With supply chains constrained and inflation driving up the cost of new builds, the big hotel companies are turning to conversions to help fuel unit growth.
As evidenced in the company’s Q2 and H1 2022 earnings release, IHG has been more aggressive than most in recent years thanks to the introduction of new conversion-specific brands like Voco and Vignette Collection. Conversions now account for around 25 percent of all IHG signings, up from around 17 percent.
“Against the backdrop of a fragmented global hotel supply, we've talked before about the increased importance of conversions. As hotel owners look to benefit from our scale, revenue-generating systems, marketing and loyalty programs to drive performance, efficiencies and returns,” CEO Keith Barr said on a call with analysts after the publication of the company's first-half results. “With Voco and Vignette Collection, we have added two brands that play primarily in the conversion space. Expanding our brand portfolio has also enabled us to sign more portfolio deals with owners with assets across multiple segments.”
Since opening last August, IHG’s Vignette Collection has secured its first eight properties. The Voco brand has reached 80 hotels either open or in the pipeline, and opened nine hotels in H1.
Because it now has conversion brands across multiple segments, IHG is increasingly looking at portfolio deals with owners where it brings in multiple properties onto its platform.
During the first half of the year, the company added three portfolio deals in the Europe, Middle East, Asia and Africa region that added 10 hotels across six brands. In this region, nearly 50 percent of openings and signings are from conversion brands.
“We always had a good conversion offer with Holiday Inn and Holiday Inn Express because they were the best in those categories. So if you had a good hotel and you were bringing it in from independent or one of the weaker brands you wanted those brands. But now having more conversion brands, so more opportunities, it does allow more owners to bring in their product. And I think we will see that continue into the future,” Paul Edgecliffe-Johnson, chief financial officer and group head of strategy, said on the same earnings call.
Income and Revenue
IHG’s reported revenue of $840 million and operating profit of $377 million for the first half of the year increased 49 percent and 101 percent, respectively, against H1 2021. Compared to the same quarter in 2019, revenue per available room in the Americas was up 3.5 percent in Q2. Comparable RevPAR for H1 in the region was up 45 percent for 2021, resulting in a deficit of less than 2 percent compared to 2019. Global RevPAR for the H1 was up 51 percent compared to 2021 and 4.5 percent behind prepandemic levels in Q2.
Average daily rate during H1 was up 24 percent compared to 2021 and up 4 percent compared to 2019. Occupancy for the first half of the year was up +10 percentage points from 2021 but down 10 percentage points from 2019.
IHG’s operating profit more than doubled year over year, Barr said, which puts it 8 percent behind 2019 levels.
Openings and Pipeline
IHG opened 14,900 rooms across 96 hotels in H1 (8,300 of these rooms opened in 51 hotels in Q2) and as of June 30 has 883,000 rooms in 6,028 hotels, weighted 68 percent across midscale segments and 32 percent across the upscale and luxury segments. The company reported gross growth of 4.8 percent year over year.
At the same time, IHG removed 12,400 rooms in 59 hotels during the first half of the year. This includes the impact of ceasing all operations in Russia, which resulted in the removal of 6,500 rooms in 28 hotels, equivalent to 0.7 percent of IHG’s global system.
The company signed 30,700 rooms in 210 hotels in H1. Its global pipeline is now at 278,000 rooms in 1,858 hotels.
Notably, IHG’s luxury & lifestyle portfolio now has 445 hotels making up 12 percent of the total system size, and a further 287 hotels represent 19 percent of the portfolio’s pipeline.
IHG opened its first two Atwell Suites properties—a new-build at Denver Airport and an adaptive reuse in Miami. Another 23 hotels are in the pipeline. Five new Avid hotels opened in the first half of the year, taking the brand’s presence to 53 locations, with the first opening in Canada scheduled for later this year. The brand’s pipeline totals 157 properties. The Hotel Indigo brand is set for a record year of openings, having reached 134 properties across more than 20 countries and poised to nearly double with a pipeline of 120 hotels. There were 16 signings for the brand in H1, including new resort properties in Barbados and Grand Cayman.
Inflation Impact
Unsurprisingly, IHG execs got a lot of questions from analysts about inflation and its impact on the business, but like so many of its rivals the company is downplaying the situation. Barr believes that the hotel industry “actually performs quite well in inflationary environment” and he pointed to high consumer demand and investment in an updated loyalty program.
Average daily rate for the period was up 4 percent versus 2019 but occupancy was still around 10 percentage points down. This effectively means that although IHG might be welcoming fewer guests, it is able to charge more.
“So we fundamentally believe we have pricing power in this industry that can continue moving forward because truthfully, ADR growth hasn't kept pace with inflation. And so we know that we have that ability to do it,” Barr said.
Earlier this year, CBRE published a paper that looked at the impact of inflation on hotels. The findings weren’t necessarily all good news for the industry. According to the study, during periods of low or medium inflation, most hotels see neither benefit nor harm from inflation. The returns follow the real economy. There is weak evidence that suggests that economy hotels may be less able to price to inflation, but much stronger evidence that luxury hotels are able to benefit from higher rates of inflation. Therefore, luxury hotels emerge as the most likely candidate as a hedge for inflation.
A version of this story ran on Hotel Management’s sister site Hospitality Insights.