September is Tourism Month in South Africa and today [September 27] is World Tourism Day.
We have been chatting to movers and shakers in the tourism and hospitality industry during the month, in particular, hotel property owners and developers.
In this episode of The Property Pod, I speak to Marcel von Aulock, CEO of JSE-listed Tsogo Sun Hotels, South Africa’s largest hotel operator and owner.
The group, which was spun out of Tsogo Sun’s gaming hospitality business a few years ago, has a history going back over 50 years, with its first hotel being the Beverly Hills in Umhlanga that opened in 1964.
Iconic hotel gaming and resort developer, the late Sol Kerzner, played a key role in the early growth and development of the group, which later became known as Southern Sun. In fact, the Beverly Hills hotel is named after Kerzner’s daughter.
Marcel von Aulock has effectively been with the broader Tsogo Sun Group for over 20 years, barring a year-long sabbatical of sorts in 2017.
He moved up the ranks to CEO of the Tsogo Sun Group in 2011 and became CEO of Tsogo Sun Hotels in 2018, upon rejoining the group ahead of the unbundling of the hotels division 2019.
Covid-19 has inflicted a heavy blow on the tourism industry since the global outbreak early last year. While initial hard lockdowns and restrictions to travel locally have eased, international and business tourism to SA is still in the doldrums.
Now, more than ever, the tourism industry depends on domestic demand for its bread and butter.
Von Aulock chats about how the hotel and tourism industry is doing and Tsogo Sun Hotels’ recovery, with more of the company’s hotels opening up ahead of the summer season. He also speaks about the hot-button issue of Covid-19 vaccinations and how vital it is for the tourism industry’s recovery efforts.
Highlights of his interview appear below. You can also listen to the full podcast above or download it from iono, Spotify or Apple Podcasts. Alternatively you can watch the video below or on the Moneyweb Youtube channel.
“We’ve got 112 hotels in the portfolio, and there are a few different business segments. Of those there are about six or seven that we don’t run ourselves. They are legacy properties we acquired with hospitality [Hospitality Property Fund] that are under long-term contracts with Radisson and Marriott.
“And there are about 25 hotels that we manage for third parties. A big chunk of that is some of the gaming hotels which, when we split from gaming, are very integral into the casino – your Palazzo node, for example, at Montecasino.
“We also have about seven timeshare resorts. I think we are the largest timeshare operator in the country. We operate, as you say, for the Liberty Consortium, for Acsa [Airports Company SA], for a pension fund in Zambia. So we’ve got quite a big management operation itself.
“And then the bulk of our cashflows come from the remaining 80 or so hotels that we own and operate outright for our own account. That covers everything from five-star properties like the Beverly Hills, Arabella, Mount Grace and so on, down to your one-star budget offerings like Sun1.”
Where is the tourism industry recovery at, and how important is domestic tourism currently, considering the constraint on the international side?
“Up to now there’s very little international travel. There is only essential business travel, which is very small. There’s a little bit of the US markets that’s come back, very much safari-orientated. So one night in Joburg, up to the bush. But by and large international doesn’t exist.
“So that impacts areas like Cape Town – which is built for the international tourist – and Joburg, which has a lot of corporate and a lot of that inbound business travel that’s not existing [currently].”
“Domestic is the only market that’s out there, and those results are trading at about half our normal levels. Domestic leisure is strong … domestic leisure is very important.
“And then there’s quite a bit of domestic government-related travel, which is not so much what we call ‘the transient’, just a person going about their business, but group stuff where, for example, the Department of Education is doing examinations, the IEC is doing training. So there’s a fair amount of that across the country where government has to move to function. But it’s all domestic-related.
“The parts of the market that are missing are your international, events and conference tourism … and then your international and your local corporate market. Sandton is still quiet. There is traffic, but it’s not what it should be.”
With the summer season coming up, how many of your hotels are open at the moment, or are set to reopen?
“Most of our portfolio is open. Not so much that it is running full, but it’s open. We find if you can trade above 10% to 15% occupancy, you are losing less money than if you are closed. So, if possible, we get our hotels open.
“They’re also not buildings that like to be closed. They’re not designed to ever be closed. If you switch off a building, you start getting issues with your lifts that aren’t moving, the lubrication around the cables, and your water systems and so on. So we prefer to have hotels open, even if it’s at low occupancy.”
“The areas where we still have closed properties are Cape Town, because there is just too much stock without an international market in there …
“But we’re hoping that some of this Red List issue will get sorted, and that a bit of a late summer season will come through for us. And then in Sandton some of the big real corporate-focused hotels are not open. Those are your two trauma markets.
“The balance of the portfolio, all our outlying stuff – Mthatha, Bloemfontein, Polokwane – is all open. And most of Africa is open. I think Tanzania is the only hotel that’s still closed. Everything else is open.”
Expansion with the Hospitality Property Fund takeover and a new property in Stellenbosch …
“These are two different types of transactions. The Hospitality Fund, when we took that over, we had a number of properties that were contracted out to third parties, and Marriott in particular walked away from a number of leases that they had. So we took those in-house, which in hindsight is actually great for us.
“We would have previously had to buy them out of those, and we are quite glad to take those. Arabella is an important one with Mount Grace – because they are leisure, and leisure is doing well at the moment – The Edward [Durban], Hazyview [Mpumalanga] and so on. We brought those in-house and it’s about six properties, I think, we’ve taken over.”
“Then something like the Stellenbosch Hotel [now branded Southern Sun de Wagen] – we’ve got a long relationship with Remgro and the Rupert family going back many years to Malelane Sun at Leopard Creek. They’ve done an exercise really to preserve historic buildings in the centre of Stellenbosch.”
“It’s a small property with 22 suites. It’s attached to the Volkskombuis, which is Jean Engelbrecht’s restaurant there. Because of our long relationship with them, they approached us to run that for them. So it’s more looking after the history of Stellenbosch than it is a hotel thing, but it will work I think really well once your internationals are back.”
How important is the vaccination drive to the recovery of tourism?
“It’s pretty vital. If we don’t get vaccinated, we are not going to get accepted on the international stage, and we’re not going to be considered a safe environment to come to. The vaccination programme was [initially] botched.
“Fortunately, that is fixed, and we’ve seen in recent months since sort of late June/July, it’s really opened up and it’s gone rapidly… Now you’re dealing with vaccine hesitancy – people who don’t want to get vaccinated as opposed to people who want it and can’t get a vaccine.
“If you want it, you can get it now. That’s really important … We are, for example, internally heavily encouraging all our staff to get vaccinated.
“It’s absolutely vital. You will not get international travel inbound or outbound if the world doesn’t perceive your vaccination programme as solid.”
“We have a very good programme here. It just needed to get, I guess, the bureaucracy out the way. This Red List issue is now about the Beta variant that hardly exists in South Africa.
“This sort of stuff will pass. I think, in a month or two, I hope, it’s certainly cleared out. But the vaccination programme is vital for us not becoming a pariah in the international market.”
With the local holiday season approaching, which are expected to be Tsogo Sun’s destinations that are going to stand out in the summer?
“Our strongest domestic market is Durban. Obviously, the beachfront is still very, very popular. We have a very loyal Indian market that goes in and out of there, visiting friends and family. So the Durban strip, both in Umhlanga and along the beachfront, should do really well.
“And then our outlying resort properties … the Mount Graces, the Arabellas and so on will do well, because they’re easily accessible within an hour from Cape Town and Johannesburg respectively.”
“Our timeshare resorts are very resilient. In that market the minute the restrictions are lifted, timeshare runs full. People use their timeshare. They want to be there. And a couple of those – we’ve got hotel offerings with them that I think will do well. We also make good money out of food and beverage and so on, and you need volume through that.
“I think we’re going to have quite a good leisure season, provided there are no changes in the restrictions, which we saw last December when that second wave came along.”
“But I’m pretty optimistic about that. This third wave was very heavy and intense on the country. So, without knowing too much about the science behind it we’re in for a good summer season because there’s a lot of pent-up demand after the impacts of this third wave and the Level 4 restrictions that went with it.”
Eyeing further expansion?
“It’s quite challenging having a long-term view when the market’s been so uncertain – and hospitality is the hardest-hit industry by far. Our short-term aim is survive, avoid a rights issue, maintain our balance sheet, get us out of this trauma.
“Our medium-term view is recover. We do think there’ll be a strong recovery in both business and leisure travel. Leisure – you can see it there, that demand is there we think. Business travel will come back; people need to move. So that’s our medium term.
“When you get into the longer term, it gets a bit harder and it depends very much on what the conditions will be at that point. What we’re seeing at the moment is the implied value of hotels. If you look at listed-share prices, they are enormously discounted and that has no bearing on what individual properties are trading at.
“Overall we’d still want to grow the portfolio. I don’t see a lot of distressed stock out there that is trading at prices that could justify not rather just buying our own shares, but you don’t know what it will be like in two or three years’ time when the recovery is there.
“There is a small outside chance that we have a really strong boom in travel, a bit of a roaring twenties, after the market opens up.”
“And then we’ve got to look at what the market does at that time. But that would really be first prize. If we get that strong economic growth and business and leisure travel all at once, then we’re firing on all cylinders.”