• Budgets look to speed up growth

Whitbread said it was confident of meeting its openings target for this year, despite the first half of the year being “a little light”.

The company said that it was focused on taking market share, at a time when rival Travelodge increased its rate of openings following its financial restructuring.

Whitbread announced that 758 UK rooms had been opened in the year to date, shy of the 4,500 target for the year. The same period last year saw the group add 1,270 new rooms.

In a call to analysts, Whitbread CEO Andy Harrison said that he was “still confident” that the group would meet the target, after a half which had been “a little light”. The company currently has an estate of 57,495 rooms. The group’s 2016 target is for 65,000 rooms.

Harrison added: “We will need to get the annual room openings up to 5,000 openings per year, we believe we have the pipeline for 5,000 in the next financial year.” The brand’s committed pipeline has grown to around 13,000 UK rooms, from 11,500 rooms at year-end in April.

He added: “When it comes to room openings, we said it would be back-end loaded. We’re doing a number of extensions, which will depend on planning and on whether we have snow at the end of the year, which can delay construction. We’re very pleased with our pipeline and we’ve been very pleased with the new site acquisition that we’ve done.”

 The group is continuing to look to London, where it is focused on taking market share. Harrison said: “Freehold is our preferred method of holding sites. The push into London means that when we find sites they can be a large amount of money and that moves the liability towards being on balance sheet debt, but we believe London is a good place to put our money.

“There are some freehold opportunities in our negotiation pipeline. Our ability to move quickly and write cheques literally at a few days’ notice means that we can win. On some bids we have been outbid, but because the buyers couldn’t complete, we have won because of our speed and credibility.” In the capital the company has seen 9% growth in room capacity, and reached almost 89% occupancy.

Commenting on the group’s target of 75,000 rooms by 2018, Harrison said: “These are targets designed to stretch the management team to deliver. I can’t sit here and say that 75,000 bedrooms by 2018 is a slam dunk guaranteed. That isn’t to say we’re not going to do it, we’re in good shape to deliver, but we need to keep doing what we’re doing. We’re very excited by Hub, which is quite an important lever for us to pull.”

The first hotel under the group’s Hub brand is due to open in London in November, with a pipeline of 11 hotels behind it.

The group faces a further challenge under plans to churn 1,000 to 2,000 rooms over the next five years, in part due to the end of agreements such as its franchise with Spirit Group, which Harrison said accounted for 200 to 300 rooms. The CEO commented that: “we haven’t thought yet about whether we will update our milestones in April 2015”.

Revpar for the period was up by 8.7%.  Harrison said that he was “not in the weather forecasting business” and warned: “revpar is a slightly slower rate of growth than we’ve seen in the past,” with the group facing tougher comparatives in the second half. He said: “I would expect to see a more challenging winter in terms of weather” and forecast full-year revpar growth of 5.5% to 6%.

Whitbread reported total occupancy at an all-time high of 87%.

The results came as Travelodge filed accounts for the year ending 31 December 2013 and said that it was confident it was “well placed to achieve our ambition to become the favourite hotel for value and perform well in a sector which is forecast to show good growth over the next few years”.

The company saw turnover increased from GBP391m in 2012 to GBP426m, with an operating profit of GBP17.5m, against a loss of GBP84.2m for the previous year. Revpar had risen by 4.6%.

The group said that, following the 2012 financial restructuring, it had undertaken a GBP57m investment programme in its rooms, with over 80% scheduled to have received a refit by Autumn this year.

Following the group’s company voluntary arrangement, it had cut debt from GBP1.068bn prior to the restructuring, to GBP431.7m at the end of 2012.

Also after the CVA, the group saw a cash injection of GBP75m, in the form of equity and loan notes, which is not due for repayment until 2026 (on a coupon of 17%). This money was earmarked for refurbishment of the older rooms in the estate.  In addition, the repayment date for the senior debt was extended from 2014 to June 2017.

The company has been increasing its rate of opening, adding seven hotels, with a total investment of GBP73m in 2013 and a further 12 hotels, with an investment of GBP83m, expected this year. Travelodge said that, looking at data from Smith Travel Research concerning the penetration of brand hotels in the UK midscale and economy market, compared to markets such as the US and France, there was still “significant room for growth”.

A sentiment shared by both Travelodge and Whitbread share.

 

HA Perspective [by Chris Bown]: Whitbread management regularly sets itself challenging targets, and the market is used to it beating them. So it is curious Harrison appears to be wishing a cold winter on the UK, so he has an excuse to miss openings and revpar targets. If business growth is getting tougher, then it may be time to downgrade those aggressive targets.

That said, expanding the operation into London was always going to be harder than building on greenfield sites in the provinces. Sites are inevitably redevelopments, permission for conversions is harder to obtain, and the capital’s crazy residential market means flat developers can outbid Whitbread on sites. Once the Hub pipeline starts feeding through into openings, the company should resume delighting investors.

The other issue Premier Inn will have to face is managing expectations regarding occupancy. It is achieving phenomenal figures, with steady growth, but the nearer to 100% the numbers go, the harder it will be to balance growth, the value for money proposition – and customers getting bumped.

Any bumped guests could well end up in a Travelodge – and they may be in for a pleasant surprise, as the refurbishment of bedrooms across the portfolio is almost complete. But as the company’s accounts show, a good long spell of profitable operation will be needed, to help pay down some of the remaining Travelodge debts.

The new owners recently gave the business a vote of confidence, buying a substantial portfolio of the Travelodge properties. It also presents them with an opportunity to restructure the leases on the hotels – and therefore the rents being paid – should they so wish.

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