Whitbread has asked its landlords for a 50% rent cut for the next three months, citing "significant" net cash outflow in the past six months.
The company owns 60% of its estate, with 40% being under leases.
Whitbread said: “Since the start of the Covid-19 pandemic, Whitbread has taken decisive action to ensure that our cost base reflects the low levels of demand, with the support of a wide range of stakeholders including shareholders, lenders, colleagues and suppliers. The actions we have taken, combined with the strength of the Premier Inn brand and our leading customer proposition mean that we continue to trade ahead of the market.
“Throughout the pandemic to date, we have paid our rent commitments in full, even when our hotels and restaurants were forced to close. With ongoing Government restrictions expected to result in subdued market demand into the first half of 2021, we are now asking our landlords to support us, as other stakeholders have during the pandemic, through a reduction in rent for the December quarter in recognition of the current environment. The business had arrived at this decision ahead of the most recent government update on Saturday 19 December."
In October CEO Alison Brittain said that the group was seeing “signs of distress in the competitive landscape”, which it hoped to take advantage of.
Brittain said: “During September we started to see local retractions and lockdowns introduced, as such the near-term environment is challenging. In the short-term the extension of local and regional lockdowns drives uncertainty and means that we will have to protect our business and carefully manage our cashflow.
“We are already seeing signs of distress in the competitive landscape. Our strong financial position goes Whitbread the opportunity to take advantage of the structural opportunities in the UK and Germany. Some of our best returns have been achieved by investing during periods of weakness.
“Our focus is continuing to protect and restore. The impact of the pandemic will be significant and will change the competitive landscape with potentially a material slowdown in room growth, significantly restrained investment and the acceleration of decline in the independent sector. Whilst we are not immune, we are the largest player and our strong balance sheet give us confidence to invest. We have a track rescued of deploying capital with discipline, we have great importunity to grow in the UK and Germany offers potential for growth.”
Nicholas Cadbury, CFO, added that the group’s 60% freehold property estate gave it “options to support future funding for investments or to protect our balance sheet”. Commenting on the transactions market, Cadbury said that he would have expected yields to have moved out, adding: “We are one of the few hotel companies to have continued to pay rent and would expect yields to have moved out less than the rest of the market. If we needed to raise cash we have options”.
Earlier this month Fitch Ratings downgraded Whitbread to 'BBB-' from ‘BBB'.
The agency said: “The downgrade reflects a more severe impact and a longer recovery path for travel, hospitality and leisure activity from the pandemic. We expect demand to progressively recover from FY22 (financial year-end to February) onwards, but the recovery pace is still uncertain amid Brexit, in addition to increased execution risks around the group's German expansion. Under our revised scenario Whitbread's credit metrics are no longer compatible with a 'BBB' rating.
“The rating incorporates Whitbread's leading market position in the UK budget segment with a high regional presence. Domestic travel should also help the group recover ahead of the overall EMEA lodging market. The rating also reflects its limited geographic diversification compared with its international peers'.
“The Stable Outlook reflects Whitbread's strong financial flexibility, aided by a £1bn rights issue in June 2020, which should help the group withstand a slower recovery towards a normalisation of its financial profile. It also factors in its commitment to a conservative financial policy and a proven ability to manage capex to protect cash flows.”
Insight: This hack likes to make the time pass by describing Whitbread as ‘boring, boring Whitbread’, but the pandemic saw the group come into its own as it was able to show off its lovely covenant, all rent paid. The story was much the same at Dalata, which has been attracting investors with its promise of rent paid.
That Whitbread is now talking about joining this pain-sharing trend illustrates exactly what a bind the sector is in and how, despite the extension of the furlough scheme into next spring, the UK government needs to start thinking about how it must support the sector or there will be nothing left once Covid-19 has passed.
Without this, even the most boring company is going to face more drama than it wants.