Whitbread increased its forecast for capital expenditure for the full year, as it acquired additional freeholds and looks to continue spending.
Premier Inn is continuing to grow as part of the company’s “ambitious, organic network expansion” while awaiting the opening of the first site under the Hub by Premier Inn flag, which is hoped will aid future growth.
Whitbread currently has 43 new Premier Inn hotels under construction in the UK and expects to open around 4,500 new rooms this year. The group has increased its forecast capital expenditure for the full year, from the GBP360m named at its full year results in April to over GBP400m. Since then, Whitbread has acquired two additional freehold properties in London, in Wimbledon and Farringdon, and said it continued “to see opportunities for further attractive freehold acquisitions”.
The two new hotels will add a maximum of 350 new rooms. CEO Andy Harrison told analysts: “We’re seeing the London property market becoming more competitive, but the fact that we have a strong balance sheet which means that we can write cheques at short notice puts us at a strong advantage. In terms of value, we make sure we get a good site, at a good price.”
Outside the UK Harrison said that “the main thrust of our international growth is ‘capital right’”.
Commenting on the challenge being posed by Travelodge, Harrison said: “Travelodge is very much as predicted. You can see that they are still lapping relatively soft numbers. Most of the revpar growth is coming from rate increases, on a much lower base number. They are in the final stages of refurbishing their rooms so one would expect to see their performance relative to where they were, beginning to improve. They are having no discernible effect on Premier Inn’s numbers.
“In terms of supply growth, we are seeing more supply coming into London. In the UK regions not very much.”
The group said that it had seen a “buoyant hotel market driven by continuing growth in London and clearer signs of economic recovery in the UK regions. Premier Inn grew total revpar by 8.8%, with 3.6% growth in London and 9.9% growth in the UK regions.” Harrison said: “There is a higher level of economic activity. There are more people in employment and business confidence seems to have gone up.”
Strength in the regions was backed by data for May from BDO, which saw “modest” growth in London, which last year saw the UEFA Champions League Final held in Wembley, but strong increases in room rate and rooms yield in the regions.
Hotel operators in the regions saw an increase in rooms yield to GBP45.42, an 8.9% jump on last year, while the average room rate rose by 8.4% when compared to May 2013 to GBP59.85. Occupancy also increased by 0.5% to 75.9%.
Robert Barnard, partner at BDO, said: “After a strong start to the year in both London and the regions, we have seen the regions pull ahead in the last month. Two bank holidays have certainly had an impact as holidaymakers escape to the country for the long weekends, but the real deciding factor for the capital has been the absence of a major sporting event.”
One area in which Whitbread is looking for growth is its Hub by Premier Inn brand. Whitbread so far has a 10-site secured pipeline, of 2,000 rooms, eight in London and two in Edinburgh, with the first site due to open on St Martin’s Lane in London later this year.
London is the primary focus, with the group looking for freeholds or leaseholds. Within the next five years, Whitbread envisages adding 23,500 rooms across Premier Inn and Hub. Of these, it expects 9,400 Premier Inn rooms and 2,500 Hub rooms to come on stream in the greater London area, within the M25 motorway.
Harrison said: “I wouldn’t say that freeholds are more easily available, we’re having to work hard. I don’t think that’s going to have an impact on the growth milestones we have laid out, but it might mean we have a slightly more freehold-oriented mix.”
The concept is focused towards single business travel and double leisure breaks, with rooms that are 45% smaller, leading to 25% lower build costs, 25% lower operating costs and a 30% lower price point. Each Hub room occupies just 11.4 sq metres, compared with an average 21.4 sq metres for a Premier Inn room.
The product will also be technology driven. It will also be the UK’s first hotel with its own app letting customers control their hotel experience, including: the chance to amend the booking, check in online, use your phone as key (once Near Field Communications technology has caught up), set up lighting and temperature before arrival as well as acting as a remote control for the room. Wifi will be free.
Simon Ewins, business development & corporate responsibility director, Whitbread, told Hotel Analyst: “Each Hub hotel will have a new high quality deli and bar F&B concept, developed specifically to address the requirements of the brand’s target customers”.
The decision has not yet been made on whether to expand Hub outside the UK.
HA Perspective [by Chris Bown]: Many of Premier Inn’s new hotels are converted from empty office blocks, and while these were easy to come by during the recession, that is less true now. Demand for office space is improving, in places, but more importantly, a government edict has made it easier to convert them into apartments, without the need to obtain planning permission. So the Whitbread cheque book needs to out-manoeuvre residential developers.
This scenario is less prevalent in the south east, and particularly parts of London where the free pass to a residential conversion has been exempted. But in areas of the capital, planning authorities are becoming wary of losing office space – and in the City, officials have indicated there is enough hotel supply for now. This despite booming occupancy levels, and newcomers such as Motel One, Moxy and Citizen M sniffing around for sites. Best to order a new cheque book?
The additional focus on buying sites doesn’t need to overly restrict the company: once the hotels are up and running, they are attractive assets for investors. Whitbread has completed a number of sale and leaseback deals totalling around GBP140m, with pension fund buyers happy to purchase hotels from such a reliable tenant. The most recent deal, at the end of 2012, released GBP51m from the sale of seven hotels around the UK, to NFU Mutual and Standard Life.
[Andrew Sangster adds]: One of the paradoxes surrounding Whitbread’s current growth is why it is having to fight so hard for sites. It clearly has the strongest covenant of any hotelier in the UK and should easily be winning the match for any site it wants.
But unfortunately, property investors seem so obsessed with chasing yield that they are overlooking the simple matter of whether the tenant can pay the rent. Or more particularly, whether the rent will continue being paid in several years’ time when the business cycle again dips.
Travelodge ought to have provided the warning that was necessary but the market seems to have shrugged off its travails. According to property agents, there appears little differentiation between the operator lessees by property owners and investors when it comes to the crunch even if some landlords talk a good game. What matters with leases, however, is not just the first game, it is the whole season. Some landlords are going to be relegated.