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IHG's Strategy Pays Off

InterContinental Hotel Group is lightening its load. The London-based hotelier is aggressively disposing of assets and ramping up its franchise and management lines of business.

The strategy appears to be working. Second-quarter earnings doubled for IHG. Net income in the recent quarter was roughly $309 million, compared with $93 million a year ago.

“InterContinental has done an excellent job in turning around what we believe was once an under-managed subsidiary of a wider leisure conglomerate,” JP Morgan analysts reported on Aug. 22.

Behind the earnings is a strategic shift from owning hotels outright into expanding its network of franchised and managed hotels. With 540,000 guest rooms in 3,650 hotels, InterContinental operates the most rooms of any hotel company and has 130,000 in the pipeline.

The company sold 175 hotels and returned about $4 billion to shareholders in the three years since it broke away from beverage maker Six Continents to form its own company.

The franchising and management business provides for a less volatile, higher-quality income stream that insulates InterContinental from the ups and downs of the hotel and real estate industries, according to Leslie McGibbon, the company's vice president of global corporate affairs. “If you're collecting a fee, rather than taking all of the profit or all of the loss, it's far less cyclical.”

InterContinental will continue to own a handful of flagship hotels in key markets, including New York, Paris, London and Hong Kong. The company doesn't want to risk losing the management of those properties because they would be difficult to replace, McGibbon says.

Most of the capital that was once tied up in real estate has gone back to shareholders. The company plans to announce further disbursements by the time it reports 2006 results next February.

At present, the company has more than 1,000 hotels representing $11 billion worth of partner capital under development. “Working with development partners enables us to grow faster,” says McGibbon.

InterContinental's efforts to exit the real estate business have been tested and proven by other brands, according to Clyde Guinn, senior vice president with Stanford Hotels Inc., a San Francisco-based owner and operator of hotels. “Wall Street is pressuring hotels to get out of real estate and focus on management.”

“The three components of the hotel business are real estate, branding, and daily management and marketing at the local level,” Guinn says, adding that few companies do all three well.

In the mid-1990s, Marriott had trouble refinancing many of the hotels and resorts it had developed and began to divest itself of much of its real estate while eying franchise and management fees for revenue.

More recently, the Hilton and Starwood lodging groups have been pushed to divest real estate by shareholders and analysts who felt the companies shouldn't leave capital tied up in properties with soaring fixed costs. Hotel operating expenses grew by 6.5% in 2005, reports PKF Consulting.

Expect more dispositions in the near future, too. Guinn of Stanford Hotels believes that the hotel industry will continue to offload real estate onto investors with real estate expertise because there is little skill overlap between real estate and the rest of the lodging business.

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