Global Hotel Leaders Are Not Always Who They Seem
June 26, 2014 10:17am
Since the IPO of the global number 2 Hilton Worldwide in December 2013, the top global hotels are now all listed on the stock exchange. For these groups, the notion of leadership is no longer measured only against their hotel supply, but also through their economic model, their turnover, their operating profit (EBITDA), and above all the market value of the company tied to the price of their shares. Each of these elements offers new insight into the global ranking and also the fundamentals of the hotel sector.
In terms of room supply, the ranking of leaders in 2014 is as follows: IHG is ahead of Hilton Worldwide, Marriott International, Wyndham Hotels Group, Choice Hotels, Accor and Starwood Hotels. However, the economic models of these seven leading groups are very different.
The fast development of the “asset light” model in recent years caused all the groups to become major franchisers. In this field, Wyndham Hotels Group, 4th in the global ranking, rightly claims to be the number 1 franchiser worldwide. Its strength in this area is still mostly in North America, but the group is currently diversifying geographically through important developments in Asia and in Europe. Behind Wyndham, the pure franchiser Choice Hotels and IHG also both surpass the threshold of 500,000 branded rooms through franchisees.
Inversely, the French group Accor stands out for its strong share of owned and leased hotels: its weight in this area (more than 190,000 rooms) far exceeds that of other groups, that all have fewer than 30,000 owned or leased rooms. This explains why Accor integrated these owned or leased properties into a specific division, HotelInvest, while its other division HotelServices brings together franchised and managed properties whose model is more comparable to that of other listed hotel groups.
Marriott International takes the lead with the most rooms operated under management contracts (more than 280,000), ahead of Starwood Hotels, Hilton Worldwide and IHG, each of which has between 180,000 and 190,000 rooms under management contracts. The strength of these actors in this field is also due to their brand portfolios, and more particularly to the importance of upscale and upper upscale brands within these groups. Indeed, management contracts are used extensively on this segment.
This is also leads to the predominance of management contracts at Starwood Hotels & Resorts (more than 55% managed rooms): unlike its competitors, the group has no brands positioned on the economy segments where the other detention modes, particularly franchise, are more widespread.
The different detention modes directly impact the turnover generated by these groups. Operators working primarily through franchise such as Choice Hotels, Wyndham Hotels Group or IHG generate significantly lower turnover per room compared to groups with a higher proportion of owned, leased or managed hotels.
In fact, franchised hotels generate mostly fees for services provided by the group, «net» of operating costs (salaries, purchases…) borne by the franchisees. Inversely, a group like Accor, which operates hotels directly, takes home all the revenues generated in its turnover and assumes the associated operating costs. In the same way, the particularly high overall sales turnover of Marriott International may be explained by the integration of the turnover and costs of its more than 280,000 managed rooms. This accounting particularity of Marriott International justifies its position as number one worldwide in terms of turnover ahead of Hilton Worldwide, Accor and Starwood Hotels.
While the total number of owned or managed rooms strongly influences reported sales, the reading slant with respect to the detention mode disappears with the analysis of the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), which corresponds to the operating profit of groups, or the turnover minus operating costs. This unit of measure puts models that generate low sales and costs on equal footing with models that integrate both sales and costs of operated hotels in their profit and loss statements. This also explains why EBITDA is so widespread in the hotel industry, where it is often used as a basis for calculating the valuation of hotel assets or non-listed hotel companies.
Relative to the room supply of hotel operators, Starwood Hotels produces the highest EBITDA, with more than $3,700 EBITDA per available room in 2013, ahead of Hilton Worldwide (more than $3,250), Accor (close to $2,600), Marriott International (more than $2,000), Wyndham Hotel Group (more than $1,750), IHG (close to $1,100) and Choice Hotels ($400).
The ranking of the leading listed operators turns out to be quite different in light of the EBITDA. In this regard, Hilton Worldwide is number one with a 2013 EBITDA greater than 2.2 billion dollars, ahead of Marriott International (1.33 billion), Starwood Hotels & Resorts (1.26 billion), Accor (1.19 billion dollars, for a dollar/euro exchange rate of 1.379 on January 1, 2014), and Wyndham Hotels Group (1.13 billion). These four actors form a tight group of followers, ahead of IHG and Choice Hotels which are beneath the symbolic billion dollar mark.
The large differences also depend on the hotel ranges offered by these groups: once again, the fact that Starwood Hotels offers mostly upscale and luxury hotels boosts the group’s average EBITDA per available room. The opposite is true for Choice Hotels whose park mostly consists of budget, economy or midscale units, and IHG, whose offer is dominated by the Holiday Inn and Holiday Inn Express units (with more than 439,000 rooms in 2014). Despite this categorical slant, it is noteworthy that the biggest franchisors –Choice Hotels, IHG or Wyndham– generate a weaker annual EBITDA per available room. Inversely, the relative performance of the French group Accor is surprising as it is the only global actor with a dominant economy and midscale supply that generates an EBITDA per operated room higher than $2,000 per year.
Thus, if the "asset light" models (particularly involving fewer owned hotels) have been popular in recent years, it is yet to be confirmed that the franchise model necessarily generates higher recurring cash flow. Naturally, asset disposal operations generate immediate cash-flows available to shareholders, but the shareholders also monitor the market capitalization of groups. Beyond the short-term or recurring cash flow generated by groups, it is the share price that produces the immediate value of exchange that shareholders may draw from a listed company by trading shares.
In this regard the ranking is still different: the newcomer Hilton Worldwide dominates with a market capitalization of 22.3 billion dollars as of June 1, 2014, ahead of Marriott International, Starwood Hotels, Accor, IHG, Wyndham Hotels Group and Choice Hotels. In terms of market capitalization per room, Starwood Hotels is the leader at more than $45,000. However, because there are different capitalistic structures (percentage of floating shares on the stock exchange with respect to the total number of shares issued, amount of the debt…), the global financial value of groups is not measured only through their market capitalization. It is the "enterprise value" that measures the theoretical cost of the full buyout of a company with assumed debt and minority participations.
On this basis, Hilton Worldwide is number 1 on the financial markets. This is true for absolute value, with an enterprise value more than two times higher than that of Starwood Hotels, closer to Wyndham Hotels Group and Accor.
The enterprise value of hotel groups depends on the profits generated (measured with EBITDA and earnings per share), and also on a "premium" attributed by the financial markets. This reflects market expectations with respect to the future perspectives of operating performances, as well as the value of immaterial assets such as brands or the rareness of operated hotel assets. This premium is realized through the financial notion of the "EBITDA multiple": the higher this multiple, the higher the value of the firm on the stock exchange with respect to its competitors, on a comparable earnings basis. On this scale, the groups Marriott International, Choice Hotels, IHG and Hilton Worldwide share leadership, as they are traded with an EBITDA multiple between 15 and 16 as of June 1, 2014. Inversely, Starwood Hotels is traded at a discount of about 15%, Wyndham Hotels Group 20%, and Accor more than 30%.
In this context, it is understandable that the French group’s shareholders have been eager for several years to make the group’s economic model resemble its main competitors. Its share of owned hotels, considered too large, is in the line of fire. And yet, the historic pattern of market capitalizations for the biggest hotel groups worldwide tells a different story. While Marriott International, Starwood Hotels and IHG all evolve in a very synchronous manner on the financial markets, Accor follows a different trajectory and Choice Hotels stands out for its strong resiliency. The market capitalization of these groups visibly reflects the economic situation of their core geographic markets: North America for most, Europe for the French group, which unlike its American homologues is still well below its pre-crisis level. From a broader perspective, the strong volatility of market capitalization raises the question: does the creation of rooms by hotel groups still generate value? While in the previous decade the room supply of major groups worldwide increased significantly, their market capitalization in 2013 and 2014 barely regained their levels of 2004.
Whereas the major hotel groups, aside from Accor, mostly regained their pre-crisis levels, the market values per room at most groups have not. Bullish analysts will see potential for further rebound, bearish ones will wonder about financial value prospects for hotel groups whose ability to generate profit is increasingly challenged by tech giants.
This article is an extract of the "2014 Worldwide hotel activity report" published by Hospitality-On. The full version of this article, with data, can be accessed here.
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Contact: Georges Panayotis
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