City Lodge cancels Maputo hotel building contract

26-09-2019
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Moneyweb
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The City Lodge Hotels Group has called up the R40 million performance guarantee of the Mozambican contractor it appointed to build its new 148-room City Lodge Hotel in Maputo and cancelled the contract.

This follows “contractor-related delays and disputes” during construction of the hotel, which delayed the conclusion of the group’s initial R1 billion African expansion strategy.

The new Maputo hotel was initially scheduled to open in the second quarter of 2018.

The JSE-listed hotel group’s chief executive Andrew Widegger confirms that the group has called up the performance bond and cancelled the contract it awarded to Lutios to build the hotel.

Widegger says the group will be bringing in a dedicated contracts manager to supervise the various subcontractors working on the project, including the group’s own installers of furniture, fittings and equipment.

Work will continue

“The subbies are essentially the same ones that were on site already,” he says. “The difference now is that we will pay and supervise them directly.

“We understand that some of them haven’t been paid, which is why there has been a go-slow on site but they are fully on board and hopefully we can get this thing going and be done in the next four to six weeks.”

Widegger says they definitely wanted to have the first few floors of the hotel completed in the next four to six weeks with the balance following in the two weeks after that period.

Contractor must hand over the keys

He adds that Lutios is taking legal advice about the action taken by City Lodge – and that City Lodge will seek an urgent court interdict to be given access to the site if Lutios does not hand over the keys.

“Practical completion has been certified, which means that [the site] should not be under the control of the builder and is now ours, and the interdict will essentially order [the contractor] to grant us access,” he says.

The group’s African expansion strategy, which was launched in 2015, involves the development of seven new hotels, including City Lodge hotels in Nairobi in Kenya, Dar es Salaam in Tanzania and Windhoek in Namibia, as well as Town Lodges in Namibia and Botswana.

When the Maputo hotel opens, the group will have completed its initial targeted expansion into Southern Africa and East Africa and will then comprise 63 hotels with 8 070 rooms in six countries.

Widegger says that of all the new projects in Africa outside South Africa, the Maputo hotel is probably the one they are most excited about in terms of the current prospects for that market. “We think it will do very well.”

Widegger indicates that the group will undergo a period of consolidation and introspection once its Maputo hotel has opened.

He says it believed its African expansion strategy would provide the group with some kind of contra-cyclical risk benefits to the South African market – but that things had not worked out that way.

‘Possibly underestimated’ Africa

Widegger says the group possibly underestimated Africa because each country in which it has opened a new hotel has its own unique circumstances and problems, all of which have unfortunately been negative.

“It’s been tough,” he adds. “We have invested a lot of money and it is now time for us to spend the time to understand the markets a bit more than perhaps we thought was necessary.”

Widegger says the group needed to ensure that all of its new hotels in Africa worked and should have focused its efforts on each of these countries before it got sidetracked by the secondary opportunities that were available in Africa.

“We have a person who is looking at all those secondary opportunities for when we are ready.”

He says the group is still looking for opportunities in South Africa, adding that it built nine hotels in 2009/2010 and knows that it is in a cyclical business – but that for every down cycle there is an upturn.

Waiting for the catalyst

Widegger stresses that the group does not want to be reckless and increase its financial risk to expand further until it knows what the catalyst is going to be to turn the market around in South Africa, which is “the rump” of the business.

“We will continue to look for opportunities and we may land bank,” he says. “We have just opened our Town Lodge in Umhlanga and are very excited about that and are busy with the Courtyard in Waterfall City, which is going to be a game-changer for that brand and signal the way we are going to take the Courtyard brand forward.”

But Widegger says the group has decided to hold back on the development of the previously announced Road Lodge in Polokwane.

City Lodge Hotels last month reported a 19.4% decrease in diluted normalised headline earnings a share to 613.4 cents in the year to June, with operating profit declining by 22% to R364.6 million.

Shares in City Lodge Hotels closed 1.87% lower on Monday at R85.37.