The owner of brands like Holiday Inn and Crowne Plaza showed signs in the third quarter that the worst of the coronavirus pandemic’s financial fallout is over.
But there is still plenty of uncertainty — and portfolio setbacks — ahead in the road to a full recovery for IHG.
The hotel giant reported on Friday revenue-per-available room, the hotel industry’s key performance metric, was down more than 53 percent from last year across its global portfolio for the third quarter. While that decline is certainly hefty, it is actually a marked improvement from the 75 percent drop seen last quarter.
“We have continued to outperform the overall industry driven by our weighting and market-leading position in the mainstream segment, by our distribution predominantly in non-urban and drive-to locations, and by our skew toward transient and leisure demand as opposed to group business,” said Paul Edgecliffe-Johnson, IHG’s chief financial officer, during a Friday investor call.
IHG’s recovery is led — like the general hotel industry — by brands aimed at drive-to and leisure travelers. Hotels operating in this space, like Holiday Inn, reported a revenue-per-room decline of 43 percent for the quarter compared to IHG’s luxury and upper upscale properties, which reported a 71 percent drop.
The company’s average hotel occupancy was also up to 44 percent from the 25 percent seen last quarter.
Despite signs of a financial turnaround, IHG leaders also cautioned of uncertainty in the coming months due to less leisure travel expected in colder months as well as reinstated travel restrictions and social distancing measures in areas experiencing a second wave of the virus.
“A full industry recovery will take time and uncertainty remains regarding the potential for further improvement in the short term, but we take confidence from the steps taken to protect and support our owners and drive demand back to our hotels as guests feel safe to travel,” said IHG CEO Keith Barr, who was not on Friday’s investor call, in a statement.
The investor presentation Friday was the first since IHG officially defaulted on a 103-hotel deal with Boston-based real estate firm Service Properties Trust, which has since announced plans to rebrand those hotels under Sonesta flags it has a partial stake in.
IHG has repeatedly downplayed the loss of those hotels relative to its global portfolio.
“We have to do right by our shareholders. They need to do right by their shareholders,” Barr said last month at Skift Global Forum. “We were entitled to not fund aspects of the deal. They’ve chosen to terminate the deal. It’s not a big financial impact.”
Service Properties Trust, or SVC, is expected to officially cut ties with IHG at the end of November. The deal is notable, as it goes against general industry thinking at the moment that hotel owners will seek the strength and reach of a bigger brand like IHG compared to a lesser-known one like Sonesta.
But IHG still sees the removal of the 103 hotels as a minimal — and one-time — impact to future profits.
“We have no other portfolios that are anywhere near that size. The next-biggest owner has about 10 hotels,” Edgecliffe-Johnson said. “There’s nothing else we can expect that would have that sort of implication on us.”
Brand Bust and Build-Up
Despite its own portfolio loss to a smaller brand, IHG continues to beat the drum that bigger is better when it comes to hotel brand affiliation.
The company inked new deals for 82 hotels in the third quarter, bringing its total for the year to 263 — just shy of a deal per day. Just over a quarter of the deals signed in the third quarter were conversions, a process where the owner of an existing hotel decides to take on a different brand affiliation.
IHG and other brands, from Marriott to Wyndham, all cite conversions as an expected source of growth out of the pandemic when banks are going to be less likely to finance new construction projects for hotels. Conversions can also be fueled by banks steering owners of distressed assets to bigger brand affiliation as part of renegotiated financing packages.
“I think you will see a bit out of a shakeout. The weaker brands will struggle,” Edgecliffe-Johnson said. “This is what we saw in previous downturns. The stronger brands came through this. I have very little doubt that will be the same this time around.”