IHG’s recovery aided by business model, midscale spread
IHG’s recovery aided by business model, midscale spread
07 MAY 2020 8:29 AM

Executives at InterContinental Hotels Group said they understood the huge pressures on owners but believe there are several factors that will sustain them through the crisis.

DENHAM, England—InterContinental Hotels Group executives believe their company’s asset-light model—with a fee structure driven by revenues not hotel profits—and its broad geographical span has positioned the company well for the eventual recovery.

Speaking at a conference call announcing IHG’s first-quarter 2020 earnings results, CEO Keith Barr said he believed the health of IHG owners is genuinely good, with the firm helping them when asked to access loans and other financial opportunities to keep staff employed.

“Owners are under incredible pressure. We see our hotels’ break-even point is in the 30% occupancies, and we are in the mid-20%s now, but of course there will be some owners struggling. Our policy is to be a good partner. We feel we are in good place for the next few months, and as the situation becomes more comfortable—I will not say comfortable—occupancies will rise,” Barr said.

IHG has provided discounts to owners paying fees on time, and he said most want to and have fulfilled their financial responsibilities.

“Some have talked about deferrals, and we’re in business with partners for 20 years, so we are here to be partners. The vast majority are keeping on top of their fees, and they want to do that, so we see no significant changes in working capital,” said Paul Edgecliffe-Johnson, IHG’s CFO, who added that a 1% decline in revenue per available room for the firm equals a $13-million movement in earnings before interest, tax, depreciation and amortization.

He said this was expected to increase by approximately $1 million through 2020 “given hotel closures in our owned, leased and managed-leased estate.”

“Now we are proactively planning for what the recovery will look like region to region and even hotel to hotel,” Barr said, who added the firm had approximately $2 billion in liquidity.

IHG has continued to sign, break ground on and open hotels in the quarter, Barr and Edgecliffe-Johnson said, with Barr adding on the other side of the COVID-19 crisis customers will want to increasingly stay at branded hotels

“Yes, building sites are being closed down, construction stopped, and this will slow growth this year without question. Much depends on how countries open up. That said, we signed 104 hotels in the first quarter and opened 44. We even had construction start in April,” Barr said.

Edgecliffe-Johnson said monthly opening and signing rates in the first quarter of the year are not indicative of the yearly total as singings tend to accelerate as the year goes on.

Barr added that much will depend on changes in the availability of capital.

“Lending will come back, and it will come back to the best companies,” he said.

He added the firm has reduced capital expenditure by approximately $100 million and realized cost savings of $150 million for full-year 2020.

“We will be net cash-flow positive in April, although we understand the pressure on owners,” Barr said, who added dividends payments announced in February have been cancelled.

IHG signed the InterContinental Rome in Q1 and, in April signed the Regent Shanghai Pudong, a conversion from a Four Seasons property and the first new Regent since that brand’s acquisition in March 2018.

“Also in that same month, we started the renovation of the InterContinental Hong Kong,” Barr said.

“In the quarter, we opened 6,000 rooms, mostly in the first two months, but 1,100 opened in March. Approximately 14,000 rooms were signed, including 4,000 in March, for a new system size of approximately 882,000 rooms, a year-on-year increase of 4.6%,” Barr said.

Barr said the firm was also helping owners by relaxing brand standards and delaying renovations.

Edgecliffe-Johnson said there is no doubt the business climate will remain challenging for the next few months.

Business travel and China
Barr said he is not among those who predict a bottoming-out of business travel, even though he said after quite some time in which IHG has struggled to get staff to adopt virtual conference-call software, the recent take up has been swift.

“I do not think business travel is over. I am not one of the naysayers who say business travel is done,” he said. “Our investments are a long gain, and we and owners expect to see returns over that time space. Travel will change and evolve, and we are trying to stay on top of that.”

Barr said the new business world will involve changes in how hotelier think in terms of innovation and design, among other things.

“Great businesses adapt. The hotel industry is in a lot different place than it was in the Great Recession, and we have more control over what we do and how we segment hotels,” he said.

IHG is another hotel firm buoyed by the partial return of China.

“Recovery there varies by segment and geography. It was 5% occupancy at the trough, now in the mid-20s. Tier-one cities have lower occupancies, and as I said it will be a domestic recovery, in midscale hotels first and then moving up,” Barr said.

Barr pointed to the early May Chinese Labor Day holiday in which some hotels in China were sold out.

RevPAR drops
Hotel performance metrics were all noticeably down, said Edgecliffe-Johnson, with global RevPAR down 24.9% year over year in Q1 and 55% in March.

He said this was the first time IHG ever released monthly RevPAR data in a quarterly earnings results and that in April he expected RevPAR to decline by approximately 80% compared to April 2019.

“Sixty-five percent of our hotels are upper midscale, which has proved to be more resilient in other crises. The Holiday Inn Express brand outperformed other global brands in RevPAR by about 3% in March,” Barr said.

He said in the United Kingdom RevPAR fell 55% in March, while in Germany it fell 70% due to the cancellation of major trade fairs.

Across all of the Europe, Middle East and Africa regions, March RevPAR declined approximately 90%.

“We have always run our business conservatively, and most of our capital is in bonds with staggered maturity profiles, the first payment being $400 million due in 2022,” Edgecliffe-Johnson said.

“We have at least 18 months of head room,” he added.

As of press time, IHG stock was trading at £35.62 ($44.02) a share, down 31.8% year to date. The Baird/STR Hotel Stock Index was down 44.72% for the same period.

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