Whitbread told investors that the hotel market was “weaker than expected, particularly in London” and blamed rapid expansion for falling revpar.
The company is planning to sell the property at its Hub by Premier Inn in London’s Kings Cross. These plans were made prior to the EU referendum, in which it said it had “a number of levers to pull” whichever way the vote went.
Talking to analysts, Brittain said that the company had continued to build market share, despite a “weaker-than-expected market”, particularly in London.
The CEO said that concerns over terrorism, heightened by the attacks in Paris, had hit revpar, alongside caution ahead of the EU referendum, which had seen people rein-in spending. In February the Whitbread board issued a statement in which it backed the Remain vote and warned that uncertainty and lengthy negotiations “would be both unwelcome and potentially damaging to our business”.
In London, the company said it was outperforming, with total sales up by 5.6% in the 13 weeks to 2 June. Premier Inn like-for-like revpar was down 3.0 % reflecting, CEO Alison Brittain said: “A soft market and the impact of our extension programme”. The figures compared with a 3.5% drop in revpar for the midscale and economy market in the capital. Total revpar was down 6.0 %, diluted by the high number of rooms opened in the final quarter of last year.
In the regions Premier Inn grew total sales by 8.5%, with like-for-like revpar up by 0.3% and total revpar down 0.2 % “again diluted by the number of rooms opened in the final quarter of last year.” Revpar was up 3.0% for the midscale and economy market, according to STR Global.
Whitbread added 3,600 rooms in the final quarter of last year, and plans to open between 4,000 to 4,500 more rooms by 2017. The group now has four Hub units open; three in London and one in Edinburgh, with a pipeline of 12 units. The end of the period saw the company at 67,438 rooms, having added 474.
Where there were no extensions, the company saw revpar up 0.8% across the group. CFO Nicholas Cadbury said: “The impact of extensions was around 1.3% on revpar. We thought that was going to be more exaggerated in the final quarter and we’ll wait and see for the rest of the year.”
Looking at revpar for the year ahead, Cadbury said: “In April STR had a forecast for the hotel market of 2.5% and a couple of weeks ago it cut this to 0.5%. We’re seeing softness in both leisure and business at the moment.”
The group is marketing its flagship Hub by Premier Inn hotel in King’s Cross, which is currently being built, looking for a total of GBP80m in a sale-and-leaseback deal, with an initial payment of GBP46.5m and the remainder helping to fund the development. The company described acquiring commercial property, “particularly in London” as “expensive, so we’re looking at the best use of our investment capital to grow the business”. The 389-room site will be the largest for the brand.
Cadbury said that, while the company would not comment about specific sites, it was “looking to raise between GBP100m and GBP150m through sale-and-leasebacks this year. And that’s making good progress”.
He added: “If you look at our London performance over all, the market has been softer but it is still a strong market – our occupancy is in the 80s. If you look at asset prices, over the past couple of years those have increased, we still have a pipeline of 4,500 rooms, but we have rejected more over the past year as they are getting more costly, but prices haven’t risen in the past six months.”
The company could yet face competition. Karen Friebe, partner, head of hotels group, BLP, told us: “Our hotel clients are watching events unfold on a daily basis following the Brexit vote. The global operators seem reasonably sanguine so far because of their geographical reach, but owners of and investors in UK assets are not. Overseas investors are weighing up the market, some wondering whether uncertainty and market caution will present opportunities – and on better terms – than have been available to them in the overheated hotel market of the last few years.”
Whitbread continues to invest in infrastructure, with a view to greater efficiency and is employing a new dynamic pricing system which is expected to have a better yield which Brittain said would “drive out anomalies and reduce manual intervention” while reducing volatility in last-minute bookings.
Brittain concluded: “With our strong brands winning market share, we remain confident of making good progress over the rest of the year.”
HA Perspective [by Katherine Doggrell]: Brittain was due to meet with outgoing prime minister David Cameron, in her role as a member of his business advisory group, after his return from Brussels. At the time of writing, the company’s share price had fallen by just over 10% in one day. For a UK-based brand, which leans on domestic travellers, Brexit is not good news.
Prior to the current turmoil, the company had warned that its rapid expansion was having an impact on performance and, just as the market looks to be tailing off, the target of 85,000 rooms by 2020 looks like something which could stand to be delayed.
Cadbury noted that asset prices had not risen for the past six months in London – a feature of pre-Brexit jitters – and this could help the company pursue its ownership-led growth for Premier Inn at prices less toppy than they had been. Although, with Kings Cross on the market, this could cut both ways.
The market is currently wobbling. Tom Page, global head of hotel & leisure group at CMS, confirmed that he had heard of his first hotels investment deal where the Brexit clause had been invoked and the deal had terminated prior to completion, but that other hotel deals with Brexit clauses were continuing without termination being triggered. But “the world,” he said, “will go on”.
At Friebe pointed out, there are opportunities for some overseas investors. For those from the US, however, who have been busy buying the regions, the plunge of the pound is going to make it hard to cash out and that market is likely to see a drop in transactions volumes.
The last downturn saw a spirited performance from coffee houses – the general public will deny itself a new washing machine, but a small daily treat was seen as allowed, required, even. A mismatch in performance between Premier Inn and Costa Coffee will only serve to increase calls for the two to split. A popular theme.
Additional comment [by Andrew Sangster]: There is no question that Brexit has caused significant jitters. Buyers have pulled some deals and, perhaps more importantly, others have decided not to explore opportunities.
But with the investment clouds comes a revpar boosting silver lining in the form of the currency devaluation. With Sterling trading at 30-year lows, the UK has become a much more attractive destination to foreigners.
And indeed for investors with an appetite for risk, buying UK assets is also more attractive now than before the Brexit vote. For those already invested, such as US opportunity funds who have deployed money raised in US dollars, Brexit only looks bad news.
While those funds deployed a few years ago might still be in the money, the gains from more recent deals will have been wiped out by currency moves and the as-yet-uncertain decline in values.
Uncertainty seems certain for months and probably years. This is not good for business and has pushed down prices and increased yields. It is still too soon to have any clear insight as to how big the problem is.
Back in 2009, Armageddon was forecast for UK hotels. Some forecasters predicted revpar would drop close to 50%. This was well wide of the mark. The out turn for UK hotels, particularly London, was much more benign.
The GDP decline in 2009 was unprecedentedly bad but despite the received wisdom that hotel performance tracks the economy, hotels proved resilient. The decline in currency is believed to have been an important factor.
This time around, the economic decline is likely to be much less severe. And yet the currency drop is even bigger. Could there be a big performance bounce for UK hotels as more foreigners visit and UK nationals choose to holiday at home? Perhaps. Will this make up for the impact of disrupted deals and trading? Doubtful.