The Bottom Line on Hotel Bottom Lines So Far

I offered last week my own themes for earnings season. This week, here are what the pros are saying, in a survey of recent reports issued by investment bank analysts about large public hotel companies.

Hotel pipelines

• IHG: “Net system growth remains behind initial expectations [2.6 percent, year-over-year], which is not a surprise but raises further concerns into fiscal year 2023, where expectations for IHG are to grow in line with industry leaders by about 5 percent,” wrote Estelle Weingrod for J.P.Morgan Cazenove. The analyst believes IHG can still meet its target next year, thanks partly to delayed openings in China that should roll over year and given that overall its conversion brands are performing well.
• Wyndham: Before earnings began, Truist’s Patrick Scholes met with Wyndham’s management. Scholes called out in a report that the company has “additional opportunities for tuck-in acquisitions” like its recent acquisition of Vienna House and that the company “plans to double the size of the brand portfolio in five years.” Scholes noted that Wyndham’s pace of signings is now faster than the original expectations for its new extended-stay brand Echo — which may lead to 300 U.S. properties in the next decade.
• Positive development cycle: “Less financing means fewer signings in the industry,” Weingrod noted. “But then demand outstrips supply, and pricing and occupancy go up, which again makes the industry attractive and therefore, both debt and supply come back up.” At the budget and extended-stay end of the market, Wyndham is seeing ongoing strength. “Financing very much available for franchisees at similar long-term valuations, 75-80 percent, to last year,” Scholes noted

Consumer demand

• IHG: “Only a few weeks visibility (limited visibility in Nov/Dec) but demand and pricing still strong – no sign of weakening trends at all.“—Weingrod of J.P. Morgan.
• Accor: “About 50 percent Europe exposure,” noted Vicki Stern at Barclays. “Our economists are already forecasting a European recession in ‘23. Hotels are highly cyclical.” That backdrop gave Stern “substantial uncertainty” about the company’s performance next year. In a worst-case, the recession has a similar impact as the 2008/2009 great financial crisis, when revenue-per-available room declines hit a trough of being down about 20 percent in the U.S.”
• Whitbread/Premier Inn: “We believe the growth trend [in the company’s profit and revenue] should remain positive near term as the weaker pound makes the UK attractive for inbound [visitors], and makes foreign travel expensive for outbound,” wrote Andre Juillard of Deutsche Bank. Premier Inn is heavily exposed to the UK market and increasingly the German one. “If the British and Germans have to reduce foreign trips, Whitbread could also benefit from a slightly higher domestic leisure demand, people continuing to take some holidays locally,” Juillard wrote.

Asset-light journey

• Accor: One headwind for the Paris-based giant relative to its peers is that it has higher operating leverage (essentially, debt) than its more asset-light peers Marriott, Hilton, and IHG, Stern noted. Accor is exposed to a higher proportion of long-term leases, and it has a higher dependence on incentive fees from hotel partners, while its rivals derive more from franchising and the base management model. “Further crystallisation of value in the form of asset sales have the potential to be a source of positive surprise for the valuation,” wrote Stern at Barclays.

Inflation

• IHG: “About 70 percent of IHG’s cost structure are people costs,” Weingrod of J.P. Morgan noted, “So wage inflation will have an impact. “Management cannot yet be precise but a 4 to 5 percent wage inflation sounds reasonable.”
• Wyndham: Franchisees credit the company’s revenue management system with helping them “be more disciplined for holding room rates versus past cycles,” Scholes wrote. Franchisees go with the system’s suggested rate about 95 percent of the time and have come to accept that selling out a property isn’t the best strategy for profitability or operational efficiency.

All-inclusives

• Wyndham: “Alltra is the all-inclusive upper-midscale resort brand that was formed through a strategic alliance with Playa,” Scholes wrote. “An official opening of the Cancún location took place last month. We view the long-term opportunities from Alltra given a global franchisor and Playa’s strength in the all-inclusive space as a powerful combination.”

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