IHG joins race to middle with new conversion brand

LONDON – InterContinental Hotels Group is joining the industry-wide stampede into the lower-middle segment with a soon-to-be-launched new brand targeted at midscale conversion opportunities, Group CEO Elie Maalouf said during the London-based company’s second quarter earnings call on Tuesday.

More than 100 hotels and 80 owners have expressed definitive interest in the brand, according to Maalouf, who added the new brand would be distinct from the Holiday Inn format.

“Conversions represent a major growth opportunity for us, generating around 40% of first half openings and signings globally, and we see an increasing desire from owners to quickly realize the benefits of IHG’s scale and strong enterprise,” he added.

The conversions, which were referred to only as “new brand” formats, Maalouf said, would come at 25% lower cost per key than for Holiday Inn Express.

Conversions represent a major growth opportunity for us, generating around 40% of first half openings and signings globally, and we see an increasing desire from owners to quickly realize the benefits of IHG’s scale and strong enterprise.

Elie Maalouf

Share this quote

IHG expects its new brand to open 500 hotels during the next 10 years and have 1,000 hotels in 20 years’ time.

Maalouf, in his first earnings call as IHG’s group CEO, said the company already has a leading position in the upper midscale segment. In the U.S. alone, it has 545 Holiday Inn and 2,283 Holiday Inn Express properties. He added: “At price points beneath this, the midscale segment is a large target market which IHG only currently addresses through our new-build avid hotels brand and our Candlewood Suites extended-stay brand.”

The expansion news came as IHG reported healthy first half earnings and expressed confidence on future trends. “Travel demand is very healthy", Maalouf said, with RevPAR improving “year-on-year across all our markets and exceeding 2019 pre-pandemic peaks for four consecutive quarters.”

The group opened 21,000 rooms at 108 hotels in the first half, up 40% from the first six months of 2022. In all, IHG now has 925,000 rooms at 6,227 hotels. Overall openings rose 6.3% year-on-year though that figure falls back to 4.8% after closures and exits are considered. Maalouf said net expansion of the entire estate is likely to continue at around 4%.

Helped by demand notably in the leisure segments, RevPAR, Maalouf said, will be 13% ahead of 2019 levels this year and 24% ahead by 2025. Inflationary pressures, however, were adding to what Maalouf called “both the opportunity and the need for higher room rates.”

Tougher comparatives, created as COVID restrictions were lifted in the second quarter of 2022, meant IHG’s preferred measure of RevPAR grew 17% in the second quarter and 33% in the first three months of the year. Taken together, RevPAR grew 24% in the first half. Americas H1 RevPAR was up +11% YOY; EMEAA +42%; and Greater China +94%.

IHG’s definition of underlying revenue showed a 27% increase to $1.03 billion with operating profit up 30% to $479 million in the first half.

Maalouf added that occupancy will be restored to more than 96% of 2019 levels in 2023 and be almost fully recovered by 2025.

Comparisons with pre-pandemic levels of 2019 show a near 7% RevPAR improvement in the first quarter of 2023, 10% in the second quarter and 8.7% for the half.

“The combination of RevPAR and system growth drove further expansion of our fee margin, leading to a +27% increase in operating profit from reportable segments,” Maalouf said. “Our +50% growth in adjusted EPS includes the additional earnings accretion from our ongoing return of surplus capital via share buybacks. The combination of these drivers demonstrates how IHG creates value for our shareholders, and as this industry continues to power forward, we are confident in the strengths of our business model, scale and strategy to capture sustainable, profitable growth.”

There’s to be a 10% increase in the half year dividend. In addition, the company has a rolling share buyback program which, together with the dividends, is expected to return a total of $1 billion to shareholders this calendar year. The sum is equivalent, the company said, to 8% of its market capitalization.

IHG expects to buy in $750 million of shares this year having repurchased $500 million worth between August 2022 and January 2023. It said its ambition was to continue to increase dividends in line with earnings per share and buy in more stock depending on other capital expenditure requirements and group debt levels.

The implication is that share buybacks will continue next year since debt is currently lower than the company’s target range of 2.5-3 times EBITDA.