IHG Will Tell a Growth Story This Week Scripted by Development Deals

Second quarter earnings season for the hotel industry is wrapping up, but there’s still time for one major company to flaunt its expansion trajectory.

UK-based IHG Hotels & Resorts reports earnings Tuesday, and it is highly likely to report a profit like its competitors at Hilton, Marriott, and Accor. While it has higher-end brands like InterContinental and Regent, IHG’s mix of mid-scale brands like Holiday Inn, Avid, and Staybridge cater to the type of drive-to and leisure travel leading the recovery.

But the real recovery story to look out for is how much IHG was able to capitalize on the last year and beef up its development pipeline.

“What you’re going to continue to see is the big three are going to continue to take more and more share of the pipeline,” IHG CEO Keith Barr said in reference to Marriott and Hilton as well as his own company in an interview with Skift last month at the Americas Lodging Investment Summit.

Marriott, Hilton, and IHG accounted for 74 percent of the 472 hotels to open in the U.S. in the first half of this year, according to Lodging Econometrics. Each of these companies wants to keep up with that level of momentum. IHG still managed to sign one new hotel deal each day for the first half of last year, and investors will want to see further growth given all the talk of how bigger brands can deliver so much value in terms of distribution and customer awareness.

Both Marriott CEO Anthony Capuano and Hilton CEO Christopher Nassetta took time on their respective earnings calls to comment on their focus in signing deals with owners of existing hotels to take on one of their brand flags. While Barr similarly sees merit in this kind of deal, known as a conversion, he also is bullish on new construction activity, despite a tighter lending environment due to the pandemic.

Most investor appetite for new construction hotels focus on brands like Holiday Inn and Avid as well as some of the company’s most luxurious options like Regent, Six Senses, and InterContinental.

“We’re talking mainstream … and there is a big interest in luxury and lifestyle,” Barr said. “It’s almost a barbell right now, which I find quite interesting.”

A New Brand Portfolio: Barr previously cautioned against brand bloat, or having too many overlapping concepts within a portfolio. But the company has made strategic additions to its brand lineup in the last few years that Barr sees as a good opportunity to fuel growth and bring in new franchisees coming out of the pandemic.

“I think a portfolio is a ladder of brands, and, if you’ve ever seen a ladder that is missing a rung, it’s really hard to go up and down,” Barr said. “When I looked at our company five years ago, I said, honestly, we’ve got some missing rungs.”

The acquisitions of Regent and Six Senses as well as the addition of the Atwell Suites, Voco, and Avid brands filled in those rungs, Barr added. Having a comprehensive line-up of brands helps woo potential franchisees, given some like to start at more affordable options like a Holiday Inn before moving up the chain scale to something like a Voco or an Indigo.

Choice Hotels leaders noted this last week on their own earnings call with respect to their higher-end offering like the Ascend Hotel Collection. The robust offering especially helps in conversion talks. Barr shared the sentiment.

“Somebody said we have more arrows in our quiver than we had in the last downturn to convert more hotels,” he added.

Cautious Expansion: An IHG growth story unlikely to get told this week but may eventually be on the table is a push into new sectors like all-inclusive resorts. Marriott and Hilton have both expanded more into this space in recent months, and Barr isn’t ruling it out for IHG.

“That is an area where there’s definitely a consumer need in there that we don’t play in today, which will always be interesting to consider in that upper upscale luxury collection space,” he said.

But the teams at Sandals and Club Med shouldn’t lose too much sleep over a new competitor quite yet. Barr added IHG wants to be “very measured” in how many brands it launches. That means spending time scaling up each new brand like Atwell Suites and Voco before moving onto something entirely new like an all-inclusive resort.

“It’s something on a radar screen, definitely,” Barr said. “But we want to be thoughtful about what we launch and when we launch it.”

Barry Sternlicht’s Dim Take on More Hotel Investments

The ink is barely dry on Starwood Capital’s joint $6 billion takeover of Extended Stay America, but that doesn’t mean the investment firm’s CEO Barry Sternlicht is salivating over any other near-term hotel investments.

“Pricing remains not so attractive for hotels because the markets are assuming they will recover to full 2019 levels,” Sternlicht said last week on an earnings call for his Starwood Property Trust real estate investment firm. “While that may be true in some cities and some assets and other assets that could exceed 2019 levels, it’s certainly not true overall for some period of time.”

Sternlicht remains cynical about the return of the traditional office model in major U.S. cities like New York and San Francisco, while also noting Starwood Trust has “very little, almost no exposure” in either market.

Not Seeing Eye to Eye: The price discrepancy between what buyers want to pay and what hotel owners are willing to sell at is largely attributed to why there hasn’t been a major wave of hotel transactions so far during the pandemic.

“The market seems to be a little ahead of itself in the hotel space,” Sternlicht said.

Marriott’s chief financial officer Leeny Oberg noted the pricing expectation disparity last month and chalked it up to why most mergers and acquisitions activity across the entire hotel industry coming out of the crisis would be small in nature.

“I think the biggest thing right now is the difference between buyer expectations and sellers,” Oberg said. “You’ve got the reality that, depending on what kind of player you’re talking about, the bigger ones would be looking for kind of one-offs that can fill in a hole rather than needing to go and do very large kind of transformational deals.”

Selling Sin City

MGM Resorts plan to offload most of its stake in its MGM Growth Properties lodging trust for $4.4 billion is a major development in the company’s push to go asset-light like a traditional hotel company. But this doesn’t mean the company is giving up real estate ownership for good.

“We have long discussed our goals of simplifying our corporate structure and monetizing our real estate at premium valuations to become asset-light,” MGM Resorts CEO William Hornbuckle said on an earnings call last week.

While MGM Resorts is putting a lot of focus on its BetMGM online gambling platform, it also plans to utilize some of the capital made off its Las Vegas real estate sales to push into new markets like Japan and even elsewhere in the U.S. like Ohio, Georgia, and Texas. Though, the latter two states shouldn’t expect an MGM Grand anytime soon.

Texas and Georgia both require voter referendums to legalize casino gambling before any development can take place.

“Those are long-term deals,” Hornbuckle said. “That’s not going to happen overnight.”