IHG Q1 buys, management deal buoy organic growth
IHG Q1 buys, management deal buoy organic growth
04 MAY 2018 8:58 AM

IHG executives said the British firm is well-positioned for organic growth and pointed to the recent Regent acquisition and management deal of 13 U.K. hotels as indicators that its business model is strong and competitive. 

DENHAM, England—InterContinental Hotels Group officials have several reasons to feel optimistic.

The company recently bought Regent Hotels & Resorts, will assume management of 13 properties that will soon be acquired by French real estate investment trust Foncière des Régions and enjoyed strong metrics for the first three months of 2018. And on top of all that, there’s the possibility of further acquisitions.

IHG also is buoyed by signing 146 hotels in the quarter, the highest rate in Q1 since 2007.

IHG CFO Paul Edgecliffe-Johnson said during a presentation of the company’s first-quarter earnings that IHG is “set up well for organic growth.”

While discussing full-year 2017 numbers on 20 February, IHG executives announced a companywide cost-savings strategy aimed at accruing $125 million per year by 2020, and Edgecliffe-Johnson said the company remains confident in delivering that number.

Another savings initiative is the development of a combined Europe, Middle East, Asia and Africa group within the company that Edgecliffe-Johnson said would allow savings in distribution and form best practices.

Recent deals
On 14 March, IHG bought 51% of Taiwan-based brand Regent Hotels & Resorts for $39 million in cash and the plan to expand its current portfolio of six hotels to 40 with an overall room count of more than 10,000 by 2021.

Edgecliffe-Johnson called Regent an “upper luxury” brand, which he said would allow IHG to take its full part in the $60-billion luxury hotel market.

This includes the rebranding of the InterContinental Hong Kong as a Regent hotel, which Edgecliffe-Johnson said will allow the brand to quickly get traction in Greater China.

IHG has the option of acquiring Regent’s remaining shares in a phased manner from 2026.

On Thursday, IHG signed an agreement with French real estate investment trust Foncière des Régions to assume management of 13 of the 14 hotels Foncière is buying from Starwood Capital Group for £858 million ($1.16 billion).

Some of those hotels, most of which were in the Principal Hotels brand, would be converted to Kimpton Hotels & Restaurants properties, thus debuting that brand chain in the United Kingdom, IHG said in an accompanying news release.

Edgecliffe-Johnson said IHG will provide more color later in the year on the U.K. Kimpton launches, as well as other possible brands that could be part of the 13-property deal.

More high-end brands
IHG officials continue to have an appetite for M&A in the luxury space, but finding the right deal might be difficult.

“We still want to grow our luxury offerings, preferably with deals that have small capital-expenditure requirements and have long-term growth and a return that is higher than our cost of capital, and there are few of those deals that meet our numbers,” Edgecliffe-Johnson said.

He said the next IHG brand “would be an upscale brand we are launching based on conversion opportunities.”

“If you look at the 15 years since we became independent, our buys have been only been Kimpton and Regent. These types of deals are quite rare for us. … We like a balance between that and organic growth such as Avid,” Edgecliffe-Johnson added, referencing the company’s recently launched midscale brand.

IHG officials remain committed to combing opportunities for the right deals.

“There are still a few things out there, and we will see if any of them come off,” Edgecliffe-Johnson said. “We will be looking for a strong brand proposition that we can grow organically from a shell.”

Despite the general preference for organic growth, Edgecliffe-Johnson said M&A is often more logical for brands like Regent.

“With luxury you are better off buying after someone else’s hard work over 10 years or so,” he added.

First quarter
As for the nitty-gritty of its Q1 results, IHG posted a 3.5% year-over-year jump in revenue per available room. Average daily rate increased 1.9%, and occupancy was up 1%.

RevPAR was negatively affected by the timing of Easter, Edgecliffe-Johnson said.

Greater China saw RevPAR growth of 11%, with a 25% rise in Macau, 15% rise in Hong Kong and a 10% rise in mainland China. Edgecliffe-Johnson said the strengthening of Chinese currency and weakening of the U.S. dollar helped performance in the quarter.

The firm also saw a 16% year-over-year increase in room openings, with roughly 8,000 opened in the quarter. IHG saw overall 4.3% year-on-year increase in net system growth to approximately 800,000 rooms.

Edgecliffe-Johnson said signings in Q1 have been led by the company’s newly created Avid brand, which exceeded more than 100 during the quarter.

In response to an analyst question as to whether signings for Avid properties would slow down now that the fee breaks for the first 100 owners to sign up now had been reached, Edgecliffe-Johnson said he did not believe any owner signed up solely to receive fee reductions for only the first few years.

“Owners are signing up for long periods,” he said.

Avid will debut its first property in the third quarter of this year in Oklahoma City.

Edgecliffe-Johnson said the overall pipeline is approximately 252,000, 45% of which is in construction. When all that pipeline is opened, IHG is expected to have more than 1 million rooms in operation.

Edgecliffe-Johnson also said IHG has no plans to look at lowering commissions for third-party meeting bookings, a move made by some competitors.

“We do not have the big boxes some other firms have, but the group is continuing to look at that,” Edgecliffe-Johnson said.

As of press time, IHG stock was trading at £4,661 a share, a year-to-date decrease of 0.7%. The Baird/STR Hotel Stock Index was down 3.7% for the same period.

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