China sweetens IHG’s bitter year

IHG Nottingham

Trading strength in Greater China brought good news to an otherwise dreary set of financial results at IHG Hotels & Resorts, the company which counts Holiday Inn and Crowne Plaza among its brands.

Fourth quarter revenue per available room in Greater China retreated by a relatively modest 18%. Moreover, recent RevPAR figures from Greater China are much better than its year-long average fall of 41%.

Companywide, IHG revenue per available room fell 53% in the fourth quarter and was down roughly the same for the year as a whole.

The biggest slumps in annual group-wide gross revenue came among the more expensive brands. InterContinental and Kimpton dropped 60% and 71% respectively while Holiday Inn Express fell 42% and Candlewood Suites only 22%. Revenues at Crowne Plaza took a 57% hit.

The pattern of IHG’s groupwide month-by-month RevPAR in 2020 was similar to that which rivals have been reporting in recent days. A sharp drop in March and April was followed by a recovery which ran out of steam in the fourth quarter.

As the year progressed, however, Europe lagged behind the worldwide average. Trading was a little better in the US.

RevPAR in continental Europe in the last three months of the year crashed 86%. Fourth quarter RevPAR in the UK fell 74%.

RevPAR in the Americas fell 50% in the fourth quarter. Comparable numbers for the US were a little better.

Keith Barr said that the COVID-19 pandemic was the “biggest challenge ever” for the hotel industry. “Demand,” he said, “fell to the lowest levels ever seen.”

He said that 2021 has started with many challenges still in place and suggested “more meaningful progress” was “unlikely until later in the year and dependent on global vaccine rollouts, lifting of restrictions and an acceleration in economic activity.”

He said the company has reacted to the crisis by reducing costs, preserving cash and conserving balance sheet strength.

Net debt was $2.5 billion at the end of 2020, slightly lower than the $2.7 billion figure at the end of 2019. IHG loan covenants include stipulations about interest cover and leverage. The unrevised covenants say that IHG interest payments should be covered at least 3.5 times by earnings before interest, tax, depreciation, and amortisation. Net debt is meant to be no more than 3.5 times EBITDA.

These conditions were waived for 2021 and reset for 2022 at greater than 1.5 times for interest cover and less than 7.5 times leverage. In 2023, the numbers are greater than 2 times interest cover and less than 6.5 times leverage.

Interest cover at the end of 2020 was 2.5 times, compared to 9 times at the end of 2019. Leverage was 8.7 times against 2.5 times.

The company said: “The Group is in compliance with all of the applicable financial covenants in its loan documents, none of which are expected to present a material restriction on funding in the near future.”

Mr Barr added that while the impact of the pandemic was severe: “our industry has recovered strongly from previous cyclical and exogenous events, and the long-term attractiveness of our industry and future growth potential remains unchanged.”

Normalisation, however, is still some way off, he said, adding that 2021 and 2022 would be “transition” years.

Total revenue for 2020 fell 48% to $2.4 billion from $4.6 billion. The loss for the year was $260 million against a profit in 2019 of $386 million.

There is no dividend. No mention was made of mergers and acquisition rumours that circulated last summer linking IHG with Accor, its French counterpart.

Insight

Let’s talk about debt. It is an industry-wide issue, especially for companies that own properties. Not only is there less income around to pay interest, owners have headaches about declines in value of bricks and mortar. Companies largely using franchise or management models – asset light models – are less vulnerable. But it is still a worry.

IHG is asset light. Investor attention focuses on two measures: the relationship between income and interest obligations; and between income and net debt. Some variety of EBITDA is usually used as a proxy for income.

At IHG, the 2020 numbers are not quite off the scale but neither are they at all comfortable.

The likelihood of eventual recovery will ease pressure. Meanwhile, IHG deserves credit for persuading its lenders to relax covenant conditions in the way it has. IHG also presented its debt figures in a clear and easily accessible fashion. This helps confidence because it removes uncertainty. At the same time, coyness and obfuscation elsewhere may suggest rivals are more worried about their balance sheets.

Nevertheless, wow. IHG’s interest cover and leverage are startling and are likely to remain problematic for a while yet.