Back on track

2022 was the year of the hotel industry’s great comeback. Such success tastes particularly sweet to us, as – without wishing to be smug about it – during the pandemic we loudly proclaimed that people and companies would go back to travelling again once this was possible.

The strong recovery has not been without its challenges, however. As the hotels quickly filled up, it became difficult to recruit staff. In this respect I am deeply impressed by both our tenants’ and our own capacity to manage the great influx of guests with limited and in many cases newly trained staff. Our enjoyment is clouded, however, by the tragic war in Ukraine that has caused many people much suffering. I am proud that Pandox has contributed in various ways. As well as a financial contribution to UNICEF, I am particularly pleased that we offered hotel rooms at no cost to people fleeing the conflict.

Inflation protection and bank financing

In 2022 the world left behind a long period of low inflation and low interest rates. For many property companies, this was a brusque awakening. Pandox is in a somewhat better position thanks to its mainly variable revenues and 100-percent bank financing with security in the underlying property. This gives us inbuilt inflation protection in our revenues and at the same time avoids the uncertainty that comes with market financing in the form of bonds or hybrid loans. Having said that, we are in no way spared the effects of these developments and we will have higher financing costs in 2023. Concern about interest rate instability has naturally demanded the full attention of the Board of Directors and the Finance Committee during the year. We have 13 banks with which we have long and strong relationships, and together we have recently navigated our way through a pandemic that was probably the ultimate stress test. We are therefore convinced that together we will also get through a period of overly high inflation and high interest rates. During the year it was more important than ever for the Board to find a balance between on the one hand maintaining a strong financial position and on the other utilizing opportunities for proactive acquisitions and investments.

Upswing in both the market and profits

The hotel market’s good growth has significantly improved profitability and cash flow for both Pandox and its tenants, and the level of financial risk in the hotel sector is lower than it has been for many years. Pandox’s loan-to-value ratio and many operators’ debt are today lower than before the pandemic. The appetite for joint development projects is also greater than it has been for a long time and new investments will make a positive contribution to the hotel products’ competitiveness and future rent potential. Our extension of 15 leases with Scandic during the year is a good example.

Good opportunities for continued value creation

A more challenging financing climate has created opportunities for attractive pricing of acquisitions, particularly in Operator Activities where we made several acquisitions at yield levels that are expected to more than compensate for higher interest expense. As always, we have also continued to invest around SEK 1 billion in the existing portfolio in cash flow-driving projects. The risk of an economic downturn brought about by high inflation, higher interest rates and more cautious consumers and companies has increased. The Board’s strategy is to plan for the worst and hope for the best. Pandox’s financial preparedness is good, and the organisation is strong and competent. A tougher economic climate makes it more important than ever to focus on meaningful value creation in the hotel industry – something that Pandox has excelled at ever since it was formed in 1995.

Finally, I would like to thank all our shareholders, lenders, business partners and employees for their great cooperation.

Oslo, March 2023

Christian Ringnes