Pandox AB

STO:PNDX B

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to today's Pandox Quarter 1 2020 Report Conference Call.And I would now like to hand the conference over to your first speaker today, Mr. Anders Nissen. Please go ahead, sir.

[Anders Berg, Senior VP & Head of Communications and IR]

Yes. Hello. It's actually Anders Berg here, and I would like to welcome you all to this presentation of Pandox interim report for the first quarter 2020. I'm Head of Investor Relations of Pandox. And with me, I have Anders Nissen, our CEO; Liia Nõu, our CFO. And we also have 3 special guests with us today: Robin Rossmann, David Goodger, and Johan Johander. And I will introduce them shortly.Let's turn to the next page, please. This report presentation is divided into 3 parts and will be a bit longer than normal. First of all, Anders and Liia will present the quarter and the business situation. Secondly, we will get an external hotel market update provided by Robin Rossmann, Managing Director International at STR; David Goodger, Managing Director EMEA at Oxford Economics and Tourism Economics; and Johan Johander, Partner and Head of Research of Benchmarking Alliance. Robin, David and Johan represent leading independent research firms focused on the economy, tourism and hotels. And I think it will be well worth listening to them. After that, we wrap everything up with a quick summary and open up for questions. Next page, please.And with that, I hand over to Anders Nissen.

[Anders Nissen, CEO & President]

Well, good morning, everybody, and also welcome from my side to this presentation. Let me start by saying the obvious, this time are not normal. Country and city are closed down. People work from home. You can say that the abnormal has started to be normal. But ladies and gentlemen, this will change.Pandox was born in a crisis at the beginning of the '90s. I was already in the company. This is 25 years ago. And we are back, as we say, to square one again and ready to manage a new crisis, more experienced with more knowledge, more humble as also as -- of course, but we are facing this crisis from a market-leading position and with a solid financial position. So we -- hopefully, we will going out stronger than we go into this crisis. Thank you very much for listening to this. Let's go over to the quarter 1 report.The first quarter 2020, you can divide in 2 phases. We had a stable start, and January and February was 2 good hotel months and then historical demand collapsed in March when COVID-19 hit and very strong government actions were taken to stop the virus. From mid-March, there came in a tsunami, and occupancy rates fall to 5% to 25% across all markets in Europe. So let's take a quick look at the numbers.For the first quarter, total net operating income decreased by 14%. Like-for-like, Property Management decreased by 12%, and like-for-like, Operator Activities decreased by 78%. Return on equity was still strong due to a few good acquisitions last year, 10%. Next page, please.Page 4. In the quarter, Pandox total operating income decreased by SEK 97 million. The strong drivers was a good January and February, as said before. We have a positive contribution from recent acquisitions in both business segments, and we have a positive currency effect and support. The revenue came also supporting from minimum and fixed rent. The negative factors in the quarter was this historical lockdown, of course, but also some increased hotel supply in some markets and some renovations costs from Pandox side. Page 5, please.Currently, the revenue is coming from minimum rent and fixed rent. It's about approximately SEK 2 billion a year and SEK 500 million per quarter or SEK 160 million approximately per month. The minimum rent is structured, so it is normally higher in Europe than lower than in Nordics. So also linked to that, we have been more active of doing acquisition out in Europe the last couple of years. We have closed the discussions with our business partner on how to help them. And we help them with temporary payment terms, but we don't change the lease agreement. And so far, rent payments is on track. Next page, please.Well, let me point out a few don't forget. First, don't forget that Pandox, even in this period, has a very high-quality portfolio of 156 hotels with 35,000 rooms that will take long time to build up a similar portfolio. 84% of the value is coming from the Property Management business, with representing where we lease out to third parties, and 16% with 20 hotels coming from Operator Activities that we own and operate. In this Operator Activities, in the 20 hotels, it's also including the 2 hotels we recently took over in Copenhagen. Next page, please.And don't forget, we're coming into this crisis, and we still have a very strong position as a market leader and a pan-European geographic position as one of the few players in Europe in size and scale, partner network and stakeholders' recognitions. Next page, please.We also have a good geographic balance in 15 countries and 90 good hotel destinations, together with 30 brands and partners. Next page, please.That takes me to the last don't forget, that Pandox platform is having most likely Europe's strongest network of brands and partners. You see them all here. We have a weekly, at least, dialogue with most of them and talking about not only how to get in rent, but also learn from their experience and share different knowledge. Next page, please.And then I hand over to Liia.

[Liia Nõu, Senior Executive VP & CFO]

Thank you. Thank you, Anders. This is a summary of the COVID-19 effects on Pandox. For full description, please go to Page 3 in the interim report.Demand in the hotel market is very low due to COVID-19 and unprecedented government actions. Currently, Pandox' main sources of revenue are minimum and fixed rent. Also Operating Activities (sic) [ Operator Activities ] is operating at a minimum capacity with very limited revenue.We have taken action on cost, and Pandox cost base is now largely at par with minimum and fixed rent. We have -- Pandox has taken part of government relief programs within Operator Activities in Belgium, Germany, U.K., Denmark and Canada. And we also have negative unrealized value changes in the first quarter explained by lower cash flows in 2020. I will come back to this later in the presentation.Since only part of the first quarter was affected by COVID-19, we expect a substantially larger negative earnings effect in the second quarter. Next page, please.It's a very strange quarter. As Anders said, the quarter has 2 phases. We had 2 stable months, followed by a historically weak March. So let me quickly run through the numbers.I'm starting with Property Management. In the first quarter, rental income amounted to SEK 672 million, a decrease of 2%. If we adjust for the previous accounting changes for property tax in the U.K. and Ireland, the increase was 1%. Like-for-like, Property Management reported a decrease in rental income and net operating income of minus 11% and minus 12%, respectively.Continuing with Operator Activities. In the first quarter, net operating income amounted to SEK 20 million, a decrease of 79%. Like-for-like, the decrease was minus 78%. The decline is explained by the severe market decrease, following COVID-19 and the unprecedented government actions take to limit the spread of the -- which has been taken to limit the spread of the virus. The action taken to reduce cost, mainly in form of stock reductions, did not materialize in full in March. So with the reductions now completed, we expect the loss rate to be substantially lower from April onwards.We also had some negative renovation and repositioning effects in Hotel Indigo, Brussels City; Hilton Garden Inn, Heathrow Airport and DoubleTree by Hilton Montreal.Total cash earnings amounted to SEK 262 million, a decrease of 29%. Total cash earnings per share decreased by 34%. Measured from year-end 2020 -- from year-end 2019, sorry, the unrealized and realized value change for Investment Properties amounted to a negative 1.1%. And for Operating Properties, the unrealized value change was a negative minus 3.6%. End of period, EPRA NAV per share amounted to a rounded SEK 187. Currency affected EPRA NAV positively. Adjusted for dividend and proceeds from the new share issue in November 2019, the annualized increase in EPRA NAV was approximately 10%. So next page, please.In the first quarter, Pandox valued the property portfolio according to the same method and model we've used since the IPO 2015. No external valuations were made in the first quarter, primarily because of practical limitations due to COVID-19. Physical site visits have not been possible to carry out and uncertainty is high. We have made downward adjustments of property values due to lower cash flows in 2020 as a direct result of COVID-19.Yields have been left unchanged since we think transaction evidence is inconclusive. We expect to be able to estimate both yields and cash flow with a greater precision in the coming quarters.In the first quarter, total unrealized and realized changes in value amounted to a negative SEK 958 million, of which a negative SEK 611 million for Investment Properties and a negative SEK 347 million for Operating Properties. Please note that we closed the acquisition of Maritim Hotel, Nuremberg on the 31st of January this year. End of period, the average valuation yield for Investment Properties was 5.42% and for Operating Properties, it was 6.40%. Next page, please.Let's take a quick look at our EPRA NAV and financial position. End of period EPRA NAV per share amounted to a rounded SEK 187. This corresponds to an increase of approximately 10% on an annualized basis, adjusted for proceeds from the directed share issue, which we did in November 2019. Loan-to-value amounted to 47.2%. And liquid funds and long-term unutilized credit facilities amounted to approximately SEK 4.3 billion. And on top of this amount, there is an additional credit facilities covered -- covering 100% at each point in time of the issued volume on the Pandox commercial paper program. During 2020, approximately SEK 5.8 billion will mature of loans, of which the absolute majority towards the end of the fourth quarter. Pandox, we have a close and constructive dialogue with all lenders on refinancing, new financing and adjustment of conditions in existing credit agreements taking COVID-19 into consideration. Next page, please.And with that, I now hand over to Anders again.

[Anders Nissen, CEO & President]

Thank you, Liia. Yes, and at the moment, we have right now 3 focus areas in Pandox: respond, where we manage the actual situation; and restart, where we start to look at the recovery; and reinvent, what's next.Let's start with the respond. After we get our hands around this new situation, we form a strategic plan with 5 priorities, which we still follow. The first one and the most important is liquidity, make sure that we have cash available. We have different strategies by having reduced significant the operational costs. We have been looking over CapEx and investment plans, of course, and reduced it as much as is possible. We have a close and constructive dialogue with business partner of temporary payment, but still pay the rent. And a close and constructive dialogue with lenders and banks to make sure that we know -- they know what -- how we are doing and how we are thinking. All in all, we have SEK 4.3 billion in liquidity funds and credit facilities. So a strong liquidity position.The second priority is earning. We have had a target to have a minimum loss in the daily business. And today, we have minimum rent of approximately SEK 2 billion, as said before, SEK 500 million over a quarter, and that's corresponding more or less to the cost we have in each quarter and over a year. So we mean that our earning, we have a minimum loss, so this SEK 4.3 billion as we have for credit facilities will make sure that we will survive for a very long time.Our third priority is stay alive. We don't have in Pandox DNA to don't want to be open. We had our hotel open. We had contact with the local market. We speak to everyone, and we have contact with local authorities, and we will be the first in frontline when activities start to go up again. We also, as number four, have a strategy of being ready to act if we have to, if our business partners don't fulfill their obligations. We can -- for protect the asset, we are ready to taking over operations as we did in Copenhagen. It's not our wish, but if we need to, we have the capacity and knowledge how to do it.And the last one, which we have learned from other crisis, is visible, open and active leadership will keep up the spirit in the company.If we then move over to the recovery. We believe now that the hotel market has hit bottom, and we are waiting for the world, frankly to say, to open up again. And this recovery will come in different phases, but we believe that the first green shoot is in June, July, given that restrictions is a little bit in the lower level as it is today. Then we believe that the leisure segment will start to grow already for the summer. That is domestic and regional demand who will start, and it will be leisure and segment -- leisure and business segment who will lead this first recovery.When we go later, we believe that our occupancy in Europe as a whole or general, it will be around 40% at the end of fourth quarter, where economy and mid-market hotel, which is easy to reach by car or train, are the winner, and the luxury hotel with big meeting facilities are the loser.If we then move over to reinvent to next page, what's next? Yes, we have started to talk to all our network. And the general conclusion is that we believe that the business and leisure will remain more or less the same in short term. There is a strong need for having -- for businessman and we believe that leisure need to do something fun, and that will help us in our industry. But of course, this will also create new demands and new product segment. We believe that keywords like less is more, more local products, sustainability and good citizen is area where we will form newer packages for our guests. We believe also as Scandinavian-based that we have good position in these areas.On the other side, large meeting hotels, sport and culture events will take longer time to recovery, and we most likely need vaccine before we can see, for example, an Olympic taking place.All change creates new opportunities. And again, don't forget, Pandox is in good position.And now I will hand over to our guest speaker. And please note that this is independent research, and they are totally separate from Pandox. Go ahead, Robin.

[Robin Rossmann]

Thank you very much, Anders, and good morning to everyone. Thank you for that introduction. I guess just quickly a little about STR. We collect proprietary hotel performance data from about 70,000 hotels around the world. And we have done so for over 35 years now. And so this is real hotel occupancy rates and RevPAR and profitability. And we provide that back to hotels to enable them to benchmark their performance from a revenue management perspective. And we also provide it to the industry to help the industry understand market dynamics.And it's fair to say -- next page, please, that we have honestly never seen anything like this. And what I was hoping to cover in the next 10 minutes is really just to give you a flavor of the global impact of China and -- sorry, the global impact of coronavirus and some of the green shoots that we are seeing in China, then really focus on Europe and end off with some analysis on previous downturns and recovery cycles, which will feed in pretty well with David Goodger from Tourism Economics, who we work with on the forecasts that we do on hotel performance into the future. Next page, please.So on to the impact of coronavirus. Next page, please. And what I'd like to start with is comparing to China. And now China is not a perfect comparison. Clearly, there are many things that are different about China versus the rest of the world. But one thing that is important is they clearly were the first to have to deal with the virus. The virus started there and became an issue there about 2 months before the rest of the world. And certainly, when we look at hotel performance, you can see here absolute hotel occupancies aligned not by the same date -- start date, but more by when occupancy started to decline. And what we saw is occupancies in China really fell off a cliff from the middle of January and hit the bottom with occupancies below 10% at the beginning of February. And when you look to the rest of the world, Europe and then the U.S. are about 2 months behind that. So Europe hitting occupancies of below 10% at the beginning of April and is currently still at that level. Now the positive thing to take from this chart is that whilst Chinese occupancies were at the bottom at the beginning of February, they have steadily recovered over the last 2 months and are now above -- next slide, please, heading above 35%. So you can see here, starting from the 1st of Feb, heading up to the middle of April, occupancy is over 35%. So occupancies in China did sit at the bottom for about a month and then did start to recover. So when we look towards Europe and the rest of the world, I think we can expect it's going to take at least a month for occupancies to start to recover and perhaps longer, given the impact of the virus has been more severe here. Next slide, please.One of the big shocking things about this impact of the pandemic on the hotel industry is the mass closures that we've seen around the world. It says a lot when you see a company like Hilton. It's been around for over 100 years, have never had to close a hotel through really all the previous World Wars and other downturns. And this was the first time ever that global hotel companies had to close their properties en masse with many having to close over half of their portfolios. Now in China, we saw over half of hotels closed at the beginning of February. And the positive news there is that, as we got to the end of March, the vast majority of those had reopened, over 90% of hotels in China were opened again. So not only was demand recovering, as I showed in the previous slide, but also that was off the back of supply nearing back to full capacity. Next slide, please.So it is important to state that whilst China as a whole has reached about 35% occupancy, it -- the recovery has definitely varied by region. And you can see here, scale sits at north of 50% that Beijing at the bottom in the pink there, is really still only around about 20% occupancies as the really strict controls are still in place by the government there, whereas Shanghai and particularly Hangzhou has seen occupancies heading up towards the 50% mark as there have been less restrictions and more of the top of hotels that have benefited from the early stage of the recovery. Next slide, please.It is important to note that this is still some way off what occupancy levels would usually be. You can see here that if we move the scale up to 100% that occupancies are really half of what they would usually be.Now how is that varied by scale? Next slide, please. First, we'll look at mid-scale and economy hotels. And what you can see here is they have recovered a lot faster than the rest of the market. Their occupancy across China is now over 50% and well over half the way back to what it would usually be at around about 75%.If you contrast that to luxury, next slide, please, you can see that luxury dropped a lot lower than mid-scale and economy hotels. Occupancy has dropped to 5% and are only now back to 25% and well off the 65% they would usually be at this time of the year. Next slide, please.So important lessons from China. It is a country that has over 95% of its demand being domestic. And that's been important because, certainly, what we expect to see in this recovery is that domestic demand drivers will drive business first. And that will probably first be in leisure, where individuals are able to take more measured risks in advance of companies or groups around their personal desire to travel. And then the business demand that comes back will be those that are probably in markets where social distancing can be made and there's less density. There's also demand that come back from quarantine guests, and we expect some of that as we see the recovery in the rest of the world.Lower-scale hotels have benefited, and it's been really important for guests to be able to see those tangible factors of hygiene. Next slide, please.So next slide, please. Just moving on to Europe. And we should be now on a map with RevPAR change at the beginning of the year, January 2020. And what's important to say that the U.S. started well. Generally, there were some markets that were in decline, where supply was growing in excess of demand. But as an overall summary, Europe had started the year well. Next slide, please.You can see that, as we went into February, RevPARs did start to decline, not that significantly yet, and this was really driven by certain corporates implementing corporate travel bans ahead of government advice as well as certain events being canceled. Next slide, please.And the -- as we moved into March, the impact really did start being felt significantly across Europe, significant RevPARs down more than 50% and up to 70%, 80% across most of the major cities. On top of this, we also started to see large-scale closures, particularly in those countries that forced the closures of the majority of hotels. Next slide, please.This is probably the most scary slide I've had to ever present. And it shows you rolling 28-day RevPAR change going from January 2007 all the way through to current day. And you can see the impact of the 2008 and '09 financial crisis where RevPARs at their peak declined 60% in China and 28% in Europe on an individual month versus the prior year. And it's fairly easy to conclude here that the impact of coronavirus has, certainly in the short term, been far more significant than the 2008 and 2009 financial crisis with RevPARs down 85% in China and almost 90% in Europe. Next slide, please.The real question then is, how long will this continue for? It's clearly been a short sharp decline in the immediate short term, but how long will that continue? And a large -- to a large degree, that will, this year and next, depend on the pace that governments start to open up, not just the economy, but also ease restrictions around travel. And as we sit here today, the reality is there is still so, so much uncertainty around that. There is some talk. There is some countries that have given guidance, many that have not. And -- but even those that have given guidance are subject to huge caveats around further reductions in cases and nonresurgence cases. And I think the reality that we sit in is, until there is a cure, it appears that restrictions will remain in place for some time. And that is going to be a challenge for the hotel industry. Next slide, please.When demand comes back, what we've seen in the past recessions and downturns and what we've seen in China is that it will -- if you look at the 3 main categories of demand, leisure will come back first. Then it will be corporate transient, and then it is likely to be corporate group or that event business that will come back last. And as we sit here today, it seems highly likely that, that final category certainly won't come back until next year. Next slide, please.But as we move beyond just the short term next 6 to 12 months, the question that is, what will this recovery look like in the medium to long term? And I'll let Dave Goodger from Tourism Economics answer that specifically. But what I'd do is -- what I'd like to do is give you some previous downturn recovery analysis to help shape your understanding of that. And I'll start with some data that is not our data. Next slide, please. And it's the UNWTO statistics on international travel numbers.And for me, this is incredibly powerful. It shows that, as an industry, we've been through significant -- very significant challenges before where, at the time, it felt like it would deal a pretty fundamental death blow to our industry. If you look at the impact of 9/11, you look at the impact of the previous SARS crisis, you look at the impact of the 2008 and '09 financial crisis, there were many people at the time who thought that travel would not recover. And that simply has not been the case.We have seen -- as the world has grown in its wealth, as an expanding middle class has grown, that desire to travel and experience the world either through business or leisure is undeniable. And the demand drivers have seen significant growth in travel around the world. And yes, there have been dips. And yes, the dip this time will be far more significant than anything we've ever seen. However, I think it would be unwise to be too pessimistic that this is not going to bounce back, and that's certainly what we expect. Next slide, please.Now will it be as significant -- as fast to bounce back its SARS. You can see here that hotel occupancies there really only dropped for about 3 months and then recovered again within 3 months to the typical levels it would have been. And we certainly hope that at the beginning. I think we can all agree that's highly unlikely now given the scale and significance of coronavirus versus SARS. Next slide, please.But what we certainly hope it won't be like is what we saw with the 2008 and '09 financial crisis, where it took 7 years for RevPARs to recover back to 2007 levels and 9 years for it to recover back -- profitability to recover back to 2007 and '08 levels. Now whilst this has been a more significant downturn in the short term than 2008 and '09, that doesn't necessarily mean it will be in the long term. And a lot of that will depend ultimately on the shape and the impact of the wider economic recovery, and I'll let Dave Goodger speak on that.But what I would end with is in terms of how we're seeing this at STR is -- next slide, please, a recovery that is kind of be as a sort of W-shaped recovery and where we've had the downturn, we have a bounce-back where economy is reopened, but reopened at a level where they are not at full capacity and stay at that level until there is a full recovery of the virus and a vaccine or some way to enable social distancing measures to be removed. So there will be a drag at that level until things eventually recover up. And I can see that's been a problem on this slide. So if you just imagine that blue up line actually being connected to the drag, so that it does get back up to the previous level. That's what we're expecting and hoping for. Next slide, please.So in conclusion, China is not a perfect example of what will happen in the rest of the world. But it's as good as we've got at the moment. And the reality there is they did get the virus under control. And that once they did that, the economy has started to open up, that, that has resulted in a recovery in hotel demand and occupancy, certainly sooner than I had expected, with it now approaching half the level of occupancies and demand it would usually have.I suspect that it may flatten out there at a while until we see a wider recovery across the world. And the extent to which it recovers fully will ultimately depend on a wider economic recovery in China and the rest of the world.As we move across to Europe, the reality is that we have not yet seen a start of the recovery. We are very much still at the bottom and that, that recovery will only start when we see governments start to release those restrictions that are in place over people's movement. I would be positive on that in the sense that there is clearly an increasing urgency at the political level to help the industry get through this and a recognition of the importance of opening up travel, particularly in the summer months ahead, when many people are looking to take a holiday in Europe. And I think I am very hopeful that measures will be in place to enable the industry to salvage some of that demand this year.Finally, as I hand over to David, I think it's important to say that we've learned one thing from the past, and I'll go back to that UNWTO slide, that everything will be okay in the end. It's clearly not okay at the moment, so it means we're not at the end. It's important to maintain that optimism, but it's also important to make -- realize the reality of the situation that we're in at the moment and make the difficult decisions that need to be made so that we survive now and can thrive in the future.And in a previous life, I did a lot of advisory work with the professional services firm back in the 2008 and '09 financial crisis. And the main thing I've learned there was the companies that got through, the ones that survived and ultimately, thrived were those that had good hotels, in good locations, with strong brands and management teams. And I think that is what's most important when looking at who's going to come through this.And so with that, I'm going to hand over to David.

[David Goodger]

Okay. Thank you for that, Robin. So I would like now just to zoom out, if you can move on to my slide, thank you, and just give some of the wider economic background as has been trailed by Robin and give some of that broader background of the wider economic trends, what we're looking at moving into the recovery phase and what that means for travel.For those who don't know us, I'm here representing Tourism Economics, which is a part of Oxford Economics, which spun out of Oxford University and is one of the world's largest economic forecasting and advisory groups. If you move to the next slide, first slide.Some things that are fairly self-explanatory on this first slide that we can see that there is a huge amount of economic activity that is being affected by the lockdown measures that are being put in place to combat the spread of the coronavirus. The countries that have implemented lockdown measures account for around 80% of global GDP. So it's not surprising that we are seeing this huge immediate impact on economy and on travel, as you can see on the right, using some data taken from another of our partners, IATA, looking at where daily flights are around 80% lower than they were at the start of the year.So next slide, please, which shows that we are, as a result of this, experiencing the deepest global recession that I've certainly looked at in my 20 years as a professional economist, even with current experiences, previous experiences, in previous analysis. It is a much deeper recession than we saw during the global financial crisis.Q1 activity, very weak. China led us in terms of the downturn, as they implemented the lockdown measures to combat the disease first. But in March, we started to see weakness, lower production numbers, falling activity across a range of advanced economies. And this is really hitting home in the second quarter in terms of this economic impact, very weak second quarter. But as Robin has pointed out for travel, some green shoots in China. We're seeing that in terms of wider economic activity, other sectors able to go back to work, factories reopening, offices reopening. And we're seeing some positive growth contribution from China in the second quarter to partly offset some of this weakness in other countries. And they way China led on the downturn, we expect them to be leading in recovery. And so we do expect to see some turnaround, as we go into the second quarter of the year, this -- some relatively rapid-looking growth with some strong contributions coming from a whole range of economies. Next slide, please.But we can see, looking at just Europe now, that GDP fall, while it's worse than we saw at any point during the global financial crisis, very large falls for GDP, it is absolutely dwarfed by what we're seeing in terms of travel, very rapid falls in travel. As this has been going on, we've been regularly updating our forecast, our expectations based on the different lockdown measures, based on our expectations of what would be happening. And you can see this has just gradually been weakened. Our expectation is much greater falls for 2020 than we were seeing earlier in the year. We're now seeing around 40% fall in total travel for Europe, comparable for the world. This is weaker, even worse, than on Robin's favorite UNWTO slide. It's not that we disagree completely with UNWTO. It is partly a methodology approach and the timing approach. I'm pretty sure the next time UNWTO run their surveys, they will then be coming out with some numbers looking at around 40% or worse in terms of their falls. But we do expect to see this recovery, some apparently strong growth in the recovery.So looking at why we expect that, some of the factors behind that, if you move to the next slide. We can see that the near term, this -- the travel behavior is going to be dominated by what happens in terms of the travel restrictions. We ordinarily see strong relationships between economic drivers and travel behavior. Right now, this is being completely overwritten by the travel restrictions, and that will dominate 2020 and potentially the early stages of 2021. Our baseline expectation is based on this being a roughly 8-month effect. This will obviously vary a lot by market, by region, but we do expect to see the current lockdown and travel restrictions in place for a total period of 4 months on average across all markets, taking us into June. And then we expect to see some easing into the second half of the year. On average, this being a 4-month process. We expect to see some earlier lifting of restrictions for domestic and short-haul travel with long-haul restrictions easing. And this profile, though, will cover a large amount of summer travel. Hopefully, there will be some of that travel allowed, but we do expect some restrictions to remain in place during this process to avoid some of the second-wave effects that may occur. And that leads us to just these lockdown measures having a 37% negative impact on European travel on top of all of the other impacts that we're seeing. And even once this is eased, we've got to say this is not going back to normal. There will be increase in tests and so on. If we change these assumptions, which we regularly do, we can see that this will have a much larger impact. And if we put a longer tail on it, say, put a 10-month impact onto this, take us right to the end of the year, with some form of restrictions, we could easily see this impact getting well into the 40%, up to 50%, so we could be seeing much larger impacts from this and into 2021. But if we move to the next slide, there are actually some reasons for optimism once we get past this immediate effect. And once we expect the restrictions to be lifted, and we're getting back to what we see in terms of normal relationships, if not normal activity, we expect to see some of the economic drivers reassert themselves being important. And this is where we see some reasons for optimism. The government response, the policy response, that's out there has been massive. There's huge amounts of stimulus being put in there, which may not be evident this year from our evidence of recovery from previous epidemics and pandemics. The current year is completely overtaken by effect. The amount of spending by governments doesn't really affect GDP or economic activity in that year, but what it does is it supports the businesses and it allows that recovery to come through. So what we're expecting is, because of the large stimulus that's being put in place now, this may not necessarily mitigate the falls this year, but it will enable businesses to keep on going, and we'll take advantage of when that demand comes back into the medium term.So if we look at the next slide, you can see our expectation for GDP growth across a range of major economies, globally, for the U.S., Eurozone, China. You can see the sharp falls for 2020, leading into some apparently rapid growth in subsequent years. But we do have to recognize that, even for 2022 and by extension in 2023, we will see some lingering impact. This will leave a mark. There will be some activity lower than what we'd expect as the prerecession trend.If you move to the next slide, you can see that we do expect a comparable picture for travel as a whole. Very sharp falls expected across Europe, across all parts of Europe. Same is true for all countries in Europe, large falls in 2020, apparently large rapid growth in return in subsequent years, but still not back to normal immediately. It will take this 3-year period in our latest expectations to get back to 2019 levels because of some of these lingering travel restrictions, because of the longer-run impact of the economy, plus also some effects on sentiment.Move to the next slide. You can see, as we're looking at the impact by source market, this is important, and this will help to explain some of the destination differences. We can see some greater volatility in the downturn from long-haul markets, U.S. and China. We expect to see much bigger falls because of the lingering restrictions. Same is true for other -- some other longer-haul markets. But because of the size of the source market -- of the short-haul source markets in Europe, these are the ones that we expect to see having the much greater impact in terms of volumes, so it's -- the falls that we're seeing in travel is largely due to intra-regional travel, and the same we expect to be true longer in recovery. It will be the fact that the short-haul can come back sooner, will help to redrive a lot of that recovery. Move to the next slide.You can see the obviously importance of the short- and medium-haul, as we call it, travel, to a range of destinations across Europe. It is the intra-regional travel from Europe that is really important and in terms of international demand for a lot of countries, the long-haul travel, even if there are restrictions, it doesn't mean we will get back to somewhere close to peaks relatively quickly if we can restore the short- and medium-haul travel. But if you look at the next slide, you can see that there is a somewhat different picture across some of the top city destinations. The main cities are much more reliant on that long-haul travel. They have been very successful at selling destination activity, tourism to long-haul source markets. So some of these larger cities are potentially more at risk in this recovery because of that long-haul reliance. And it may be some of the smaller cities, towns, more rural destinations that will be set to recover from this first stages of the recovery due to the source market mix and due to some of the activities as well, as Robin mentioned, with some of the leisure coming back ahead of the major corporate.If you move to the next slide, just like to finish off then looking at the importance of domestic as well. Domestic travel is also very important for the vast majority of destinations across Europe. And if we do see this domestic travel coming back sooner, then this will definitely help a lot of destinations. We do expect domestic travel to come back sooner.And if you look to the next slide, I just like to share what we're seeing as a profile, what we expect the profile to be for domestic travel versus international travel, where the domestic restrictions being lifted sooner will allow people to travel within their own countries more quickly than they're able to travel to even their neighbors or, let alone, long-haul destinations. Plus as we've seen in previous downturns, there are effects on income, as -- even if it's temporary job losses, there will be blows to people's incomes, there will be blows to sentiment. And recovery from previous downturns, we have seen people switching to domestic rather than international travel, and we expect to see that again in this recovery period. So we expect to see about 1- to 2-year recovery period for domestic travel to regain 2019 levels, whereas more of a 3-year, potentially 4-year, outlook for international travel.And if we just finish on that final slide, quite a detailed one that I won't dwell on to a huge extent, but we just tried to categorize a lot of different destinations across Europe in terms of the volatility due to market mix. So in the bottom right, we see some of the more volatile markets, which have a higher reliance on long-haul demand and less reliance on domestic. And in the upper left, we see the less volatile markets with that greater typical reliance on domestic travel, who should -- and these are destinations that, based on just the market mix alone, should weather this storm, see a stronger recovery. And shaded in red, a lot of markets of potential interest, looking at U.K., German markets as well as a lot of the Nordic markets. And we can see a lot of these markets sitting nicely up in that upper left region.And at that point, I'll then move on to the next slide and move on to Johan, who will take us through the -- some more details for Nordics.

[Johan Johander;Benchmarking Alliance;Partner and Head of Research]

Thank you, Dave. Just a few words on Benchmarking Alliance. We do pretty much what STR does, but we focus on the Nordics and the Baltics. And being last, I will try to keep this short and just focus on a few points that are particular to the Nordic markets, not try to -- try not to repeat what previous speakers have said. Next slide, please.If we start to look at the Nordic markets that Pandox are active in, we can see that there is a broad decline in line with what Robin showed. We can see some differences. Sweden doing better than the other markets, partly explained by less harsh measures being taken in Sweden than in the neighboring countries. We can also see that Denmark has had a greater decline than the other markets, and that could especially be explained by Copenhagen being perhaps the most internationalized market in the Nordics and then being hit by this crisis, particularly hard. Another explanation could also be that the decline in the leisure segment being a bit smaller and a bit later than the business segment, and especially than the domestic leisure segment. Also in the Nordics, we can see the decline in the MICE segment being particularly hard. The 2 markets in Sweden that has declined the most are almost exclusively driven by meetings and events.And if we put this into a longer time perspective, we can see that the decline is massive and sudden in all these markets. This is occupancy being split up in sold rooms, and we also have room revenue and showing closed rooms as well, because that's a phenomenon that worth taking into consideration here. Robin showed some numbers on that internationally, and we see this in the Nordics as well. And we see this to a very varying extent in different countries, in particularly Finland and Norway, also Copenhagen in Denmark, not Denmark that much otherwise, but particularly Finland and Norway, we see a lot of closed hotels, not so much in Sweden actually. And that could be explained also by the less harsh measures being taken there.What we also should take into account here is that it's not only room revenue that's important. It's total revenue for the hotels. And in total revenue, we don't see as much decline as we do in room revenue, and we even see an increase in spend per guest. So that's a positive thing to keep into consideration. The room revenue has not gone down as much as the sold rooms. So we see a less decline in ADR than in occupancy. And if we look at historical data, that is a positive thing. Recoveries have been faster when ADR has not declined as much. And if there is a willingness to spend from the guests, that's something to -- that could be worth a lot in the recovery when that comes.Looking at the closings and the effect. We can take Oslo as an example here. We see the occupancy, excluding the closed hotels and, including the closed hotels, with a fixed capacity in the market, the blue line, we see that the occupancy when taking the closed hotels out of the equation, we see that we have almost double the occupancy in those hotels staying open. So that's, of course, something that helps those hotels quite a lot. And this is an effect that we see in Norway, especially. In Sweden, we haven't had that many closings. And as a matter of fact, we have seen very few bankruptcies and hotels closing permanently so far. It's only a handful of hotels and have done so since 1st of March. So that's something that indicates that the hotels are still keeping up, and they're adjusting very quickly to the new situation in the short term.Just looking a bit at the effect of domestic travel that has been mentioned, if we take Sweden as an example. The Swedish tourists spending abroad is bigger than the spending domestically. And if we can see an effect where the international tourists spending is more or less gone. We see very limited international travel. We might see a decrease in spending due to a recession in -- a general recession after this crisis. In the recovery then, we would like to see ideally that the spending abroad by Swedish and as well as other Nordic tourists would be put domestically. It could compensate to quite a far extent for the loss in the foreign tourist spending. We might see some spending abroad, of course, still, even though, as Dave mentioned, this will probably be limited in the short term at least. There is also an infrastructural part of that with the airlines not operating and might not make it much longer. And we might also see, of course, a decreased spending due to recession from Swedish tourists. But there is a significant potential in increased domestic travel spending in the Nordics. And also looking at the other markets where Pandox is operating, those are all very -- we have the heavily spending tourist nations, of course.Looking a bit ahead, if we look at the occupancy on the books for the coming 12 months, we have seen a negative pickup in all the major markets. This negative pickup is very short term so far. It's 2 to 3 months. So that's an indication of the market still viewing this as a short-term problem, that might be turned around in the medium term. We haven't seen any decreases really from the later part of the summer, none. It should be noted that for, especially Copenhagen, the occupancy on the books compared to the same time last year is significantly lower, of course, but on the other hand, if this turns around, that might turn up quite quickly.And just to sum up, this is in the Nordics as well as in the other markets that we've seen a severe demand problem. There has been a break on the old demand for hotel rooms and also driven by the measures taken by the authorities. And the million-dollar question, of course, is how long this will last. And also, can this turn around before it's -- this short-term shock turns into a long-term recession and puts the broader economy on a downward slope? Hopefully, we can turn it around while the wheels are still turning, so to speak.We see still in the Nordics fiscal measures that could be added to. They've been unprecedented in dimensions so far, but there are discussions of even more measures being taken quite soon. And for the medium to long term, we think that, if there is some international travel returning, at least in the medium term, especially Sweden, Norway and also Iceland where Pandox are not present, but still, they will benefit from the quite big downturn in exchange rates, at least short term. And we see the domestic leisure segment as the single most important factor to turn this around in the short to medium term.And that's what I plan to say. So I'll turn over to Anders.

[Anders Nissen, CEO & President]

Well, thank you, Robin; thank you, David and thank you, Johan, for this hotel market update, and thank you for sharing your deep knowledge in our industry. Very helpful. Thanks a lot.Let me sum up before the Q&A of saying a few words that the Q2 2020 will be substantially weaker than Q1, of course, and that revenue will come mainly from minimum and fixed rent, approximately SEK 500 million in the quarter, would happen to be the similar number as our running costs. When you look at revenue-based rent and Operator Activities start-up, that will gradually pick up on the second half of 2020, as we have been talking about before. We're facing this period with a solid financial strong position and a strong staying power. And I will say we are in a good relative position here now with a clear game plan.With that said, ladies and gentlemen, thank you very much. This conclude the presentations part. And now we move over for a Q&A. And as you know -- Yes, sorry. Sorry, go ahead, please.

[Operator]

[Operator Instructions] Our first question comes from the line of Fredric Cyon.

[Fredric Cyon, Research Analyst]

Anders and Liia, a couple of questions from my side, starting off with minimum and fixed rents. Do you expect all hotels to run at minimum levels during the second quarter?

[Anders Nissen, CEO & President]

Yes, we expect that every month, I'm sorry.

[Fredric Cyon, Research Analyst]

Yes. What I mean is basically that you don't expect any contribution from any RevPAR sharing in the second quarter? It's just going to be the minimum level?

[Anders Nissen, CEO & President]

Yes. We have a small part of revenue-based leases for the second quarter, but it's basically minimum rent.

[Fredric Cyon, Research Analyst]

And you gave us some updates in the report on your occupancy outlook for the second half of 2020. Based on those numbers, will the levels be enough to have any RevPAR sharing in Q3, Q4? Or is -- it's going to remain at minimum rents also in second half?

[Anders Nissen, CEO & President]

No, no. We will specifically, in Scandinavian and Nordic, we will have revenue-based leases in the Q3 and 4. Yes, we will also have some revenue from Operator Activities, we believe.

[Fredric Cyon, Research Analyst]

And then moving over to the Operating Properties. How large losses do we expect? I understand that it's some -- you had a somewhat higher flexibility on costs there. But if the current situations prevail for some time, how large are you running losses for the time being?

[Anders Nissen, CEO & President]

Well, it's more or less balanced between the minimum rent and the running costs. So I would say, very small losses. So with this SEK 4.3 billion of credit facility, we will survive a couple of years, given the rent is there, yes.

[Liia Nõu, Senior Executive VP & CFO]

And if the rent -- specifically, the Operating Activities, it's part of the term cost. So of course, the minimum rent we receive on our Investment Properties, they basically cover for all of the costs, including interest, et cetera, et cetera, which we have in Pandox, which means that we're basically at plus/minus 0.

[Anders Nissen, CEO & President]

Yes. Correct.

[Fredric Cyon, Research Analyst]

And then I have 2 more questions, if I may, and the first one being on the rent renegotiations. You stated that, so far, if you have received rents according to the current negotiation, but do you see risks of changes to minimum rent in those renegotiations that are bound to occur?

[Anders Nissen, CEO & President]

No. We give them, as we have said before, temporary payments from or the TAM terms, but we don't change the agreement in the leases.

[Fredric Cyon, Research Analyst]

And then my final question. I understand it's extremely tricky to do fair value changes when the situation is as it is. But do you think that perhaps, structurally, there is a risk that yield requirements for hotels will move higher due to COVID-19?

[Liia Nõu, Senior Executive VP & CFO]

I think the answer to this on there -- out there is so large, so we will monitor this with the evaluators constantly, so we can't guess anything. I mean, the interest rates may go down, so there are being other aspects to also take into account. But as of now, we don't have any actually forecast for this, or any.

[Operator]

Our next question comes from the line of Christopher Fremantle.

[Christopher Richard Fremantle, Executive Director]

Can you please give some more detail on covenants within your debt, please, whether it's on an LTV basis or an interest coverage basis? Just trying to understand where you're likely to -- or how far values need to fall before you start hitting covenants, please? That would be my first question. And just to follow up on a previous question. Can you please just specify what proportion of your minimum rent roll is due for lease renewal in 2020, please? Or over the next 12 months, for example? Some color on that would be helpful, please.

[Liia Nõu, Senior Executive VP & CFO]

Okay. Well, if we start with the first question, then as we said before, the majority part of our lending covenants are -- is -- they are interest cover ratio and LTV. And again, according to before, our Pandox policy is to have LTV between 45% and 60%, we are at 47.2% at the time being. Of course, the covenants that we have in place is reflecting a marginal to what our policy would be, so, i.e., highly above 60%.

[Christopher Richard Fremantle, Executive Director]

Okay. With respect, it doesn't really answer the question. Do your covenant agreements with your banks prevent you from giving any further detail on that?

[Liia Nõu, Senior Executive VP & CFO]

Well, we choose not to give any more detail on this. As we said, we have 11 or 12 different banks. There is a multiple of facilities. There is not one single structure for the whole, but we are confident that we are sort of within good margins from being in breach with anything. Also, we do have discussions, which are ongoing with all our banks. And this is unprecedented conditions for everyone. We don't have any reason to believe that we would be -- come into difficulties with this. So no, you won't get the specific ratio, sorry, if it's all right.

[Christopher Richard Fremantle, Executive Director]

On the ratios -- sorry, on the renewal...

[Anders Nissen, CEO & President]

Renewal leases? Okay. So we don't have any negotiations in 2020 for renew any leases.

[Christopher Richard Fremantle, Executive Director]

Okay. And in 2021?

[Anders Nissen, CEO & President]

1 or 2, and then coming is in bigger part in 2022, about 20 hotels.

[Christopher Richard Fremantle, Executive Director]

Okay. So it's less than 20 hotels in 2021?

[Anders Nissen, CEO & President]

Excuse me?

[Christopher Richard Fremantle, Executive Director]

It's less than 20 hotels in 2021?

[Anders Nissen, CEO & President]

In 2021, we have -- it's just a few. And that in 2022, we have a portfolio of hotels, who should be negotiated the new lease terms. So that is 2 more years before we are there.

[Christopher Richard Fremantle, Executive Director]

Okay. And if I may, I'm just going to ask one more question. When you talk on rent collection, and you talk about deferral of payment terms, I mean, can you give some more detail about what proportion of your rent roll is on deferred payment terms? And how deferred we should be talking here? Are we talking months of deferral? Or are we talking a longer period of deferral?

[Liia Nõu, Senior Executive VP & CFO]

I think the normal payment in the normal world, which we -- you have up to February, was that you pay your rent monthly or quarterly in arrears or before, and advance -- sorry, in advance. And now typically, you would maybe see pending but maybe monthly in afterwards in arrears. So we will wait, wait for maybe a month in advance or monthly, of course, typically.

[Operator]

Our next question comes from the line of Simen Mortensen.

[Simen Mortensen, Analyst]

A few questions from my side as well. We also saw in terms of rent collection, how questions asked, but we also saw the first hotels in Copenhagen, the 2 hotels being taken back to -- from Property Management to Operator Activities in the end of Q1. Can you please tell us what's been going on there and the plans for the hotels? And how come there -- how much of that is actually COVID related? And is it unpaid rents and et cetera?

[Anders Nissen, CEO & President]

Well, as you most likely understand is that when you have a financial problem so early into this crisis, it means that you had a problem even before the corona crisis. So they were in a weak position, as said before. Now when they couldn't pay the rent, and they couldn't pay actuaries and other things, we choose to taking over these operations, which was mainly because of protecting the assets. We have implemented all our system there now. We have management on Board. We have taken a few actions according to, in smaller investments and other things, and now we've got to make sure that there things will open up again, and the hotel will be stronger because I believe that we will have a stronger power into the online distribution market than the previous operator had.This is a thing we have done many, many times in Pandox, mostly in crisis period. So this is nothing new, and it took just a few days to get everything organized.

[Simen Mortensen, Analyst]

And in terms of also what you guided and reported for Q3 and Q4, just help us clarifying some of your assumptions being put on that and how come you're going to have rents above minimum rents? First of all, what kind of occupancy levels are we going to have to see before the operators are breaking even and start contributing other than minimum rents? And what are your assumptions of what restrictions has to be listed, et cetera, before they actually breach those thresholds?

[Anders Nissen, CEO & President]

Extremely difficult to answer your question because some hotels don't have a minimum rent and some have high minimum rent, so a difficult market. And as you know, we are in 90 different cities, I don't know exactly where to start, but let me guess what I can try to guide you. You can say that, in Nordic, in general, when hotels start to picking up now as we're expecting all over the summer, a little bit better and coming up to level at the end of the year, a close to 40%, perhaps some hotels will have more, we will gain revenue. And we will get rent from the revenue level immediately. If the same trend will happen in Germany and U.K., we will not gain the same sort of revenue rent because the minimum level are higher there.

[Simen Mortensen, Analyst]

And in terms of occupancy, we talked about, a lot about, occupancy, of course. But price is also a part of the RevPAR equation. Could you please tell us a bit about your pricing strategies going forward? And how you work with that part of the equation as well?

[Anders Nissen, CEO & President]

Well, so far, the price hasn't been affected so much. And I believe that will start -- you will start to see some change maybe during the tourist summer, but we also have contracted companies and other things. So that is a risk, of course, that you will see press on price as well. And we have different strategies with different brands, so depends on which hotel you want to know about. But let's say, in Germany, we believe that our price are quite solid because we are in the mid-market segment. And if you already can get the room for EUR 80, you maybe can buy it at some EUR 70, but it's not so dramatically. That must have been much harder if we would have been dominated by international hotel with international premium brand, they might like -- will have much more press on price than our mid-market hotel will have.

[Simen Mortensen, Analyst]

And also coming back to the covenants, I understand you don't want to comment so much, but you keep talking about the LTV had fall back to that, but ICR seems also to be part of the covenant. And it's pretty obvious when you say you have costs and income roughly in par for some months and quarters there, I assume the ITR is supposed to be higher than 1. Is there a risk also that if the ICR covenant kicks in that you will see higher funding costs because of the credit margins going up? Or how will that work in practical? Will we get lease from the banks? Could you please help us understand the mechanisms here?

[Liia Nõu, Senior Executive VP & CFO]

Yes. Again, there is a different mechanism for -- we have a lot of different facilities. But again, as I try to emphasize the dialogue discussions with all the banks are very strong and they are very supportive. They're actually more supportive than actually pre-corona because I think people -- this is unprecedented, and this is something that we will come through it. There isn't typically a mechanism that says that you will be punished when you reach a certain level or whatever, even though that level is very far away. And again, we have very constructive dialogues, which I think all of the companies in all regions and all industries are having with the banks, meaning that there are holidays that there are looking -- fruitful discussions of looking at continuing doing business with your relationship banks ongoing and also after this. So again...

[Simen Mortensen, Analyst]

So we shouldn't expect margins to all of a sudden like jump up because [indiscernible] from the banks are coming through?

[Liia Nõu, Senior Executive VP & CFO]

I don't expect that, no.

[Simen Mortensen, Analyst]

So -- but you also said here and you kept about SEK 1.2 billion in cash and cash equivalents on your balance sheet because you might -- because if banks close credit lines, is there any reason for us to expect that? Because you said that straight out.

[Liia Nõu, Senior Executive VP & CFO]

No, I think...

[Simen Mortensen, Analyst]

Or are you saying it? Or what's going on there?

[Liia Nõu, Senior Executive VP & CFO]

No. I think I don't know if I actually said that or meant that, that was a misunderstanding. We have SEK 4.3 billion in liquid funds and long-term committed credit lines. It doesn't really matter whether it sits on the bank. It costs a little bit of money depending on what currency it is or whether it's in the long-term committed RCF. But on top of that, we have committed credit lines, which are backing up the commercial paper program we have. So -- and as all of you know, the commercial paper program isn't so liquid for the time being. And now in some countries and also in Sweden, there are state backing up as a lender for these programs. But as we have said, when we launched our certificate program, we said that this is for optimizing the net financial cost, not for a borrowing position. So even if the commercial program actually completely locks down, it doesn't affect our liquid funds.

[Operator]

Our next question comes from the line of Tobias Kaj.

[Tobias Kaj, Research Analyst]

Yes. I have 2 questions. First, regarding the cost level in your Operator Activities. Can you guide for how much lower the cost level will be in Q2 compared to Q1 and also if you're able to reduce it further in Q3?

[Anders Nissen, CEO & President]

Well, the cost is, what we have guided with before, it's a part of this SEK 106 million to SEK 107 million we have every month. And I don't expect them to be lower in Q2 and Q3. And when we open up, it will be, of course, will be higher again. So -- but we have a strong -- we have a good balance between, as said before, income and cost.

[Tobias Kaj, Research Analyst]

Okay. And second one is regarding your guidance for breakeven or it's more the losses. First of all, is that on an EBIT level? And is that based on the full year for 2020 or for individual quarters?

[Liia Nõu, Senior Executive VP & CFO]

It's on a cash earnings basis, that the minimum rent level that basically will be in par with the total cost, including interest, et cetera, of cash earnings, basically.

[Tobias Kaj, Research Analyst]

And is it for the full year or for individual quarters?

[Liia Nõu, Senior Executive VP & CFO]

It's for individual quarters. So if you have a clean quarter of only minimal rent, no turnover-based revenue basically for the hotels that don't have minimum rent and then you have all the costs, then basically, we are running at a small, small, small cost that we with our SEK 4.3 billion will hopefully cover.

[Tobias Kaj, Research Analyst]

But in Q1, you have the interest expenses of SEK 130 million and the central admin of SEK 30 million. Does that mean that all the expenses in the operating activities are gone from Q2 and onwards?

[Liia Nõu, Senior Executive VP & CFO]

Most -- yes, most of the operating cost in Operator Activities from Q2 will be 0.

[Anders Nissen, CEO & President]

Yes.

[Operator]

[Operator Instructions] There are no further questions at this time, please continue.

[Anders Nissen, CEO & President]

Well, thank you very much for this -- for listening to us today. I have -- I will say just thanks for questions. And in this difficult time, stay safe and speak to you on next report in mid of July. Thank you very much.