Recent Hotel Earnings Tell Us Brands See Resilience in Development Pipelines

• Updated on: 2022-11-18
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While economic storm clouds gather, public hotel companies said in earnings calls that their deal and development work remains largely strong — and intact.

Earnings seasons for the hotel sector is nearly over, and one striking aspect of executive comments on calls with investors was the resilience of development pipelines for hotels belonging to brands run by global groups. For new construction, conversions, and franchise signings, hotel companies painted an optimistic picture.

The U.S. market was still among the world’s robust during the third quarter. Choice Hotels, which has a heavy presence in the U.S., reported that in September it saw a 23 percent increase year-over-year in new domestic franchise agreements awarded. A majority were for conversions. Demand for its new construction brands rose by about 30 percent in the third quarter, year-over-year.

New construction in the U.S. has faced a relative slowdown for more than a year, first because of supply-chain and labor disruptions and then because of interests rates rising making it somewhat harder for developers to get debt to finance projects. But southern states have held up better.

In the North American market, owners tend to get financing through regional banks, which have been generally slower to approve loans this year, noted IHG’s chief financial officer, Paul Edgecliffe-Johnson. By contrast, owners in some parts of the Middle East and Asia Pacific get loans through relationships to banks built on links to other businesses. This liquidity has remained comparatively more fluid, he said.

Hilton said its construction starts outperformed expectations in the quarter, largely due to better activity in the U.S. as the cost of materials stabilized and demand for residential construction declined. It has been the only major U.S. hotel company to deliver year-to-date growth in its under-construction pipeline, according to data benchmarking firm STR.

During the quarter, Hilton signed about 20,000 rooms, bringing its pipeline to a record 416,000 rooms — half of which are under construction. While its international signings are below the historical average, the company still forecasted net unit growth of about 5 percent for the year — not too far off its historical growth rate of 6 percent to 7 percent.

IHG continued to hold onto an aspirational goal of having 4 percent year-over-year net system growth. Edgecliffe-Johnson implied that the owner of at least one significant portfolio of hotels of an average or above average worth would join its system by year end. Without the deals, the company will likely be at 3 percent year-over-year.

Over at Hyatt, when asked whether the company would be able to sustain its 6.5 percent year-over-year growth in its network next year, President and CEO Mark Hoplamazian said yes.

“Things are firming and we have actual openings to point to in the near term, and we’ve got other portfolio deals on which we’re working, all which give us great confidence that we’re going to sustain this net rooms growth into next year,” Hoplamazian said.

Accor, whose large portfolio of properties in Europe exposes it to more of Europe’s recessionary turmoil, forecasted its net rooms growth to be at 3.5 percent year-over-year.

“Despite a tough interest rate environment, we see our development prospects as very solid,” said Jean-Jacques Morin, deputy CEO and chief financial officer, who added that the company’s pipeline is “stable” at about 212,000 rooms.

In the UK, the economic situation soured significantly in September and October. Yet Whitbread executives raised their long-term development goals for its Premier Inn brand from 110,000 rooms to 125,000 rooms. Executives thought that the economic pressures of the next year or two, coming after the long pandemic, could pressure many independent hoteliers to sign up for its flag. A recession could also shift travelers into the value end of the market where the brand is.

An increasingly cautious European approach to hotel growth was evident at Scandic Hotels, a Stockholm-based company that typically owns its owns properties. It opened 10 hotels this year, an all-time high, which boosted the company’s rooms under management by about 6 percent year-over-year.

Yet Scandic has modest ambitions for next year.

“[In light of] the economy, it’s maybe good that we have less openings in the coming year,” said CEO Jens Mathiesen. “We have one opening in Q1, and that’s the only one next year. Also meaning that we have limited growth in capital expenditure for next year and thereby can steer the net results a bit better…. We will be adding hotels to the pipeline, but that will be hotels opening up in 3, 4, 5 years from now.”

China’s pandemic restrictions have dampened development there. IHG, which appears to have the largest ground game in China among its peers, said still outstripped openings by more than two to one.

“The actual way development gets done on the ground in China is still very much a face-to-face culture, so that’s affecting our level of signings at the moment,” said Kevin Jacobs, chief financial officer and president of global development. “There’s a lot of demand for our brands, particularly Hampton and Home2 that are just getting started and then we’re rolling out Hilton Garden Inn franchising. So that’s sort of a long way of saying we think the trajectory is up over time in a material way. But in the short term, you do have some choppiness.”

An unknown factor is how severe turmoil in China’s property markets may change the hotel ownership and development strategy of several Chinese companies, including Jin Jiang, which owns, operates and manages about 1,500 hotels with about 235,500 rooms. Jin Jiang is a minority stakeholder in both Accor (at about 13 percent) and Raddison Hospitality (controlling shareholder).

But many other parts of Asia are looking up. In Singapore, this year’s combined hotel room revenue of $1.4 billion so far is more than double that of last year, inspiring developers to invest.

Steady pipelines are desirable because companies generally start earning marginal revenue with each unit that opens.