InterContinental said in its first quarter results that the limited availability of financing for hotels is slowing down its ability to sign new properties to its system. And it does not see this changing before the end of the year.
This problem highlights that selling off property may have eased the impact of economic cycles but it has far from eliminated them.
When the company was in the middle of its property divestment programme it put forward the notion of future growth coming from a combination of revpar, new rooms and royalty fees.
To an extent, the previous record level of signings is mitigating the dropping revpar. During the quarter 12,440 rooms opened and at least another 38,000 are due to open in the balance of this year.
But the extra new rooms coming on line were only just ahead of the 10,595 rooms removed from the system. These were removed mainly due to non-compliance with brand standards. Over the rest of this year about 25,000 more will be removed.
This means the net amount of new rooms will be just 15,000 in 2009 (during the quarter just 1,845 net new rooms were added). With a system size which stood at 621,696 rooms at the end of the quarter, the level of increase is only just over 2%. This will do little to take the edge off plummeting revpar numbers.
In the quarter, global revpar declined by 13.6% on a constant currency basis.
The good news was that the company can see no further deterioration in demand in forward bookings but it warned that room rates remain under pressure. The second quarter will also suffer from the shift of Easter.
CEO Andrew Cosslett, in a conference call, said: "We expect our rate of net rooms growth will slow with higher removals and slower openings. Our main focus is the continuing support of our hotel owners."
The main factor here is the ability of the IHG system to deliver guests. The numbers indicate this is proving successful so far: the share of revenues booked through the system is now 47%, up a percentage point.
Cosslett believes the downturn is an opportunity for the predominately mid scale IHG to grow its share of business against more upscale players. The company has increased its sales resources and has focused on persuading corporate accounts to reassess their existing policies.
The top priority, however, remains the relaunch of Holiday Inn. To date, 700 of the new look properties have been opened and several hundred more are preparing to enter. The programme will complete as planned by next year.
The rebranding is the main cause of the exits from the system. IHG is maintaining a tough line on brand standards and this has led to a slightly higher than expected level of exits from the system as under pressure owners struggle to keep up.
In particular, there are 20,000 more removals from the Holiday Inn system than had been originally envisaged when the rebranding exercise was planned. Exits had been expected to have peaked last year at 35,000 but this year the level is now expected to be the same.
The quarter saw continuing revenue fall back by 24% to $342m and continuing operating profit drop 44% to $69m. Helping to shore-up profitability are cost savings. These are now expected to come in at $70m below 2008 levels.
The cost saving programme was originally forecast, back in February, to deliver about $30m in savings. The extra is mostly thanks to currency benefits (around $30m) rather than more cuts. Also about $10m is coming from the bonus pool which is not going to be paid out.
The most worrying aspect of the conference call was Cosslett's admission that the hotel industry has not been able to hold rate. He described as being substantially down over the last three to four months.
For IHG, however, the current environment was a chance to show its mettle. Cosslett claimed it is outperforming peers both generally, thanks to its portfolio bias towards the mid scale, and within the mid scale segment thanks to its strong brands.
The IHG pipeline remains the biggest in the industry at 236,343 rooms and 1,696 hotels. About 90,000 of the rooms in the pipeline are under construction with the remaining 146,000 under continuous assessment on progress.
Cosslett admitted that the time it takes to open a hotel in the pipeline is lengthening. Historically it has taken about nine quarters from the signing of a hotel to its openings. This has now extended by almost a quarter and is becoming even longer.
While there has been some flexibility with owners, where IHG feels there is not sufficient progress ultimatums are issued and properties are removed from the pipeline. At this point the owner loses the deposit money which is at least $50,000.
During the current quarter around 7,000 rooms were removed from the pipeline but Cosslett insisted that the level of attrition remains in the historic range.
Defaults are up a little but Cosslett said that even highly leveraged owners are so far finding a way through the current difficult economic climate.
HA Perspective: It is during challenging times that business models are tested. The asset light model is performing well but does not offer immunity from the current downturn.
IHG is benefiting from its scale and its mid market focus. It is even managing to sign new hotels albeit at a slower pace. During the last quarter 46 hotels were signed.
This contrasts markedly with rivals such as Marriott where no new upscale hotels were signed during its last quarter. (IHG signed 447 rooms under the InterContinental brand and 1,239 rooms under the Crowne Plaza flag.)
On the issue of business models, the contrast between IHG and its rivals is less clear cut at first sight. Millennium & Copthorne, for example, an extensive property owner and manager with fairly weak brands, did not have markedly worse results.
M&C's hotel revenue in the first quarter was down 17.9% on a constant currency basis and headline operating profit was down 54.1% in constant currency terms. Revpar was down 18.2%, again on constant currency terms.
The change for IHG on a constant currency basis was revenue down 19%, continuing operating profit down 48% and revpar down 13.6%.
But IHG has more exposure to the US which is further into the current cycle. And IHG's figures do not show the level of leverage exhibited by M&C. A 2.2% drop in revenue in reported currency terms created a 50% drop in pre-tax profits for M&C.
Leverage is also an issue for leased players such as Rezidor. The first quarter for Rezidor saw its loss widen to Eu19.2m from last year's Eu7.0m loss.
The constant currency decrease in revpar was 13.4%.
But Rezidor is moving away from a leased model. All 14 of the hotels it signed in the quarter are fee-based.
These latest results indicate that the speculation about operators switching away from the fee-based model they have been pursuing for the past few years is wide of the mark.