Whitbread plc (OTCPK:WTBCF) Q2 2023 Earnings Conference Call October 25, 2022 4:15 AM ET
Company Participants
Alison Brittain – Chief Executive Officer
Hemant Patel – Chief Financial Officer
Conference Call Participants
Jamie Rollo – Morgan Stanley
Vicki Stern – Barclays
Jarrod Castle – UBS
Leo Carrington – Citi
Alex Brignall – Redburn
Tim Barrett – Numis
Ivor Jones – Peel Hunt
Desmond Taljaard – LR Ventures
Operator
Good morning, everyone, and welcome to the Whitbread H1 Full-Year ’23 Interim Results Call. My name is Seb, and I’ll be the operator for the call today. [Operator Instructions]
I will now hand the floor over to Alison Brittain, CEO, to begin. Please go ahead.
Alison Brittain
Good morning, everyone, and thank you for joining us for the half-year results. I’ve got the Group CFO, Hemant Patel, here with me today and some of the IR team as well. So, we’re all here. I’m looking forward to answering your questions later. I hope you’ve had a chance to review the results release already and watch the presentation.
But I will start the session with a very brief overview of the results before we open up the call for questions. So, I guess the overall performance, the first thing to say is the overall performance in the first-half was really good. It was outstanding. Revenues and profits exceeded pre-pandemic levels, and we continue to significantly outperform the rest of the U.K. market. And that outperformance is in large part due to the continued execution of our investing to win strategy. That investment that we’ve made over the last few years has meant we’ve been particularly well positioned to capitalize on what’s been a strong market recovery in both the U.K. and Germany.
So if we take Premier Inn first, the hotel performance in the U.K. was excellent. Accommodation sales were 35% up versus the pre-pandemic levels, and we continued to outperform the market by 26 percentage points. And that’s thanks to our scale, the strength of our brand, our direct distribution model and the quality and consistency of the customer proposition.
We’ve continued over the last few years to add more rooms and we’re filling those rooms at good rates, always mindful of continuing to offer great value for money for our guests. We’ve recently completed our latest network planning exercise. We’ve talked about that before. But now it’s finished. And we believe there is an even greater opportunity for growth in the U.K. and Ireland. So, we’ve increased our long-term network target from 110,000 rooms to 125,000 rooms. And as you know, we now have — at the moment, we currently have 82,700 rooms open today.
And in Germany, we’re also making great progress. We reached an important milestone during the second quarter when the cohort of 18 hotels that have been trading for the longest for just over a year, they turned profitable. That’s a great achievement, and it increases our confidence in getting to the long-term goals for this large and exciting market.
We’ve got plenty of cash, and our balance sheet strength underpins our core business model. And that ensures that we can continue to invest in the business in a confident way and from the execution of our business strategy. And we’ve been able to do that as evidenced by being able to do that through the last few years, which have been challenging to say the least. And it’s that investment that’s left us stronger and well placed to continue to extend our market-leading position.
We do have a disciplined approach to managing returns and capital, which we’ve had for many years and which we continue. And we have a capital allocation framework that allows us to think strategically and try and strike the right balance between ongoing investment in our business and in our teams, maintaining the balance sheet, delivering attractive long-term returns to shareholders through both dividends and possible capital returns.
We actively and regularly manage these priorities based on our financial performance and on the outlook under a range of different scenarios. And so we’ll provide further update on this at the time of our next full-year results, when obviously we will have further visibility and a view on the broader business and economic environment.
You’ll see in the results that we’ve returned to paying dividends. We did that at the end of last year, and this is our — our half year dividend is 24.4 pence per share, and that will be paid in December. Our current trading position is strong. And despite the macroeconomic uncertainties, our outlook is positive and we’re excited about the significant and increasing growth opportunity that we have across the U.K., Ireland and in Germany.
Now that’s the end of the sort of performance section. But before we hand it over for questions, I thought I should update you on the topic of my departure as CEO, because I know many of you want to ask that, but then don’t like to in case it’s rude. So, I thought I’d just cover it straight away. I’ll be delivering the next financial update, which is in January 2023, and then we’re expecting Dominic Paul to arrive as my successor, certainly by mid-January. And he and I will then have a very orderly handover for a few weeks thereafter. So whilst this is not technically my last results presentation, I think it is my last big results event, where it’s a much more significant event at the half-year and full-year than at the quarters, which is just an update. So, I did want to spend a minute or two just reflecting, to indulge me, reflecting over the last seven years.
And I guess the first thing to say, it’s been a wonderful time and Whitbread is a fabulous business with brilliant operational and support center teams and colleagues and a fantastic Executive Team. And I’d like to just take a moment to thank them for being such fantastic colleagues throughout the period. And if I think about the seven years that I’ve been in the job, I mean, like eighth year now, actually, then it’s been a period of economic and political and social upheaval and quite a lot of instability. But the stability of our own team here at Whitbread has been strong. And I think that’s been important to get through this period.
We only had one CEO. We have transitioned our CFO, but then Nicholas had done nine years, and Hemant had worked for us for three years. So, I think a seamless transition. And we did have a Chairman transition. Again our new Chairman Adam having already served as Senior Independent Director on the Board, so a degree of continuity. I will point out, although, it’s a little mischievous, but in the same period, we’ve had five Prime Ministers, seven Chancellors, six Home Secretaries and six Foreign Secretaries. And we also had a Brexit vote in 2016, followed by the uncertainty of exit until January 2020, but no trade deal until a year after that.
We’ve had a recent cost of living inflation crisis, with inflation at the highest levels in 40-years, a war in Europe on the doorstep of our business in Germany. And of course, less we forget the matter, the very small matter of a global pandemic. So if that sounds a lot to manage over seven years, you’d be wrong, because in some ways, it isn’t. Whitbread’s 280-years old, and it’s been through lots of difficult periods in that time. And I suspect some of my predecessors would call me a bit of a worst for even mentioning these issues. And they’d say, you didn’t dive in the Industrial Revolution or a couple of World Wars.
And so actually, we are a long-term business. We’re a long-term investment business, and we have to think about running the business as a long-term business. When we build a hotel, it’s a 30 to 50-year investment. They take three years or even four sometimes to build. Sometimes we take three years just to get planning permission. And it takes the same amount of time to mature.
So any CEO who really has the privilege of doing this job and it is an enormous privilege, is just a custodian of a great company for a few years. And I think has to spend their time protecting what’s vital to the long-term success of the company, whilst trying to innovate and strengthen the new areas for the future. So it’s been a great run. It’s been fantastic. I’ve enjoyed my time here enormously. I think we’ve delivered a lot despite the instability and putting aside, for example, the development of Costa and its channels and its digital and its international business and its sales of GBP3.9 billion, and focusing only on the hotel business.
We’ve grown the business enormously by nearly 200 hotels in the period. We’ve opened a new market in Germany. First hotel was 2016 in Frankfurt. We now have 42 hotels, with 38 in the pipeline. We innovated with hub. The first hotel was open when I joined, but we now have 12 or more. We’ve innovated with Premier Plus rooms. We didn’t have any of those. We now, by the end of the year, have about 4,000. And we’ve invested in our commercial and IT and digital systems, taking direct bookings from 80% to 100% pretty much. And all the while, we’ve maintained brilliant operational excellence, great high guest scores and superb team engagement. So thank you to my team for all the things they’ve done in the last seven years, because they’ve been brilliant.
And then I thought one last thing. If you’ll just bear me just to be indulgent for one second is, what does make this company really brilliant and what do we have to protect? Well, the power of the brand, I think, the incredible power of our scale and the platform that, that gives us our brand and operational excellence is almost replicable. And we can’t lose our focus on the guest and the fact that we’re a value-for-money proposition because that is critical to maintaining our scale and our power and our brand.
I think the balance sheet is really important. It’s fundamental. It’s a powerful asset for us. And as you can see over recent years, it’s always given us the confidence to be able to invest through the cycle. And there are always going to be cycles. So, there will always be moments of more difficult periods and great periods. And it’s important to remember, we need to invest throughout. I think our capital discipline and our approach to returns in a capital-intensive business like this with a long-term horizon is really important, and we haven’t wavered on that for a second.
And then the structural opportunity for growth is enormous. And actually, despite the difficulties of the pandemic, one of the things that has given us is an even longer runway for structural growth and a more difficult supply in the market, which we can fill and we can extend our market-leading position.
And finally, we only do any of this because we’ve got a fabulous engaged team that delivers for guests every day. And we must, at all times look at to them. So, those are my reflections on the sort of wonderful time that it’s been. It’s a little indulgent because I’ll probably speak to you again in January, but I promise I won’t repeat the event in January.
Now with all of that said, and with a bit of a celebration on some cracking half year results, let’s open for Q&A. So Seb, could you open the lines for questions, please?
Question-and-Answer Session
Operator
Of course. [Operator Instructions] First question today comes from Jamie Rollo from Morgan Stanley. Please go ahead.
Alison Brittain
Hi, Jamie. Good morning.
Jamie Rollo
Good morning. And congrats and best of luck. In terms of — so there’s three questions first. You’ve given us a feeling for additional costs this year, which includes bringing forward some costs for next year. I was wondering if you could give us a feeling for FY ‘24 cost growth? And specifically, what utility costs might be next year on current rates?
Secondly, on food and beverage, it seems to weaken sequentially in the second quarter. Seems to be underperforming the value segment. So really wondering if you could elaborate on your plans there to turn it around? Or is that really something for Dominic’s entree?
And then finally, how much of the balance sheet review pushed out to the full-year? The presentation talked about if you have excess capital, you might return that. I mean, do you think there was excess capital and might, kind of, estate revaluation be part of the review as well? Thank you.
Alison Brittain
Okay. And lots of questions there. And actually, quite a lot of them for Hemant. I’ll start with the F&B question, because Hemant will probably pick up the cost question as well and go through the detail of where we see inflationary pressure into next year and what we’ve hedged, particularly with energy hedging. We’ve had some of it into next year. I think, however, I will just sort of — as an aside, say that from a cost perspective, we are managing costs quite well and managing inflationary impact quite well.
Part of that has been about our estate growth and our outperformance and our management of both occupancy and rate, and being able to move our pricing and use our dynamic proprietary software to be very good at, pricing in this environment and having an ongoing cost efficiency program. And we have a long history of saving costs. As you know, we’ve always drawn a program for the last seven years of cost and efficiency. So it’s more in the D&A, I think, than a lot of companies.
And so we do this year and into next, have a much more stable team. And that particularly difficult period last summer when we went into reopening has passed, and we’re into a different world in terms of labor stability. And we have got opportunities to work in partnership with suppliers and partners and also to hedge, again, not an opportunity everybody has. But I’ll let Hemant comment a little bit more.
And on F&B, we work hard at F&B. It is a critical part of the hotel offer rather than a business, which is a sort of standalone business. We know that where we offer F&B ourselves, we have higher RevPAR. So actually, some of the merit of F&B fits in the P&L of the hotel business. And one of the things that makes us strong versus our competitor set is that we offer hot food and beverage in pretty much every one of our hotels and not many others do that. And so it’s hard to just pick on the F&B side of the business as if it’s standing alone and as if it manages itself, it doesn’t. It’s an integral part of the hotel business. But we are investing in the business and doing new things. We did, during the half, extend our drinks offers and that has some real upside. We also invested, not huge amounts of money, but good quality investment in some of our gardens for the summer.
And again, we saw some real uplift in performance there. So some of that, I suspect we will invest again next year. And we continue to work. We do have colo partners who provide the food and beverage for us, which we do in about 100 sites. We continue to work very closely with them to improve their service to our guests and then be able to maximize the RevPAR on the hotel side of the business, albeit it isn’t as strongest when we do it ourselves.
So yes, I think Dominic will focus on it, it’s part of his DNA, having run Costa for us and then have been at Domino’s, I suspect it will be in his entree and there’s more to do. But we are broadly back. We’re a little behind pre-pandemic sort of 5% below. But as of next year, we’ll actually just be looking at year-on-year performance.
Hemant, do you want to comment more on the costs?
Hemant Patel
Yes. So I mean, Alison just talked about our major mitigants to cost in terms of scale, the fact that we are still increasing scale as well all the other efficiency plans we have, as well as the real benefit we have in terms of our ability to price so efficiently. I think, I’m not going to give specific guidance on our cost base overall. You’ve seen — you’ll see the inflation numbers and you’ve seen the inflations we’ve built into this year and you can work out what that might mean for next year.
On utility specifically, I think it’s worth saying, as you have seen in the results, we’ve taken our hedge position for next year from 40% at our previous results to 70% now. That 70% — that increased to 70%, that’s crystallized GBP20 million of cost — of year-on-year cost into next year’s P&L. The 30% that’s remaining, I mean, obviously, it does depend on the rates, which, again, have been quite volatile. They have been generally on a downward trend over the last few weeks. And if you were to take the spot rates at the moment for next summer or next winter, you’d be looking at something like a GBP20 million further increase on costs potentially. But obviously, we’ll manage that, and we’ll hedge tactically as we see the right timing, depending on the pricing and as that moves over the next few months.
And the second question, just on the balance sheet. Yes — so I think, first of all, I’d start with the fact that Whitbread has been known for the strength of its balance sheet and its capital discipline. And I think that’s really been manifested. If you — the slide in the presentation that shows our longer-term returns, the U.K. returns and how we’ve maintained them over 10% within our stated number 10% to 14% for a significant time period, apart from just through the pandemic. And how that number is, if we take a rolling 12-months to the end — to the half year, it’s up over 11% now. And that includes a time period where we were still disrupted by the end of the pandemic as well. So, you’d expect that to slowly improve as well.
So, I would say the discipline we’ve had and our focus on maintaining long-term returns, as Alison mentioned in her opening speech, has really stood as well. I think it’s really important to put down the framework and make sure we put that down and make sure that we’re very clear in terms of our capital allocation framework. Obviously, the guiding principle of this is to maintain our investment-grade basis and maintain investment grade leverage metrics.
And we know the benefits of being investment grade has, in fact, got more and more important, particularly over the last few months with the economic conditions that we’ve had. It allows us, obviously, much better access to debt markets, better pricing as well, but also just gives strength to our financial covenant, which helps in a variety of situations in terms of negotiating with landlords and being able to access perpetual debt, et cetera. So keeping the focus — the initial focus on investment-grade metrics, that’s really important to us.
The other factor that’s also key is continue to be able to invest through the cycle. Again, as Alison mentioned in her opening speech, whether it’s our ongoing organic capital program where we are putting new rooms down, whether it’s selected M&A, high returns as well, whether that’s in the U.K. Obviously, the focus there is on Germany, but also investing in the fabric of our state in terms of reaffirming our state repairs and makes as well, it’s all really important.
We’ve got a clear dividend policy. And as mentioned, we’ve got — we’ve announced the half-year an interim dividend as well. So, we hope to continue to grow our dividends in line with earnings. And then if there is excess capital at that point, clearly, we’d be looking to return that to shareholders to understand whether it’s excess or not. I need to also then really understand what the future landscape might be. And as of — right at this very moment, I think we hopefully, just over the peak of the macroeconomic and political turmoil that we’ve seen over the last period and hopefully, that’s going to come down, but who knows. But right now, I think it’s not the time for me to make imprudent decisions in terms of capital returns.
We’ll come back, as we said, at the time of the full-year results. We’re clear that we want to, in the long-term, manage an efficient balance sheet. So to reiterate that, that’s really important, and I think we will have a lot more visibility in six months’ time or so when we come back with the full-year results. We’ll understand a lot more, what’s happened politically, what’s happened to the economy and consumer sentiment, as well and have much better visibility into next year.
Alison Brittain
And just to sort of complement Hemant’s point there, the Board actively and regularly review our balance sheet, as you would expect in our business. And they also actively and regularly review our returns profile and we do a post completion review where we — every year — every six months, we look back at all the capital deployed in the previous five years and whether or not it has reached its right returns. And if it hasn’t, why it hasn’t? And if it has, why it has? And we change our models pretty regularly to ensure that whenever we’re signing off new capital programs, which is in the future that they’ve done with the latest information that we have.
So, we are pretty disciplined and the Board are, as I said, they’re very actively engaged. We’ve never — just from a philosophical perspective, we haven’t ever particularly run an inefficient balance sheet. And of course, we’ve been through a pandemic with enormous amounts of uncertainty and a GBP1 billion loss in one of the years. We are now back into profitability again this half-year, particularly for the first time and strongly so, I might say, and with a good forward outlook.
And so, of course, we, of course, we are regularly reviewing, therefore, as we’re throwing off cash now, because we are operationally geared. So in the good times, we do throw off lots of cash. And we’re trying to balance all of that up along with what we know and how much visibility have we got and where are we from an economic situation. So, you should expect to hear from us again at full year results, and it is a point of active consideration.
Hemant Patel
Perfect. And Jamie, I threw in a — I thought it was a fourth question or not. And Alison just a [Multiple Speakers]
Alison Brittain
And we’ve answered that fourth question. You know that’s not allowed.
Hemant Patel
Maybe I misheard. Anyway, just in case anyone’s interested in valuation, I mean, we last valued our property at the kind of 2018, 2019 and the valuation at the time was between GBP4.9 million and GBP5.8 million, that was done on a careful managed sale and leaseback, the marginal sale leaseback basis. And the yields used were effectively taking — we were the — treating us as a tenant at a yield of 4.5% to 5%, obviously was 4.5% to 5%. And we’ve seen a very little really in terms of numbers of transactions in that post-COVID time period. So it’s difficult to really come up with a really representative update on that. Clearly — and we’ve again seen very recent volatility in terms of yields and therefore, potentially market yield as well, but it’s very difficult to know whether that’s case or not.
What we do have is that we have got enough confidence that the transactions where we have been the tenant and our parts where we have been the tenant have actually given us a little bit headroom towards that 4.5% to 5% valuation. So, we’re comfortable overall with current level of valuation and on top of that, obviously, we’ve made some further freehold investment as well between now and then.
Jamie Rollo
Does that mean you are going to revalue or you’re not going to revalue at the end of the year?
Alison Brittain
Jamie, to be honest, it’s Alison. I don’t see why we do a revaluation with this amount of market uncertainty and without the need for — to do it, frankly, because there isn’t a particular need to do it right now. I don’t think it’s too much to be gained. I think we can read into the transactions that have taken place and be pretty comfortable where we are. But until there’s a few more transactions in the market, I think it wouldn’t be a terribly robust exercise. So, I’m not expecting by the full-year results that there will have been a revaluation.
Dominic will think about that next year, I’m sure.
Jamie Rollo
Brilliant. Thanks a lot.
Alison Brittain
Thank you.
Operator
Our next question comes from Vicki Stern at Barclays. Please go ahead.
Vicki Stern
So, I appreciate we’ll speak again in January. But I also wanted to add my congratulations, Alison, and wish you all the best. Just firstly, on the return on capital employed criteria, you touched on this a little just there. But as we’re thinking about the inputs in terms of utility cost increases, general level of inflation and you’re sort of extending the room target now to the 125,000. Just if you could help us understand how are you thinking about the group’s ability then to offset that higher cost that is expected into future years with higher price?
And ultimately, is the expectation that margins will resemble what they did pre-COVID, because price will ultimately get passed on? Just help us to sort of conceptualize the future thinking about returns given that higher cost environment?
And related to that, on the supply outlook, so you are seeing now a 4% contraction in industry supply coming off sort of 10% or so contraction in independent. Just your expectations on that piece going forward. Are we sort of done now with the additional wave of sort of post-COVID independents coming out? Or would you be actually looking into next year with, again, all those cost pressures on the industry and thinking that we stay at these sort of elevated levels of supply out for independent next year?
And then just finally, on Germany, I think the industry data is a little bit weaker in the last couple of weeks. Just any outlook, commentary there on the RevPAR piece? And while we’re on Germany, just M&A opportunities. Obviously, you’ve always flagged you want to do some more. And any signs of life there? Thanks.
Alison Brittain
Okay. Yes. So taking those in turn, just in terms of how we think about returns, we have stiff hurdles for — well, let’s go back a piece. When we do a network plan, we do it at an incredibly granular level. We often talk about this. And I think we’re the only people who do this sort of thing. So, our data is proprietary and pretty special. So, we really do go down to 1,700 catchments for the supply, and we look at how supply has moved in the market where it is. So, we have a really strong handle. And we also then look at demand and off the back of both supply and demand and where we’ve got hotels to date and what our perfect portfolio might look like, in particular, catchments, to move things, extend things closely.
We have a granular network plan. And that gives us pretty rightful short targeting of where we want to place hotels. So it can be down to postcode specific. And in areas where we have plenty of hotels, it will be very specific and we probably do our sort of white areas where it can be more flexible. And we then set a return threshold, which is sure that we maintain a strong discipline when we’re going to put in capital. And that is at site level. So when we then assess sites individually, there isn’t any — there are no sites that don’t ultimately come for Hemant and I. And we model all the time.
So, a good example was when we went into the pandemic, for example, we knew that sort of NPVs were going to move out and those models changed immediately. So made it much more difficult to reach hurdle levels, but we still did and we were still able to manage the pipeline. We also reassessed our entire pipeline based on the new model at the time and made changes within that pipeline so that what we had and what we were building out was going to maintain the hurdle rates.
So, we do that based on cost or labor costs, on labor models, on — and energy costs and all of the components of cost, and we also do it on the revenue lines and what we think RevPar growth will look like. So, I don’t want anyone to think for a second that just because we have a target for bigger growth that, that target will be reached with any less discipline applied to it in terms of the capital allocation and the returns hurdle that we would expect to receive because it won’t.
But I mean, part of the extension of that opportunity within the U.K. and Ireland is because the supply has dropped out of the market, which brings me to your second question, Vicki. And what we’ve seen is a fact of the supply drop-out, which has been quite extensive. And if you remember, we’ve talked historically about what happened in the Great Recession in 2008-2009, the supply took quite a while to come out. It took two or three years to drop out. And during that two or three year period post the Great Recession, we saw more supply coming into the market because the people have put spades in the ground and half built hotels, they have to finish them. And we didn’t see the drop out.
But then when it did come, there was then a dearth of new builds, because people haven’t put new sites to work and equally, we had to dropout. And we saw a big increase in our RevPAR and our market share, and we extended our lead in that period. This has all happened much earlier. And the dropout of the supply in the market has been quite significant and quite acute. And it was a more acute shock to completely closed businesses than it was to sort of be in a recessionary period.
So, I’m not expecting that supply to come back to sort of pre-COVID levels before 2026, for sure. And do I think the contraction in supply is over? Well, it’s a best guess, isn’t it, rather than the science. The science of what we’re showing you is what has happened and that fact. What will happen is me using my crystal ball. I suspect there’s more to come. And it is a tough environment out there. There will be people who have hung on. But actually, the labor pool is tight. They don’t have synergy benefits. They haven’t got dynamic pricing, and they’ve got energy costs and other inflationary pressures that just make it quite difficult to operate.
And so I suspect that there will be some more to come. But even without any more to come, the supply landscape is extremely favorable. And given that many others are constrained with investments, I mean, we are not constrained to invest with a good headroom to what we want to do in terms of leverage and a good balance sheet. And so we should be able to fill the gap that’s been left by the drop in supply and take more market share over time and continuously consolidate our position as the market leader.
So, I think it’s a structurally quite attractive forward look that I’m seeing for the business. I think your last question was Germany?
Hemant Patel
Germany, yes. Weakness —
Alison Brittain
Which — I mean, I don’t know whether Germany has been weaker last year. It’s been our best period effort in which —
Hemant Patel
Tenant market.
Alison Brittain
Hemant is — Hemant is bound we’ve been talking about our best period ever. So, I’m going to anyway because I can’t resist it. Again, he is laughing at me. Because periods — I think period seven was the entire German business made a profit. And so that was a very strong period, and it won’t be replicated. And it will be weaker in the winters, so two things will happen. Period four is always the weakest period for the hotel business, and that will be everywhere. It’s just the nature of period — sorry, quarter four, not period four. Quarter four will be the weakest period both in the U.K. and Germany.
And we may see a bit of movement. Germany — Germany has introduced some COVID restrictions. They’re quite light, so just mask wearing on public transport, et cetera. We’re not really — there’s currently not a sense in either the U.K. or Germany that there will be much more in the way of restriction. But we, again, don’t have a crystal ball for that. So, I’m pretty positive about where we’ve got to with Germany and its prospects as we go into next year. We’d hope for more M&A. And do watch this space for that. Again, probably small rather than large, though, Vicki, small add-on elements of M&A.
Vicki Stern
Okay. Very helpful. Thanks.
Operator
Our next question is from Jarrod Castle at UBS. Please go ahead.
Jarrod Castle
Great, thanks. And Alison and the team, well done for a really strong set of numbers. Hopefully, some form of a repeat at 4Q and we’ll all say our goodbyes. Maybe just on goodbyes and it’s just an observation. I mean, obviously, Whitbread’s got an extremely strong culture, extremely successful. And just an observation, over the last decade or so, we haven’t had a CEO rise from internally. So just interested in your thoughts why that is? Is it just always bringing fresh blood, or is it something about internal development.
And again, just kind of looking ahead, you’ve upped the target in terms of the U.K. target from 110,000 rooms to 125,000 rooms. You seem like you’re making very good progress in Germany. So is there any thoughts there in upping that target? Is there upward pressure at the moment?
And then also just in terms of any further comments. Hub is, obviously, a small part of your business, but no real comments there. So just any comments on how you see that in terms of runway looking forward as well?
Alison Brittain
Okay. So, well, starting with the CEO, what I can tell you is we have an incredibly strong executive team and some very deep internal capability through the organization. So, we’re not short of talent and capability. And we’ve a stable executive team and they have collectively a very significant number of years experience, either in their function or in the hospitality arena or associated areas and a long tenure now across the board with Whitbread. I mean the Board’s job — and I don’t really want to speak for them. But the Board’s job at point at which they have to appoint either a CEO or CFO, and we did appoint Hemant internally, as you know, only a few months ago. Hemant had joined us as a high potential and has been with us for three years and took over from Nicholas, so a nice transition.
The Board will then always just look at, at what characteristics they’re looking for the next period of growth for the company. And they will look at the market and internal candidates and consider what the best fit is and what the best team structure is as well. And they’ll make the decision on that basis, and that will always be the case. But if there’s any suggestion in the question that we don’t have an incredibly talented and deep base of capability within both the executive team and the senior management and some of the ops and property lines, we do. It is very, very strong.
You asked then about did we have any sort of the bigger longer ambition following the lengthening of ambition in the U.K. or Germany. And we’ve got an aspiration two-fold, I guess, to be number one in the market in Germany and with a sort of clear network runway to 60,000 rooms. We will do more network planning work this year on Germany. The focus and priority was to do the work for the U.K. first, but we will. Now that we’ve been trading for longer in Germany and open for longer, next year, we will do a similar network planning exercise journey, I’m sure. But between the two being number one in the market and the room target we’ve got, we’ve got so much runway for growth that we don’t really need to set another target in the short term, but we will keep looking at it.
Third question was —
Hemant Patel
Hub.
Alison Brittain
Hub has been a great innovation. It’s been about how do you get a Premier Inn offer to — into markets where the land value is very high. And the rooms must, therefore, be different to a standard Premier Inn offer. And the hub concept has been incredibly popular. And the returns profile for hub is very strong and certainly has met all of our expectations. We are reviewing and willing to next year review whether the hub concept has a wider application, either both within the U.K. and a wider application in different cities or in a different way or indeed internationally what platform — additional platform we might grow for us. But we are very positive about it, and we do have further growth for hub, particularly currently in London.
Jarrod Castle
Alright. Thank you.
Alison Brittain
Thank you very much.
Operator
Our next question is from Leo Carrington at Citi. Please go ahead.
Leo Carrington
Good morning.
Alison Brittain
Hi, Leo.
Leo Carrington
Thanks for your reflections, Alison, and to continue on innovation. Thanks for the color on the Premier Plus rooms. How has that rate uplift evolved over the course of the rollout bridging across the pandemic? And then just to help scale the potential rollout across the state, of the hotels with Premier Plus rooms, what proportion of the overall hotel are they?
Secondly, on demand, I think you explained the reasons for your outperformance clearly. But can you elaborate on the drivers behind the strength of the overall market, particularly in September and October? Are weekend and midweek trends in terms of pricing and occupancy still performing well.
And last question, a very quick follow-up on the network target. In terms of that room growth going forward, has the balance between new hotels and extensions changed at all?
Alison Brittain
Yes. Okay. Well — so we’ll try and talk — try and share a bit of the question in here. But let’s just start with Premier Plus rooms first. They have, all the way, through since inception and since testing and then through the start of roller, been popular and they have very broad appeal. When originally devised, we all expected them to have an appeal for business customers. And actually, they had appeal for leisure customers as well. And so they do sell well. And they’re not the sort of the only room left, and so that’s what people have to book. They go early.
And we are able to have a premium, a meaningful premium and uplift in AAR versus the standard room in the same hotels. So plus GBP15 to GBP20 on the room. And we have now got dynamically pricing. So it can be a percentage because obviously GBP15 or GBP20 on a room that’s being sold at GBP50 is significantly different to an event in London where the room rate is GBP180.
So actually, we are now more dynamically pricing. So it becomes more of a percentage of the room and therefore, we have further opportunity at high rates to have a higher amount of [Technical Difficulty] from the Premier Plus room. And in terms of — it’s quite hard to say anything about what happened during the pandemic when room rates were low and you were managing demand and you were closed and open and closed and open. But what I can say is in a standard — in a standard arrangement, we have a meaning — we have consistently got a meaningful uplift.
We generally — because the second part of your question, I think, we generally put about 15% of rooms in any given hotel over to Premier Plus. It’s not always the same percentage because what we try and do with Premier Plus, for those of you on the call who stayed in them is have a separate area, because part of the appeal as well as the upgraded facilities is the quiet and the piece. So there aren’t any family rooms, for example, at Premier Plus. And generally, it is on a separate floor or a separate area.
So sometimes it might be slightly more than 15%, slightly less because we do that site by site. And the capital employed for it is not enormous. And so the returns profile is very strong. And when we’re doing — are already doing the refurbishment of a hotel, it’s particularly good because the incremental amount on top of an already being leased hotel is very small. But even when we are just going in and putting Premier Plus into an existing hotel without another refurb going on, we still get a return profile that’s good. So, I think that probably is all I’ll tell you about Premier Plus rooms.
And Hemant, question two and are you going to take the question?
Hemant Patel
Yes. Just in terms of the strength of the overall market kind of like through the last couple of months, I mean it’s not a huge amount to report, Leo. You’ll be seeing all the market data. There’s been strength midweek and at the weekend. In terms of looking forward, we’re still relatively short lead. So although we can see over the next few weeks that nothing is changing in terms of trends, as we’ve said. And we’ve got no reason to believe the current run rate is going to fall off this quarter. But the market position overall has remained strong, with nothing particularly — nothing really that different than compared to the last few months of trends in terms of the type of customer and the midweek weekend mix.
Alison Brittain
What I will say, though, is if you look at other data sources and you talk to credit card companies and bank data that’s held, people are holding on to travel and experiences. So, I think there’s been a lot of talk about that they can still see passing through in the consumer — all the consumer research when people are talking to consumers, the last thing to go is going to be their travel experience and trips. And as Hemant said, we’re also seeing a very strong demand still for business travel. If anything, that’s returned to pre-pandemic levels. And we’ve seen possibly because of the pound, an improved position on inbound as well, albeit not a huge amount in our business but helps the market.
Hemant Patel
And then your last question was just in terms of network target and whether we thought through whether new hotels or extensions. I mean at the moment, the way we do — we do this in stages. That target is just based on the number of rooms we want in particular catchments. We still have to do the work to work out what that actually might mean in terms of new hotels. So for instance, we might decide that actually fewer larger hotels in particular catchment might mean we decided to change the number of smaller hotels in that catchment or we might be able to add extensions. So, there’s work to be done to work out the detail. But that’s something we do on an ongoing basis. And as we’ve got more information, we’ll let you there.
Alison Brittain
And in our current pipeline, it’s pretty much new. We have — extensions are announced first that most of the companies don’t have because we have freehold premises. So, we have opportunities for extensions and we have flexibility with extensions. So there’s two good things about them. One is you never actually have to build them. You can get the planning commission sit on it for three years and decide when you think the right moment is. And particularly if you’re going to optimize a catchment area when to extend versus when to close another hotel nearby and therefore, maximize the revenue opportunity and the catchment is in your own hands. We control the development of them.
So actually, we know when they’re quick that you can have extra rooms in six months as opposed to having to wait three years to build a brand new hotel. And they are much lower risk because we already know hotels are full two days or three days a week when we decide to build an extension. So it’s a lower risk opportunity. So extensions have a place for us. During the last couple of years, we have got our extensions on hold and we will be reopening the extension category as we go into next year.
Leo Carrington
Okay. Super helpful. Thank you very much.
Operator
The next question comes from Alex Brignall from Redburn. Please go ahead.
Alison Brittain
Hi, Alex.
Alex Brignall
Good morning. Thanks very much for taking the questions and congrats, Alison. Three just to be traditional. So just on supply, I guess the question in a couple of ways. You talked about the independent access being short and although very sharp this time around, could you sort of have a sense of what the buildings are being used for? There’s some that have talked about some potentially coming back, obviously, distressed sales of assets are difficult [indiscernible] as much else. So then they could sort of come back afterwards. So there’s a rewinding in those much smaller properties.
On the other side of things, again, you talked about the lags because of when the spades have been put in the ground and pipeline signings have already been made, there’s been a massive reduction in pipeline signings by the franchise hotels. And obviously, the sort of conversion of a signing into an opening goes up in the air when your financing costs go up so much. So how that works for you, whether there’s the opportunity of an asset that has sort of come back to markets that were in someone else’s pipeline or whether you’ve seen construction stopped or projects stopped and how that might affect your opportunity?
And then, Hemant, one for you just because some time you might not be alone in doing the inflation for next year given the amount of moving parts. But there’s obviously sort of cost inflation on the utility side, but then there’s people and then there’s some things that are theoretically one-offs for this year, but maybe we also expected to be one-off last year in terms of payments. Could you just give us a little bridge of what overall inflation of the pieces of that might be to next year? And what we should really be taking out of the base when we do that? Thank you very much.
Alison Brittain
Okay. Alex, let me start with independent room supply and acreage. So when we do the network planning exercise that we talk about and we’ve put numbers out into public domain, it is a very careful exercise because we know the numbers aren’t going out. Probably — and also we are banking a lot on planning around those things. So when we do the very extensive piece of work, it’s why it takes such a long time to do and why we have a team sort of dedicated to it. They do go into quite a lot of granular detail about what happened to supply. And one of the things they do is check whether the supply really has gone or whether it’s going to come back into the market, whether it’s going to be refurbished with some capital spend and come back into the market as a more vibrant competitor.
So the numbers that we’ve given you are the ones where we believe they’re not going to come back. And so there are other numbers that come out of the network planning exercise, which are bigger, but where we haven’t yet got certainty on whether the supply will be back. So what we’re showing you in that sort of fact pack is stuff that we are pretty confident won’t come back in a new guys or as a new competitor.
In terms of your second question about the reduction in franchise, I think the franchise model is probably feeling pretty stressed. So if I think about how that model works, you’ve got an owner operator who is taking a brand and paying commission for that brand from a brand owner. They are probably quite heavily indebted and their debt is going up if they get to the freeholder or they are paying rent and their rents probably going up if they’re leasing it.
Their operating costs have gone up really quite significantly. And there is a preponderance of franchise more in bigger cities and London and the Southeast where particularly labor — the labor pool is tighter. They’re not quite as regionally based, for example, as we are. And so I suspect with energy, labor, food and beverage and everything else increasing in price is quite a stressed operating model. And they’re still paying — getting probably the mass majority of bookings through an OTA, who even with the brand opportunity, they’ll be using OTAs who will be taking a big chunk of commission off of every sale.
And so when you take that in the round, if somebody’s quite stressed and that’s why you will be seeing lower sign-ups and potentially single-asset sales. We will always look at single-asset sales and if they’re in our rifle shot, then we’ll be interested. So, we don’t overpay and we don’t have a different return hurdle for those. So, we can often organically do our own thing and fill our own pipeline. But we do — we have a history of doing single-site acquisitions from franchise owners even in the very recent past. So, they certainly are of interest to us and give us an opportunity.
The other reason, if you think about the franchise model as opposed to the independent sector being quite stressed, that’s another reason why I suspect we will not see supply growth coming back in any great form for quite a number of years, but it also explains quite a lot why prices haven’t dropped. Because, actually, it’s really difficult if you’re running a franchise business at the moment, even with weak demand to drop your prices because you’re not actually sure dropping them is going to give you any better occupancy if there’s a demand issue.
And similarly, your cost base has gone up so much that you literally cannot withstand it. So actually, although we have increased our prices, as you see in the deck and our average — and our RevPAR is up significantly and really improved. We’ve done a lot on occupancy. So, we really filled occupancy. And we’re just slightly below the market on rate, which is a good place for us to be in terms of our value for money credentials and our brand positioning.
Alex Brignall
That really helpful.
Hemant Patel
Yes, on costs. So, Alex, yes, on costs, today, in our announcement, we guided on a few extra costs. I think, first of all, just in terms of general inflation, I think probably as expected with the increased inflation that the market has been seeing over the last couple of months, we’ve taken the opportunity to say that we think we’ll have about 2% more inflation. So it takes our year-on-year inflation for this year to about 10% to 11%, so that’s GBP30 million versus previous guidance. We are fully hedged on utilities for the year as we talked about as well.
We’re also adding in another GBP15 million on team member pay based on the announcement you have seen over the last few weeks. GBP10 million of that is for a cost of living support bonus, which is a one-off. Even though we had a summer retention bonus last year that we used for different purposes, but that’s a one-off that won’t annualize. And then the other GBP5 million is accelerating a pay increase, which with the living wage increases annually will, in theory, be built into models for next year. So it’s accelerating that. So that’s not anything new. It’s just an acceleration of cost.
We’re also accelerating GBP50 million of IT and marketing costs. Specifically, we’re investing in a new reservation system, which will unlock future commercial opportunities. And we’re also taking opportunity based on how we feel versus the competitive situation as well to put our foot down and put some more money into marketing as well. Whether those costs are ones that will annualize into next year, I’m not really ready to talk about next year’s — we’ve given guidance on next year’s cost because obviously, there’s still quite a lot of uncertainty in terms of cost inflation.
What I can talk about is utilities. We’ve annualized — sorry, the — we are 70% hedged now for next year, as mentioned earlier on, which is kind of a GBP20 million crystallization of costs and then plus another GBP20 million on top of that potentially if the rest of that crystallizes as mentioned earlier in the call. Offsetting all of that, by the way, this year, we’ve got GBP25 million cost of improvements in change risks costs as well with high levels of deposits, obviously, and higher interest rates offsetting and a bit of notional pension interest within that.
Yes. So, I think we’ll know a lot more when we announce our next sort of quarterly results in January and be able to give much better guidance in terms of what we think will happen with cost base for next year. But beyond what we’ve said in terms of the base inflation that we built in, I’m not seeing anything else that’s particularly annualizing into next year.
Alex Brignall
And final piece is just the underlying — the cost savings figure that you’ve seen during contingency. I didn’t see if you — how granular you had made that on an annual basis? And where would it might be for this year net? I’m not sure about whether you just have the long-term targets.
Alison Brittain
We put — we did GBP40 million last year and so — which was off of GBP100 million three-year target. So, we just rolled the three-year target forward for the next three years at GBP100 million. And all I would say at this stage is if you just made it a one-third that would be a sensible thing to do because we don’t get into the granular delivery of it. Sometimes we have to invest in a prior year or before we can get a cost out because actually, it’s an industrial strength cost. In other times, we can just make savings in procurement or in a labor model or similar. So just cut it three ways and use that for modeling purposes.
Alex Brignall
Fanstastic. Thank you very much.
Alison Brittain
Thanks, Alex.
Operator
Our next question is from Tim Barrett at Numis. Please go ahead.
Alison Brittain
Hi, Tim.
Tim Barrett
Thank you. Well, how are you [indiscernible] and congratulations. The two topics I just wanted to come back on, firstly, the 125,000 room target is clearly very big. Should we interpret that just that you’re able to grow at this pace for another 10-years? Or are you willing put a more specific timetable on how you’re going to get there? And then coming back on leverage. Is investment grade basically still 3.5 times? And where are you now versus that on a run rate basis? Clearly, you don’t report quarterly, but the current picture is clearly better than 2.8 times. I just wondered by how much. Thanks very much.
Alison Brittain
Tim — okay, Tim. Yes, no, you will never ever entice me to put a time scale. It took me 12 months to 18 months on arrival here in 2015, ’16 to get away from having a room target by months virtually. And the whole dysfunction that, that gives your organization in terms of the push at the end of the year to hit a room number target without which confidence in the business drops, people running in and out of hotels on the 29 of February with beds trying to get them open. So no, you will never get me do that. And also, the reason is it’s ultimately dysfunctional. Of course, we’ve got choices about capital allocation.
And so in one year, we may choose to do a lot in the U.K., because the right opportunities will come with great returns profile than we want to do more. And there’ll be other times where Germany or other places where we want to put our money and where the returns profile will be higher, so no. What the 125,000 room target means and the same with the German rooms target is we have huge opportunities for growth for a decade in this company. And we will be very choiceful and appropriate in how we deploy the capital towards achieving those goals. But we don’t want the opportunity to fill. I think Hemant will talk about the leverage. But yes, we’re obviously — I think it’s 3.7 times rather than 3.5 times is the leverage number that we have got, so slightly higher than the one we used to use, Tim. But we’re a long way off it.
Hemant Patel
Yes. So Tim, yes, it’s 3.7 times because of post-IFRS update to the target. So, I agree with Fitch, our rating agency. So 3.7 times in theory is the upward threshold of the target that we would be aiming for. Yeah, at the moment, as of half year, we’re at 2.8 times, as you mentioned. I’m not going to speculate in terms of what that might look like going forward. Again, that’s the point, I suppose of giving the capital allocation framework. That overall is the target we’re aiming for.
The other variables here are very much our ambitions in terms of investment and our view of the market conditions, which, obviously, at the moment, as we mentioned already quite variable. So probably, I’m not going to give you any more in terms of what our run rate might look like. But obviously, we’re in a position where we are below that, that we do want to run an efficient balance sheet as we mentioned already.
Alison Brittain
So plenty of head room. Thank you, Tim.
Tim Barrett
Yes. That’s helpful. Thank you, guys.
Operator
Our next question comes from Ivor Jones at Peel Hunt. Please go ahead.
Alison Brittain
Hi, Ivor.
Ivor Jones
Hi, good morning. Don’t forget those of us still leaving behind. On the real estate market, sort of an extension of Alex’s question, you seem to have a better balance sheet than some property companies. Is there an opportunity for you to buy an existing leaseholds? And specifically, could you talk about the five, the Strand project that you said is a GBP200 million project. Was that freehold? Do you release the capital back out of it, that part of the structure? And are there another — could there be another couple of GBP200 million that drives you into London? Or was that a very particular circumstance. Thank you.
Alison Brittain
Okay. Brilliant. I’ll let Hemant deal with the first bit of it. And then I’ll just pick up the point on the Strand. I mean the Strand is a particularly good location. I would hope we’d have more opportunities for things of this caliber. But it is outstanding for those that you — who know London well, it’s just off Trafalgar Square next between Charing Cross station along that little walkway into Trafalgar Square. So it is quite — the most astonishingly good showcase location for a Premier Inn property. It will be a hub property by Premier Inn. And it is a property we’ve covered it for some time. So it’s not the first time we’ve attempted to acquire it. We had several goes over the course of last few years.
Yes, it is a freehold. But the amount we quoted is the total development cost, not the cost of purchase. It is the whole development of the site and the hotel. And obviously, that is a number of years away. It will be opening probably early 2027. So it’s a long-term. And we always will have a big hotel, but we have other hotels which are bigger. So, we are used to operate in big hotels and we have got other big hub hotels.
So, I don’t think it’s out of kilter with the estate it isn’t. And it will also have a Bar + Block steakhouse restaurant attached to it. It has the opportunity to generate excellent long-term returns and be a brilliant cornerstone property for us in London. We’re good at driving returns from our freehold estate. We, of course, have a huge opportunity in London. We are still underweight in London. So, this is a great opportunity. And hub in London has performed brilliantly for us. So no reason to suppose that this one will not.
And of course, yes, we can, if we choose to release capital at various points in the development cycle, you’ll see us do that with other properties in London and forward fund. Usually when it’s a much lower risk, then the yield for us therefore, is better and we get a lower rental payment as well from an operating profit perspective. But yes, that is an available option to us. And I would hope actually the next few years might bring us more opportunities for developments in London than we’ve had the last few years. It’s been very difficult to buy freehold in London, and that may ease up over the coming period.
Hemant Patel
Okay. And then your question on whether we would potentially buy back. I mean, actually, just related to the point Alison just made, it really does depend on the yield — property yields. And it’s exactly the same as when we make tactical sale leasebacks. We’ll make the decision based on that particular property at the time in terms of yield and cash flows and make sure it’s most advantageous to us. So it works to go around in theory, not against buying back in. If the opportunity arose, it would all depend on whether that was a sensible decision in terms of cash flows based on yields, which I think what you will expect from us.
Alison Brittain
[indiscernible] profile and all that. Good. Thank you, Ivor.
Operator
Our last question comes from Desmond Taljaard from LR Ventures. Please go ahead.
Alison Brittain
Good morning, Desmond.
Operator
Applogies. Desmond, your line is now open.
Alison Brittain
Good morning, Desmond. Hi, we can hear you now, Desmond
Desmond Taljaard
Yes. So, I think my asterisk watch ran out of time. Well done and great performance so far this year. I’m trying to get an understanding of how your leased estate is performing. I’m wondering if you could give an indication of further breakdown of excellent Page 46 of your release today, which shows EBITDA split drive freehold and leasehold in the U.K. and Germany. And also the average EBITDA to rent coverage in those markets for the lease estate.
Hemant Patel
Okay. Desmond, probably the best way of doing this is taking this offline actually and talking to you directly about your specific question. And whether — I mean, we probably — we won’t be able to release information below this level necessary, but we might be able to get to your question specifically because I think we’ve got some one-on-one time with you later this week.
Desmond Taljaard
And just for a sense how profitable the lease estate is, obviously, versus the freeholding stuff?
Alison Brittain
Yes. Well, they are possible. Let’s pick it up. I don’t know if this is helpful, but with a sort of an overview and this might be helpful in terms of how we think about the property. We don’t mind whether we have freeholds or leaseholds. It’s one of the beauties actually of our ability to get the right location is a lot of other people who are competing for hotel development for its care, they can’t buy freehold or they have to have leaseholds or they have to do it one way or the other. We don’t. We have an ambivalent attitude to it. But we have return hurdles for both and we set them in a manner, which makes sure that we take account of the lease obligations and liabilities that we have, so a lease adjusted returns hurdle.
And so because they both work for us and they are both — give us the right level of returns in the portfolio and they’re profitable, we don’t mind which we do. But let’s pick up your more specific questions and see whether we can answer those, and we see you later.
Desmond Taljaard
Okay. A quick general question about — I understood you spent GBP1 billion to date on the German portfolio. And I think you’ve opened about 7,500. What’s the overall cost you have opened roughly at, let’s say, about 14,500 rooms? By the time you get to the current pipeline, what your basis be in the last of that hotel pipeline is opened?
Alison Brittain
That’s GBP1 billion investment that we’ve made.
Desmond Taljaard
I always said GBP1 billion to-date.
Alison Brittain
No, including the pipeline.
Desmond Taljaard
It won’t include conversion costs. It won’t include. So, there’ll be conversion costs still to come as we open the pipeline going forward, but we’ve committed to GBP1 billion so far.
Alison Brittain
So where our pipeline is being developed by a developer, obviously, we aren’t paying for that. If we acquire in M&A and convert, then future M&A conversion costs aren’t yet in there. But broadly speaking, the GBP1 billion investment is covering what we’ve got today in opening and committed.
Desmond Taljaard
Okay. So the 4,500 released and over will be in for GBP1 billion when that last 38 —
Alison Brittain
Yes. Broadly.
Hemant Patel
Conversion costs. Yes.
Desmond Taljaard
Alright, thanks a lot
Alison Brittain
That’s great. Thank you.
Hemant Patel
Thank you.
Alison Brittain
I think we may have come to the end of the Q&A. So we’d just like to say thank you, everybody, for your time today and look forward to seeing people as we’re on the roadshow over the next few days and picking up further details. Thanks, everybody. Have a great day. Thank you.
Operator
This concludes today’s conference call. Thank you for dialing in. You may now disconnect your lines.
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