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Pandox’ operations and profitability are affected by a number of factors, of which the most important are described below.

The hotel market

The development of Pandox’ earnings and the value of its hotel properties are dependent upon trends within the hotel market, which in turn closely follow general economic developments.

Business travel and conference activities nor­ mally increase during periods of high economic activity, while there is a corresponding decrease during periods of low economic activity. There is thus a strong connection between economic trends (GDP) and trends within the hotel market. Developments of GDP can be closely monitored, whereas factors that influence local hotel markets are significantly more complex. The most impor­ tant influential factors are local economic condi­ tions, the proportion of new hotel capacity in the market, how well developed a market is concern­ ing brand names and segments, currency fluctua­ tions, aswell as extraordinary events.

New capacity

New capacity introduced to the market implies an increased risk for local players. Depending upon existing demand, additional hotel rooms through the construction of a new hotel can lead to a rapid negative influence on occupancy rates and aver­ age prices. To deal with this risk, Pandox has developed an information system that continually monitors planned new constructions within its market areas, and thus enabling Pandox to be prepared and proactive.

Agreement structure

Pandox has a large proportion of variable leases, which represented 95 percent of total rental reve­ nue in 2011 for Pandox wholly owned properties. About 32 percent of variable leases contained a guaranteed rent, meaning that 62 percent of rental revenues were fully variable downwards. A change in the occupancy rate and the average room revenue consequently affects Pandox very differently, depending on the direction of change. The choice of agreement is based on optimal distribution of cash flow between Pandox and the operator so that both parties are motivated to continuously increase the hotel property’s overall

profitability. Factors that may influence risks asso­ ciated with variable leases are the hotel property’s location, market segment and brand name/oper­ ator. Pandox’ strategy is to operate in a selected market segment, which in combination with its hotels market expertise and systems, limits the agreement risk.

Partners

Pandox’ agreement structure, with a large propor­ tion of variable leases, means that the Company is more dependent on the individual tenant/opera­ tor’s business than other property companies. The Company’s strategy to actively cooperate with the

market’s most competitive and powerful opera­ tors with well established brand names, reduces both the related operative and financial risks. Pandox’ largest tenants in terms of revenue are Scandic, Hilton, rezidor, Elite Hotels, InterConti­ nental Hotels Group, Nordic Choice Hotels and First Hotels, which together accounted for 85 per­ cent of all rental revenue in 2011.

Leasing level

The leasing level in Pandox’ wholly owned port­ folio as of 31 December was 99.8 percent. vacant space amounting to 1,430 sqm consisted entirely of store and office premises.

InterContinental, Montreal

If for any reason a hotel operator should choose to terminate its lease agreement, Pandox may either select a new suitable operator as ten­ ant or operate the hotel under its own manage­ ment. with Pandox’ specialist expertise in the hotel sector, the risk of vacant hotel space is seen as being extremely low.

For other commercial space, which represents approximately 8.1 percent of total space in the Company’s properties, Pandox is exposed to the same fluctuations in supply and demand for prem­ ises experienced by other property owners.

Changed risk potential

Historically, the hotel industry and hotel property sector have always been associated with high risk. The market has however changed signifi­ cantly in recent years. owners have become more professional with restructured companies and focused strategies, with a greater holistic view and specialised expertise. reports from public com­ panies have substantially improved information about the transparency of the market. The pro­ portion of established strong brand names with efficient operations has increased. For streamlined companies with own expertise in hotel operations, hotel properties and business development, and who are active owners, the potential risk is consid­ erably lower than it has been in historic terms.

Decisions by public authorities

The hotel market can be affected by decisions made by public authorities. Two examples of such decisions are changes in taxation related to claims for travel expenses or rules concerning value added tax both in general and for the hotel and restaurant industry in particular.

Property tax

Property tax on Pandox’ Swedish properties amounts to 1.0 percent of the tax assessment value. Changes in the tax rate or in the tax assess­ ment value affect Pandox’ earnings. However, an increase only has a limited impact on the earnings because many lease agreements are formulated so that the property tax be passed on to the ten­ ant. Property tax on properties outside Sweden is generally less than one per cent of the book value. About 55 percent of the property tax was debited to tenants in 2011, which means that the net effect on Pandox’ earnings amounted to SEK 22.4 M.

Site leasehold rents

In the wholly owned portfolio as of 31 December 2011, Pandox held seven properties via site lease­ hold rights. rents on these properties are cur­ rently calculated in such a manner that a munici­ pality that normally owns the land receives what is deemed to be a reasonable real rate of interest on

the estimated market value of the land in question. Site leasehold rents generally run for periods of 10 to 20 years.

Interest rates

Interest expense is Pandox’ largest single cost item. Fluctuations in interest rates will therefore have an impact on Pandox’ earnings. In order to limit its financial risk, the Company’s average fixed interest period is 4.7 years. The full effect of a change in interest rates is accordingly not felt by Pandox until after this period.

Currency risk

Pandox’ policy is to hedge the major part of its currency exposure, including shareholders’ equity, by financing properties in local currencies and by hedging through means of appropriate currency instruments. Transaction exposure is limited as revenue and costs are usually in the same currency.

Hotel BLOOM!, Brussels

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