectedly thrust into the frontline against COVID-19 shortly before the lockdown in South Africa was announced. At that point, we found out that a guest was COVID-19 positive and had to be immediately quarantined in the hotel. This event prompted the group to quickly form a COVID-19 rapid response team and institute protocols that later formed the basis of industry standards for South African hospitality.
We developed the initial protocols for quarantine and essential worker accommodation facilities in collaboration with organisations such as the Tourism Business Council of South Africa (TBCSA), Federated Hospitality Association of South Africa (Fedhasa), Association of Southern African Travel Agents (ASATA) and Southern Africa Tourism Services Association (SATSA).
Based on our 'people first' philosophy, these rigorous protocols were also instituted for guests, employees and service providers.
As soon as a staff member feels ill or shows any COVID-19 symptoms, we may send the employee home to self-isolate or to take a test, depending on our assessment. Employee screening is intensive, and we have a full track-and-trace process for those who test positive. We encourage our employees to schedule regular outdoor breaks to take a walk and lower their masks at a safe distance. We take care that every staff member is supported through this pandemic. Central office employees now work from home.
Since we could not always physically interact with employees, our human resources department developed online training on safety protocols. We also introduced regular 'How to keep safe' messaging via SMS. Our Rate-Us questionnaire now includes aspects of our COVID-19 protocols. City Lodge achieved an exemplary guest satisfaction level of 93% in July 2020.
We have received many letters of thanks and appreciation from our quarantined guests. Our humanity has been tested to the hilt and we will re-emerge stronger than ever as Africans, South Africans and fellow travellers.
How did CLHG mitigate the financial effects of COVID-19?
Shortly after the lockdown was announced we introduced proactive cost containment measures to minimise the adverse financial impact of the lockdown of our operations. Key initiatives were: a freeze on all uncommitted capital expenditure, suspension of certain large key contracts and rental relief negotiated with our landlords.
To date we have not retrenched any employees. However, to manage the cash burn, we reduced salaries by 50% for all employees who were not able to work remotely, for the period April to August, followed by an increase to 60% of salaries for September and October. We continue to review salaries on an ongoing basis. The group continues to contribute 100% of its portion of medical aid together with the risk benefit portion of the retirement funds. We are also assisting with applications for revised Unemployment Insurance Fund (UIF) benefits. These measures are unfortunate but necessary. We intend ending these measures when occupancies return to sustainable levels.
We engaged promptly with our funders to secure short-term liquidity, while also implementing a rights offer to support medium-term working capital requirements and ensure that the group can meet its obligations. This rights offer, which closed on 21 August 2020, raised R1.2 billion. It was extremely well supported by our shareholders and fully subscribed. We are delighted and inspired by the implicit trust that shareholders have placed in our ability to manage CLHG back to profitability.
Now that the board and executives can focus single-mindedly on restructuring CLHG for a future no one had envisaged a year ago, we are taking the bold and necessary steps to justify raising this capital.
How did CLHG perform during FY2020?
The impact of the COVID-19 pandemic on the group's business and results of operations increased steadily in magnitude and severity following South Africa's strict lockdown protocols enforced from 27 March 2020. Similar lockdown protocols were adopted shortly thereafter in the other African countries where the group operates.
Average occupancies for the group in the 12 months to 30 June 2020, declined from 55% in the previous financial year to 38%. In South Africa, occupancies decreased from 58% in the previous financial year to 41%. The group incurred a net loss of R486.6 million. This was primarily due to exceptional losses of R344.6 million, net of tax, related to the impairment of property, plant and equipment, along with right-of-use assets of some hotels. Other causes of the loss were impairment of deferred tax assets of R47.1 million, together with our initial recognition of IFRS 16 Leases interest expense and depreciation net of previously recognised lease expenses of R67.4 million, net of tax. This is the first time that the group has recognised impairments to its hotels. This outcome was driven by our assessment of the negative impact of COVID-19 on forecast cash flows generated by the underlying hotel, along with increased risk assessments that had a material impact on discount rates applied across the portfolio.
Although our results show resilience under the circumstances, CLHG has been profoundly impacted by the COVID-19 pandemic and the short-term performance will continue to be challenging, with break-even only expected in the second quarter of 2021.
Looking beyond South Africa, our Botswana performance was stable, and Namibia continues to improve, albeit from a low base. Kenya was disappointing as market supply in our category expanded ahead of demand, while Tanzania continues to struggle, particularly with the unexpected move of government, a key market segment, from Dar es Salaam to Dodoma, the capital city. Mozambique is too early to forecast, although we are fairly optimistic, given our competitive rates and growing business and leisure activity in Maputo.
Our expansion into the rest of Africa will be complete when the remaining floors in City Lodge Hotel Maputo have been completed. We will henceforth concentrate our efforts on managing each of our hotels into contributing positively to the bottom line. The board and executive team will evaluate each underperforming asset for possible disposal or realigning with its markets.
With the group's financial stability secured for the near future, what are the primary risks to be managed?
COVID-19 cuts across all our existing risks and is our most material matter at this time. It magnifies existing challenges such as oversupply, discounting, and stagnant economic conditions. Uncertainty is a major factor. We simply do not know yet what future lockdowns will look like, or when and how international borders will reopen, which airlines may return to the skies, or how the 'new normal' will evolve. All these factors make future planning more complex than ever.
These risks and uncertainties are playing out against the long-term effects of COVID-19 on global society and its macro-economic well being.
Competition in the hospitality industry will be fiercer than ever until weaker competitors bow out, which compels us to continue enhancing the CLHG appeal to current and potential guests.
We will restore and grow occupancy levels by refocusing and evolving our services to recognise our guests' enhanced hygiene needs in a
post-COVID-19 world. This requires being innovative in our guest offerings and maintaining and refurbishing our hotels to continue to offer best value, while building relationships with key corporate accounts and business travellers. CLHG is aggressively leveraging technology to build internal efficiencies and a broader marketing reach, particularly through online applications and travel intermediaries.
3
CUSTOMER
PROMISES
QUALITY
We listen and act on your feedback. Our teams and the partners we work with are always looking to improve to make your next holiday even better.
SERVICE
We’ll be there whenever you need us. Our teams are available 24/7.
We are here to make you happy and we promise to put you at the heart of everything we do.
RELIABILITY
We care. You can trust us to always be open and honest with you.
We always give you all the information you need to make your time away stress-free.
Fixed costs are a major challenge in a low occupancy environment, with the group exposed to above-inflationary increases in administered costs such as utilities and property rates. We are actively renegotiating all contracts where possible.
What are CLHG’s real opportunities at this time and how are you leveraging them?
Until recently, CLHG’s pricing strategy was based on a standard rate across-the-board, regardless of demand or season. Shortly before the COVID-19 pandemic commenced in South Africa, we commenced investigating a Best Available Rate model further enhanced by demand forecasting using artificial intelligence (AI) predictive analysis. We are currently piloting this new model, which will offer the best rates possible through a tiered pricing model. This major advancement in our pricing strategy will be a differentiator as hospitality reopens to a ‘new normal’ travel market.
We are also examining ways to boost our spend per customer. For every guest, there are opportunities to up-sell some of our offerings. For example, our food and beverage offering will extend as we introduce additional concepts such as eat-in offer, craft beers, and cocktail menus. We can offer our commercial spaces as hygienic and comparatively safe places for guests to work, meet and socialise.
Over the past year we redoubled our marketing drive to include a dedicated sales force wielding a well-articulated strategy. We partnered with a wider spread of online travel agents and listed on the popular Bookings.com and LekkeSlaap.co.za platforms.
CLHG is also automating the entire guest experience from start to finish, from the initial capturing of guest profiles to optimised direct booking engines leading to one-click check-in functionalities. Our ‘Guest 2.0’ strategy will guide every single stage of the customer journey. In so doing, we are creating a seamless guest experience that travellers will return to time and again.
We are leveraging technology by introducing a new City Lodge App and refreshing our website to drive online bookings. The App offers upgraded functionality for online check-in by enabling guests to download their IDs to their online profiles, tick the terms and conditions, and merely collect their keys on arrival. This added convenience reduces unnecessary physical touchpoints during this COVID-19 reality.
The modern-day traveller expects fast and unlimited internet, which prompted us to roll out a significantly improved WiFi and broadband capacity across most of the group’s hotels.
In March 2020, the CLHG became the 35th company to list on South Africa’s A2X exchange. This secondary listing provides a lower cost entry into CLHG shares and is intended to attract fresh capital and new investors.
An opportunity presented by the pandemic that we will approach with much caution is the potential acquisition of distressed assets. We may acquire land for future development if market prices in targeted locales fall sufficiently. Other than the completion of the Courtyard Hotel Waterfall City, the board does not foresee developing any further new hotels in the near future, but could secure well-priced land for future expansion.
Internal transformation is a pillar of the CLHG strategy and we are realistically aiming to achieve a Level 4 broad-based black economic empowerment (BBBEE) accreditation. The group has made steady progress in all BBBEE requirements but has fallen back on the equity rating due to our underperforming share price. Resolving this issue will be a critical focus area in the months ahead, as our current BBBEE debt arrangement must be settled by 31 January 2021. A portion of the proceeds from the rights offer is held on deposit for the BBBEE debt settlement.
Our strong commitment to combating climate change and environmental responsibility remains unwavering, as we successfully completed solar installations at 25 of our hotels following the initial single hotel pilot. These installations have immediately generated utility expense benefits and are expected to generate sufficient power to be paid off within four years of normal trading operations. We are currently conducting feasibility studies on future solar power rollouts.
We are also delighted to finally eliminate single-use plastics used in bathroom amenities across all hotels in the group, with the introduction of our new Zero Bar bathroom amenities range launched in July.
We want to thank all those who remained committed to CLHG through this challenging time. Our employees remain steadfast and resolute to always giving the best of themselves to our guests and the group, even during this adverse time. Our employees navigated the uncertainty of supporting quarantine guests following their repatriation home to South Africa and worked outside their regular responsibilities. For example, general managers and front desk personnel cleaned rooms, performed landscaping and even did the odd bit of routine maintenance, despite not being paid their full salaries. Our COVID-19 rapid response team has worked tirelessly and reacted swiftly and appropriately to any regulatory changes.
We appreciate our shareholders, who, even while realising significant reductions in their investment value, have shown their commitment to the group through a fully subscribed rights offer, and their continued support of management.
The partnerships presented by our suppliers and vendors have given us hope that as a community we will get through this pandemic. They have procured PPE for the entire group at short notice and helped us with swift supply deliveries to ensure that we remain flexible to reopen hotels at short notice. Many have contributed financially to the cost containment measures by allowing us to suspend or reduce services procured as we halted most of our trading operations.
Amidst all the chaos and uncertainty of the COVID-19 pandemic, the strength and tenacity of the human spirit has risen like a phoenix from the ashes. Adversity has brought out the best in our people, our shareholders and our partners. We remain grateful to the City Lodge family we have grown over the past 35 years.
City Lodge will survive the COVID-19 pandemic. Our new rates model is industry leading and our hotels with enhanced hygiene protocols are ready to welcome returning and new guests. The rights offer has secured our survival and placed us in a position of strength as the hotel business evolves to meet the demands of a ‘shaken and stirred’ new world.
Non-executive chairman
Chief executive officer
Chief operating officer
Chief financial officer
Life as a quarantined GM
For the last 35 years, the City Lodge Hotel Group has operated on the firm belief in the principal of TLC ‘Tip-top, Loving and Clean’.
However, after the national state of disaster was pronounced, all this changed. Every citizen returning to the country had to undergo mandatory quarantine in a facility determined by government.
City Lodge Hotel Group in solidarity with the government and the fight against the spread of Covid-19, made certain hotels available for quarantine purposes. The new principal became TLCSS ‘Tip-top, Loving, Clean, Screen and Sanitise’.
New quarantine specific hotel protocols were introduced to ensure the general mental and physical wellness of each individual. All employees and guests lived in a ‘quarantine bubble’ tested by the Department of Health on arrival and screened daily by nursing staff throughout their stay. Every quarantine hotel also had a hotel security presence, as well as perimeter security in the form of SAPS.
Before hotels were ready to welcome quarantine guests, all surfaces were treated with surface defence standard treatment. This product protected and sanitised all touch points for up to 90 days.
Room cleaning involved the use of newly introduced chemicals, with the World Health Organization (WHO) recommended concentration of sanitiser and cleaning properties. Laundry procedures were also adjusted to include a chemical and heat treatment that killed any potential viral matter.
All employees were required to use personal protective equipment (PPE) during the cleaning and laundry process. All discarded PPE was placed in a sturdy plastic bag and disposed of in a designated sanitised bin.
To further provide for our quarantine guest’s physical wellbeing, City Lodge Hotel Group had outsourced meals delivered to the hotels fully prepared and packaged. These meals for breakfast, lunch and dinner were monitored daily for presentation, nutrition, variety and any individual specific dietary requirements.
However, perhaps the most important aspect of managing a quarantine facility was to ensure that the repatriated RSA citizens did not feel like ‘inmates’ but rather guests.
As hoteliers, our first response to a guest’s request is generally yes, but due to government regulations, the team now had to generally say no. Therefore, the team worked tirelessly to ensure that mental wellbeing stayed top of mind in every interaction and that quarantine guests were not too adversely affected by the strict regulations.
Daily meetings and information sessions via social media were held. Guests, according to a schedule, were allowed to leave their rooms daily to exercise outside in the fresh air. A fitness corner, available at reception had a number of prescribed exercises that guests could do in their rooms. Laundry was done by the hotel to ensure the guests had ample clean clothing. WiFi was reconfigured and improved upon, to ensure hassle-free streaming. An in-hotel shop was introduced, so that quarantine guests had easy access to some South African favourites. The team ensured that items such as biltong, cold drinks, potato chips and chocolates were available.
Comforting guests and going the extra mile was a daily occurrence, with regular stories of employees organising favourite magazines, home comforts and ensuring birthdays were celebrated.
Our quarantined guests soon realised that they were not only quarantined in a safe and secure environment, but also supported by compassionate hotel employees, who made them feel welcomed. We delivered not just a service, but comfort and security during a very uncertain time for many.
As evidenced by numerous positive responses, City Lodge Hotel Group’s quarantine hotels managed to achieve the fine balance of being a strict COVID-19 facility, but still treating South African citizens with dignity and respect.
General Manager
City Lodge Hotel GrandWest
