The Bottom Line on Hotel Bottom Lines So Far

Skift grip

Overall, investment banking analysts like what they hear from public hotel companies about their near-term financial performance. But some are revising their 2024 growth forecasts down, worrying about the impact of economic storms.

Sean O’Neill

Last week I came up with my own themes for earnings season. This week, here’s what the pros are saying, in a survey of recent reports published by investment banking analysts on large public hotel companies.

Hotel pipelines

  • IHG: “The net growth of the system remains below initial expectations [2.6 percent, year-over-year], which comes as no surprise but raises further concerns in fiscal 2023, where IHG’s expectations are expected to grow by around 5%, in line with industry leaders,” Estelle Weingrod wrote for JPMorgan Cazenove. The analyst believes that IHG can still meet its target next year, thanks in part to delayed openings in China that are expected to continue through the year and given the overall good performance of its conversion brands.
  • Wyndham: Before earnings start, Truist’s Patrick Scholes met with Wyndham management. Scholes said in a report that the company has “additional complementary acquisition opportunities” such as 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 the pace of Wyndham signings is now faster than initial expectations for its new extended-stay brand Echo — which could lead to 300 U.S. properties over the next decade.
  • Positive development cycle“Less funding means fewer signings in the industry,” Weingrod noted. “But then demand outstrips supply, and prices and occupancy go up, which makes the industry attractive again, and therefore debt and supply go back up.” On the budget and extended stay side, Wyndham is seeing continued strength. “Financing very available to franchisees at similar long-term valuations, 75-80%, to last year,” Scholes noted.

Consumer demand

  • IHG: “Visibility for only a few weeks (limited visibility in November/December) but demand and prices still strong – no sign of weakening trends.“—JP Morgan’s Weingrod.
  • Accor: “About 50% exposure in Europe”, noted Vicki Stern at Barclays. “Our economists are already predicting a European recession in 23. Hotels are very cyclical. This backdrop has given Stern “substantial uncertainty” about the company’s performance next year. In the worst case, the recession has an impact similar to the Great Financial Crisis of 2008/2009, when the decline in revenue per available room bottomed out at around 20% in the United States.
  • Whitbread/Premier Inn“We believe that the growth trend [in the company’s profit and revenue] should remain positive in the short term as the weaker pound makes the UK attractive for entrants [visitors], and makes overseas travel costly for outgoing students,” wrote Deutsche Bank’s André Juillard. Premier Inn has a strong exposure to the UK market and increasingly to the German market. “If Britons and Germans are to reduce overseas travel, Whitbread could also benefit from slightly higher domestic demand for leisure as people continue to vacation locally,” Juillard wrote.

Asset-light travel

  • Accor: A headwind for the Paris-based giant compared to its peers is that it has higher operating leverage (essentially, debt) than its less active peers Marriott, Hilton and IHG, Stern noted. Accor is exposed to a higher proportion of long-term leases and relies more on incentive fees from hotel partners, while its competitors leverage more of the core franchise and management model. “Further crystallization of value in the form of asset sales could be a source of positive valuation surprise,” Stern wrote at Barclays.

Inflation

  • IHG“About 70% of IHG’s cost structure is personnel costs,” JP Morgan’s Weingrod noted, “So salary inflation will have an impact.” Management can’t be specific yet, but 4-5% wage inflation seems reasonable.”
  • Wyndham: Franchisees credit the company’s revenue management system with helping them “be more disciplined on waiting room rates compared to previous cycles,” Scholes wrote. Franchisees accept the system’s suggested rate about 95% of the time and have come to accept that selling a property is not the best strategy for profitability or operational efficiency.

All-in

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

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