Von der Heyden: Real estate hedging hotel operations

The Von der Heyden Group (VDH), is involved in real estate development, real estate leasing, hotel management, and hospitality. VDH has operations in Germany, Poland, Ukraine, Spain, Portugal, Italy, Montenegro, and Malta. In 2017, the Group through its financing vehicle, Von der Heyden Group Finance plc (the “Issuer”), tapped the local main market and issued a €25m 4.4% unsecured bond 2024.

Recent developments

In December 2019, the Group’s associate Bogenhausener Tor Immobilien S.à r.l, sold its second and last asset, the Blue Tower forming part of the Bavaria Towers office and hotel development in the city of Munich, Germany. The asset was sold to the leading asset manager on the German market, Real IS consortium. The property was sold at a record yield of less than 3% (i.e. the discount rate to derive the net present value), registering the highest rate of return on equity for the Group so far in its A-Class real estate portfolio.

Additionally, in December 2019, VDH sold its 3-star hotel, IBB Hotel Paradis Blau, located in Cala’n Porter, a famous village in the island of Menorca. This sale was part of the Group’s hotel restructuring plan and was sold at a price of €5m.

Trading update: COVID-19 and outlook

Undoubtedly, the COVID-19 pandemic has presented unprecedented conditions to the world economy, with the tourism sector being one of the most severely impacted. Consequently, the VDH Group, which is heavily exposed to this sector, noted that the outbreak has led to the material disruption of its hotel and catering operations. In response to this unprecedented event, the Group took immediate actions to mitigate the impact of the sudden loss in demand arising as a result of the lockdown and travel restrictions introduced in the countries where it operates.

Such challenging environment has led to the acceleration of the Group’s planned hotel restructuring exercise, which amongst other measures, resulted in the termination of the lease and operation of the IBB Hotel Passau City Centre (Germany). Additionally, as part of its cost reduction measures, the Group terminated all non-permanent employments, reduction of staff in all hotels down to the minimum necessary level, negotiation of rental and supplier payments, in addition to applying for governmental aid funds, wherever possible.

VDH’s accommodation segment, which is managed under the Group’s IBB brand, has been underperforming. The Group attributed this to the industry’s aggressive market competition and the need for VDH to restructure some of its operations. As noted earlier, the COVID-19 pandemic has significantly impacted the Group’s hospitality segment, with its revenue contribution expected to fall by 47.0% in FY20.

Despite the material impact on the Group’s operations as a result of the outbreak, VDH expects consolidated revenue to increase marginally by 1.1% to €26.2m. This is attributable to a surge in real estate development revenue, where up to Aug 2020, the Group generated €12.4m contributing 47.5% to the overall revenue. This income reflects the promote fee earned by VDH for being involved in the sale of the Bavaria Towers.

In FY20, the Group is forecasting an EBITDA generation of €2.6m (FY19: €2.4m), which translates into an EBITDA margin of 9.8%. Given the dire economic conditions caused by the pandemic, such result is positive, especially when considering that VDH’s hotel activity has been materially impacted by the ramifications of COVID-19.

In conclusion, the sale of the Bavaria Towers and the Spanish Hotel has generated excess liquidity which has been essential during such depressed environment. Therefore, the Group’s diversification in real estate has clearly paid off and moving forward, this segment will continue to be a key revenue stream for VDH. The Group has a number of other real estate projects currently undergoing development, which once finalised can potentially yield attractive returns. Most notably, the Group is undergoing the Andersia Silver project and the Nowy Swiat Atrium project, amongst other prospective developments. Additionally, following positive news on the vaccine front which augurs well for the initiation of an economic recovery in FY21, the Group’s hotel chain should start to recover, which should also complement the strategic decision taken by management to downsize and restructure unprofitable hotel operations.

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