Macro economic fluctuations
Norgani Hotels is exposed to the economic cycle and macro economical fluctuations,since changes in the general economic situation may affect rent levels and the valueof the Company’s assets. This relates, among other things, to the fact that the lease contracts are mainly revenue-based.
Inflation
The minimum rent in the majority of the Company’s rental agreements and the vendor rental guarantees are subject to an inflation adjustment (CPI adjustment). Lower inflation than currently expected may thus have a negative impact on the Company’s revenues and liquidity.
Exchange rate risk
A substantial part of the Company's revenues and expenditures are paid in foreign currency (SEK, DKK and EUR). As a result, the Company is exposed to market risks resulting from fluctuations in foreign currency exchange rates. A major drop in the value of any such foreign currency as compared to NOK could result in a major adverse effect on the Company's cash flow and revenues.
Interest rate fluctuations
Norgani is to a large extent financed by debt and will be exposed to interest rate fluctuations. Any period of unexpected or rapid increase in interest rates may hence negatively affect the Company’s cash flows and profitability. Norgani seeks to limit its interest rate risk by entering into fixed interest rate contracts/swaps for a major part of its outstanding loans. The interest rate level over time will also be an important factor in the development of the value of the Properties and the return which investors may obtain. Indirectly, the interest rate level may also affect rent levels by having a negative impact on the revenue of the tenants, as well as when re-negotiating/renewing or entering into new leases.
Demand for accommodation
The demand for accommodation will influence the tenants’ income and hence financial situation. The tenants’ income will affect their ability to pay minimum rents over time (tenant risk) and influence the level of revenue based component of rents (revenue based leases), if any. The demand for accommodation is influenced by several factors, on both a micro and macro level. Negative changes in the general economic situation, including business and private spending, will adversely affect travel and hence the demand for lodging. Likewise, geopolitical uncertainty may negatively affect travel. On a micro level, the relative attractiveness of regions and cities, both with regards to business and leisure, will affect business and leisure travel to the respective regions and cities. There are no guarantees that regions that are attractive today will remain attractive in the future.
Supply of accommodation
The supply of accommodation is influenced mainly by growth in construction. Historically, positive developments in the hotel markets have been followed by an increased construction of hotels. This may lead to an oversupply, hence lowering revenues for the tenants. In turn this will negatively affect the tenants' financial strength as well as reduce revenue-based components of rents. The long lead time of hotel construction may further increase this effect, as construction that has been started will, in general, be finalised regardless of any market slowdown.
Revenue based leases
The Company’s leases are mainly operator revenue-based which means that factors affecting the revenue of the tenants (such as quality of the tenants’ operations and general market conditions) will affect the rental income of the Company.
Tenant risk
The Tenants’ financial status and strength, and thus their ability to service the rent etc., will always be a deciding factor when evaluating the risk of property projects. It is not unusual for some of the leases to be terminated and new lease contracts to be entered into. The termination of leases with a subsequent vacancy of the premises will negatively influence the rental income. The Company’s dependency on a limited number of companies increases the risk.
Vacancies and level of rent
It is normal for tenancies to be terminated and for new tenants to appear. The termination of lease contracts with a subsequent vacancy of the premises as well as possible refurbishment may have a negative impact on the total income. Furthermore, tenants leasing properties situated in Sweden have, by law, an indirect right to an extension of fair market conditions upon expiration of the lease term. The tenant may be entitled to compensation if the landlord refuses an extension or if the conditions offered for the extension are deemed to be unfair.
Maintenance/Technical condition/Operating risk
Maintenance etc. of the hotels has been regulated mainly so that the landlord is responsible for external maintenance and the tenant covers all other operating costs (e.g. internal maintenance) in the leased premises. In addition, in several of the leases, the landlord is obliged to cover the costs for replacing components in the technical environment. Thus, the lease agreements cannot generally be characterised as a”Triple Net Lease1” in the traditional sense of the word. There is a general risk that costs for maintenance and replacements, upgrading, etc., for which the Company is responsible for, may be greater than expected. Furthermore, in several of the tenancies, the parties concerned have entered into agreements in which the landlord is obliged to contribute to the upgrading and renovation of some specific parts of the lease object (e.g. bathrooms). The scope of the landlord’s potential obligation will depend on the technical state and condition of the lease object.
Hidden defects and omissions - pollution
Generally, under the purchase contracts the Company carries a risk of hidden defects and pollution at the Properties. In respect of some of the Properties, and the ground on which some of the Properties are built upon, the Company is aware of pollution/use of toxic material. Furthermore, some of the acquired Properties are situated in areas where it is not unlikely that the ground is polluted, based on the history of the site/area. Moreover, some of the hotels have previously been motels and petrol stations operating on the same site. The risks relating to pollution in the ground, in the Properties and their associated buildings largely rest on the Company. Such pollution may render further development of the properties/ground and excavation more expensive (due to required soil surveys or otherwise) and subject to approval by the authorities.
Regulation risk
Changes in or completion of existing planning regulations by relevant authorities may significantly affect the operations of the Company’s properties, including the interest from potential tenants in future rental of premises or interest from future purchasers of the Properties. Furthermore, existing planning regulations may limit the possibility to further develop the Properties.
Legal claims/legal matters
Norgani Hotels is, and may also be in the future, subject to legal claims from tenants and authorities, including tax authorities and other third parties. No assurance can be given to the outcome of any such claims. This is particularly in relation to the renegotiation of site leaseholds and lease contracts where
there are presently disputes between the owner and the tenant, and which are likely to continue in the future.
Tax risk and losses carried forward
Changes in laws and rules regarding tax and duties may involve new and altered parameters for investors and the Company. This may involve a reduction in the profitability of investing in property and the profit after tax for the Company. Tax implications of transactions and dispositions of the Company are to some extent based on judgment of applicable tax law and regulations. Even if the Company is of the opinion that it has assessed tax law in good faith, it can not be ruled out that the authorities are of a different opinion.
The Company’s losses that have been carried forward have been part of recent transactions from businesses that are to be contuniued. Norgani has no assurance that these losses carried forward are usable, either within the country they appeared from or across the Nordic region. Furthermore, Norgani have no assurance when and how these losses may be utilised against profits.
Fulfilment of loan obligations
The loan facility negotiated for the Company contains certain requirements as regards to the financial condition of the Company (financial covenants) relating to i.e. a minimum equity ratio, interest coverage ratio, change of control etc and other obligations of a financial nature. No assurance can be given that the Company will be able to satisfy all these terms and conditions at all times, or that its lenders will waive or change the terms to avoid an actual or expected default of the above mentioned conditions. This could mean that repayment of the loan to the Company is accelerated by the lenders, including an acceleration based on the provisions regarding a cross-default, which could itself oblige the Company to seek to refinance its loans. There can be no assurance that the Company will, if required, be able to enter into new loan facilities on satisfactory terms and to what extents are necessary to maintain its existing and future business.
