Good morning, everyone, and welcome to the Whitbread H1 for year 2023 interim results call. My name is Seb, and I'll be the operator for the call today. There will be an opportunity to ask your questions. You may register a question by pressing star one on your telephone keypad or press star two to withdraw your question. I will now hand the floor over to Alison Brittain, CEO, to begin. Please go ahead.
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. We're all here and looking forward to answering your questions later. I hope you've had a chance to review the results released already and watch the presentation. I will start the session with a very brief overview of the results before we open up the call for questions. 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.
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. 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. 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. We've increased our long-term network target from 110,000 rooms to 125,000 rooms. As you know, at the moment we currently have 82,700 rooms open today. 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. We've been able to do that as evidenced by the, you know, being able to do that through the last few years, which have been challenging, to say the least. 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 in which we continue.
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 for 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. We'll provide further updates 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 half year dividend is GBP 0.244 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. 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. 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. He and I will then have a very orderly handover for a few weeks thereafter.
While this is not technically my last results presentation, I think it is my last big results event, where, you know, it is a much more significant event at the half year and full year event than at the quarters, which is just an update. I did want to spend a minute or two, just reflecting and do indulge me, reflecting on the last seven years. 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. I'd like to just take a moment to thank them for being such fantastic colleagues throughout the period.
If I think about the seven years that I've been in the job, I'm in my eighth year now, actually, then it's been a period of economic and political and social upheaval and quite a lot of instability. 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've 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. I think a seamless transition. 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, that in the same period, we've had five Prime Ministers, seven Chancellors, six Home Secretaries, and six Foreign Secretaries. We also had a Brexit vote in 2016, followed by the uncertainty of exit until January 2020, but no trade deal till 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, lest we forget, the very small matter of a global pandemic. 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.
I suspect some of my predecessors would call me a bit of a worster for even mentioning these issues, and they'd say, "You didn't have it that bad in the Industrial Revolution or a couple of world wars." 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 they take three years just to get planning permission. It takes the same amount of time to mature.
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 while trying to innovate and strengthen in new areas for the future. 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. Putting aside, for example, the development of Costa, and its channels and its digital and its international business and its sales for GBP 3.9 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. We've invested in our commercial and IT and digital systems, taking direct bookings from 80% to 100% pretty much. All the while, we've maintained brilliant operational excellence, great high guest scores, and superb team engagement. Thank you to my team for all the things they've done in the last seven years, because they've been brilliant.
I thought, one last thing, if you'll just spare me just to be indulgent for one second, you know, 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 of brand and operational excellence is almost irreplicable. 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. As you can see over recent years, it's always given us the confidence to be able to invest through the cycle.
There are always going to be cycles, so there will always be moments of more difficult periods and great periods. 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. The structural opportunity for growth is enormous. 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.
Finally, we only do any of this because we've got a fabulous, engaged team that deliver for guests every day, and we must, at all times, look after them. 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. Seb, could you open the lines for questions, please?
Of course. As a reminder, to ask a question, please press star one on your telephone keypad or press star two to withdraw your question. The first question today comes from Jamie Rollo from Morgan Stanley. Please go ahead.
Hi, Jamie.
Thanks. Hi, Alison.
Good morning.
Good morning, and congrats and best of luck. In terms of, so two questions first. You've given us a feeling for additional cost this year, which includes bringing forward some costs for next year. I was wondering if you could give us a feeling for FY 2024 cost growth, and specifically what utility costs might be next year, on current rates. Secondly, on food and beverage, it seemed to weaken sequentially in the second quarter.
Seems to be underperforming the value segment. Really wondering if you could elaborate on your plans there to turn it around or is that really something for Dominic's in-tray? Then finally, Hemant, on 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 is excess capital? Might an estate revaluation be part of the review as well? Thank you.
Okay. Lots of questions there. 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 hedged some of it into next year. I think, however, I will just sort of as an aside say that, you know, 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, you know, 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. We have a long history of saving costs. As you know, we've always run a program for the last seven years of cost and efficiency, so it's more in the DNA, I think, than a lot of companies. You know, we do this year and into next have a much more stable team. 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.
We have got opportunities to work in partnership with suppliers and partners and also to hedge. Again, not an opportunity everybody has. I'll let Hemant comment a little bit more. You know, 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. Actually some of the merit of F&B sits in the P&L of the hotel business. 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.
It's hard to just pick on the F&B side of the business as if it's standing alone, as if it manages itself. It doesn't. It's an integral part of the hotel business. We are investing in the business and doing new things. We extended during the half our drinks offers, and that had some real upside. We also invested, not huge amounts of money, but good quality investment in some of our gardens for the summer. Again, we saw some real uplift in performance there. Some of that I suspect we will invest again next year. We continue to work where we do have co-located 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 strong as when we do it ourselves. 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 in-tray and there's more to do. We are broadly back. We're a little behind pre-pandemic levels, sort of 5% below. You know, as of next year, we'll actually just be looking at year-on-year performance. Hemant, do you want to comment more on the cost?
I mean, Alison just talked about, you know, our major mitigants to cost in terms of scale, the fact that we are still increasing in scale as well, and all the everyday efficiency plans we have, as well as, you know, the real benefit we have in terms of our ability to price so efficiently. I think, I'm not gonna give specific guidance on our cost base overall. You've seen, you know, you'll see the inflation numbers and you'll see the inflation numbers we've built in for this year and, you know, you can work out what that might mean for next year.
On utilities specifically, I think it's worth saying, as you'll 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 increase to 70%, that's crystallized GBP 20 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. If you were to take the spot rates, you know, at the moment for next summer or next winter, you'd be looking at something like a GBP 20 million further increase on cost potentially.
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. The second question, just are you on balance sheet? Yeah. I think first of all, just this, I'd start with the fact that, you know, Whitbread has been known for the strength of its balance sheet and its capital discipline.
I think that's really been manifested if you know the slide in the presentation that shows our longer-term returns, our U.K. returns, and how we've maintained them over 10%, you know, within our stated 10%-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, is up over 11% now, and that includes a time period where we were still disrupted by the end of the pandemic as well. You'd expect that to slowly improve as well.
It, as I say, you know, the discipline we've had and our focus on maintaining long-term returns as Alison mentioned in her opening speech has really stood us well. I think it's really important to put down the framework and make sure, you know, put that down in writing 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 status and maintain investment grade leverage metrics. 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, you know, gives strength to our financial covenant, which helps in a variety of situations in terms of negotiating with landlords, and being able to access preferential debt, et cetera. Keeping the initial focus on investment-grade metrics, that's really important to us. The other factor that's also key is continuing 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 selective M&A, higher returns as well, whether that's in the U.K. or both, obviously the focus there is on Germany, but also investing in the fabric of our estate in terms of refurbishing our estate and repairs and maintenance as well. It's all really important. We've got a clear dividend policy, and you know, as mentioned, we've announced the half-year interim dividend as well to continue to grow our dividend in line with earnings. 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, you know, I need to also then really understand what the future landscape might be, and as of this very moment, I think we hopefully just over the peak of the macroeconomic political turmoil that we've seen over the last like period. Hopefully that's gonna come down, but who knows? Right now, it's, I think, not the time for me to make any prudent 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. To reiterate that's really important.
You know, 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.
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. They also actively and regularly review our returns profile, and we do a post completion review where we, you know, every year or 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. We change our models pretty regularly to ensure that whenever we're signing off new capital programs, which are for the future, that they're done with the latest information that we have. We are pretty disciplined, and the board are, as I say, very actively engaged.
We've never, you know, just from a philosophical perspective, we haven't ever particularly run an inefficient balance sheet. Of course, we've been through a pandemic with enormous amounts of uncertainty and a GBP 1 billion loss in one of the years. We're 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. Of course we're 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. We're trying to balance all of that up along with what do we know, how much visibility have we got, and where are we from an economic situation. You should expect to hear from us again at the full year results, and it is a point of active consideration.
Perfect. Jamie Rollo, I think I threw in a, not sure it was a fourth question or not, and they're on just the third valuation.
That was bound to be the fourth question. You know that's not allowed.
Well, maybe I misheard. Anyway, just in case anyone's interested in this valuation. I mean, we last valued our property at the kind of 2018, 2019, and the valuation at the time was between GBP 4.9 billion and GBP 5.8 billion. That was done on a carefully managed sale and leaseback basis. And the yields used were effectively at, you know, taking, you know, where our, we were treating us as the tenant, at a yield of 4.5%-5%, property yield of 4.5%-5%.
We've seen very little really in terms of numbers of transactions kind of in that post-COVID time period. It's difficult to really come up with a really representative update on that. Clearly, and again, seeing very recent volatility in terms of gilts and therefore potentially market yields as well, but it's very difficult to know whether that's the 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 property where we have been the tenant have actually given us a little bit of headroom towards that 4.5%-5% valuation. We're comfortable overall with the current level of valuation. On top of that, obviously, we've made some further freehold investments as well, between now and then.
Does that mean you are going to revalue or you're not going to revalue at the end of the year?
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 there'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. Until there's a few more transactions in the market, I think it wouldn't be a terribly robust exercise. 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.
Brilliant. Thanks a lot.
Thank you.
Our next question comes from Vicki Stern at Barclays. Please go ahead.
Morning, Vicki.
Yeah, morning. Hi there. I appreciate we'll speak again in January, but also wanted to add my congratulations, Alison. Wish you all the best.
Thank you.
Just firstly, on the return on capital employed criteria, you touched on this a little just there. 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, you know, into future years with higher price? You know, ultimately, is the expectation that margins will resemble what they did pre-COVID, because price will ultimately get passed on? Just helpful for us to sort of conceptualize the future thinking about returns given that higher cost environment.
Related to that, on the supply outlook, you've seen now a 4% contraction in industry supply coming off sort of 10% or so contraction in independents. 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 independents next year? Then just finally on Germany, I think the industry data did get a little bit weaker the last couple of weeks. Just any outlook commentary there on the RevPAR piece. While we're on Germany, just M&A opportunities. Obviously, you've always flagged you want to do some more. Any signs of life there? Thanks.
Taking those in turn, just in terms of, you know, 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 we, I think we're the only people who do this sort of thing. Our data is proprietary and, you know, pretty special. We really do go down to, you know, 1,700 catchments for the supply, and we look at how supply has moved in the market and where it is. We have a really strong handle.
We also then look at demand and off the back of both supply and demand on where we've got hotels today and what our perfect portfolio might look like in particular catchments, where we might want to move things, extend things, close things. We have a, you know, a granular network plan. That gives us pretty rifle shot targeting of where we want to place hotels. It's not, you know, it can be down to postcode specific. In areas where we have plenty of hotels, it'll be very specific and, but we do have sort of white areas where it can be more flexible. We then set a return threshold, which ensure that we maintain a strong discipline when we're going to put in capital, and that is at site level.
When we then assess sites individually, there are no sites that don't ultimately come to Hemant and I, and we model all the time. You know, a good example was, you know, when we went into the pandemic, for example, we knew that sort of NPVs were going to move out, and that those models changed immediately. It 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.
We do that based on cost, on labor costs, on labor models on, 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. I don't want anyone to think for a second that just because we have a target for bigger growth that target will be reached with any less discipline applied to it in terms of the capital allocation and the returns hurdles that we would expect to receive, because it won't. 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.
What we've seen is the fact of the supply dropout, which has been quite extensive. If you remember when 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. During that two or three year period post the Great Recession, we saw more supply coming into the market because the people had put spades in the ground and half-built hotels, they had to finish them, and we didn't see the dropout.
When it did come, there was then a dearth of new builds because people hadn't put new sites to work, and equally, we had the dropout, and we saw a big increase in our RevPAR and our market share, and we extended our leads in that period. This has all happened much earlier. The dropout of the supply in the market has been quite significant and quite acute. You know, and it was a more acute shock to completely close businesses than it was to sort of be in a recessionary period. I'm not expecting that supply to come back to sort of pre-COVID levels before 2026, for sure. 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've shown you is what has happened, and that's fact. What will happen is me using my crystal ball. I suspect there's more to come. You know, 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. I suspect that there will be some more to come. Even without any more to come, the supply landscape is extremely favorable.
Given that, many others are constrained with investment, and 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. 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 you know, continuously consolidate our position as the market leader. I think it's a genuine structurally quite attractive forward look that I'm seeing for the business. I think your last question was Germany.
Germany, yeah.
I mean, I don't know whether Germany has been weak in the last few weeks. We had our best period ever. Hemant has banned me from talking about our best period ever, but I'm going to anyway because I can't resist it. Now he's laughing at me. Because, I think it's period seven, wasn't it? The entire German business made a profit. But that was a very strong period, and it will be weaker in the winter. Two things will happen. Period four is always the weakest period for the hotel business, and that will be everywhere. It just, 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. We may see a bit of movement. Germany has introduced some COVID restrictions. They're quite light. They're just mask wearing on public transport, et cetera. There's currently not a sense in either the U.K. or Germany that there will be much more in the way of restriction. You know, we again don't have a crystal ball for that. 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, you know, to watch this space for that. Again, probably small rather than large, though, Vicki. More add-on elements of M&A.
Okay. Very helpful. Thanks.
Our next question is from Jarrod Castle at UBS. Please go ahead.
Great. Thanks. Alison and team, well done for a really strong set of numbers. Hopefully some form of a repeat at 4Q, and you know, we'll all say our goodbyes. Maybe just on goodbyes, and this is just an observation. I mean, you know, obviously Whitbread's got an extremely strong culture, extremely successful. Just an observation, you know, the last decade or so, we haven't had a CEO rise from internally. So you know, just interested in your thoughts, you know, why that is. Is it just always bringing fresh blood or you know, is it something about internal development?
Again, just kind of looking ahead, you've upped the target in terms of the U.K. target from, you know, 110,000 to 125,000 rooms. You seem like you're making, you know, very good progress in Germany. Is there any thoughts there in upping that target? You know, is there upward pressure at the moment? Also just in terms of any further comments, you know, Hub and Zip, obviously a small part of your business, but no real comments there. Just any comments on how you see that in terms of runway looking forward as well. Thanks very much.
Okay. 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. We're not short of talent and capability. We've had 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 the point at which they have to appoint either a CEO or a CFO, and we did appoint Hemant internally, as you know, only a few months ago.
Hemant had joined us as a high potential and had been with us for three years and took over from Nicholas. A nice transition. The Board will then always just look at what characteristics they're looking for, you know, for the next period of growth for the company. They will look at the market and internal candidate and consider what the best fit is and what the best team structure is, as well. They'll make the decision on that basis, and that will always be the case. 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, bigger, longer ambition following the, lengthening of ambition in the U.K. or Germany. We've got a, you know, we've got an aspiration, twofold 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 for Germany, I'm sure.
Between the two, being number one in the market and the rooms 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 Hub. Hub's been a great innovation. You know, it's been about how do you get a Premier Inn offer to into markets where the land value is very high and the room must therefore be different to a standard Premier Inn offer. 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 will into next year review whether the Hub concept has a wider application, either with both within the U.K. and a wider application in different cities or in a different way, or indeed internationally, what additional platform it might grow for us. We are very positive about it, and we do have further growth for Hub, particularly currently in London.
Great. Thank you.
Thank you very much.
Our next question is from Leo Carrington at Citi. Please go ahead.
Good morning.
Hi, Leo.
Hi. Morning. Thanks for your reflections, Alison. To continue on innovation, thanks for color on the Premier Plus rooms. How has that rate uplift evolved over the course of the rollout as bridging across the pandemic? Then just to help scale the potential rollout across the estate, 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? 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?
We'll try and share a bit of the questioning here to bring this. Let's just start with Premier Plus rooms first. They have you know all the way through from since inception since testing and then during the start of rollout been popular and they have very broad appeal. When originally devised, we all expected them to have appeal for business customers, and actually they've had appeal for leisure customers as well. They do sell well. 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 ARR versus the standard room in the same hotels. You know, plus GBP 15-GBP 20 on the room. We have now got dynamic pricing, so it can be a percentage, be cause obviously GBP 15 or GBP 20 on a room that's being sold at GBP 50 is significantly different to an event in London, where the room rate is GBP 180.
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 revenue from the Premier Plus room. It's quite hard to say anything about, well, what happened during the pandemic, what you know when room rates were low and you were managing demand and you were closed and open and closed and open. What I can say is in a standard arrangement, we have consistently got a meaningful uplift. We generally put, because the second part of your question, I think, 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've stayed in them, is have a separate area, because part of the appeal as well as the upgraded facilities is the quiet and the peace. There aren't any family rooms, for example, that are Premier Plus, and generally it is on a separate floor or a separate area. Sometimes it might be slightly more than 15 and slightly less because we do that site by site. The capital employed for it is not enormous, and so the returns profile is very strong.
When we're already doing the refurbishment of a hotel, it's particularly good because the incremental amount on top of an already being refurbed hotel is very small. Even when we are just going in and putting Premier Plus into an existing hotel without another refurb going on, we still get a returns profile that's good. I think that probably is all I have to tell you about Premier Plus rooms. Well, Hemant, what was question two, and are you going to take the question?
Yeah, I just in terms of the strength of the overall market, kinda 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. It's still, you know, in terms of looking forward, we're still relatively short lead. Although we can see over the next few weeks that nothing's changing in terms of trends, as we've said, and that, you know, we've got no reason to believe the current kinda like run rate's gonna fall off this quarter. The market position overall has remained strong. We've nothing particularly, you know, nothing really that different than compared to the last few months of trends in terms of the type of customer, and the midweek to weekend mix.
What I will say though is if you look at other data sources and you talk to people, you know, credit card companies and bank data that's held, people are holding on to travel and experiences. You know, I think there's been a lot of talk about they can still see passing through, you know, 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. As Hemant said, we're also seeing a very strong demand still for business travel. If anything, you know, that's returned to pre-pandemic levels. We've seen, possibly because of the pound, you know, an improved position on inbound as well, albeit that's not a huge amount of our business, but helps the market.
I think if your last question was just in terms of the network target and whether we'd thought through what, you know, whether that's new hotels or extensions. At the moment, the way we do this in stages. That target is just based on the number of rooms we want in particular catchments. We've still to do the work to work out what that actually might mean in terms of new hotels. For instance, we might decide that actually, you know, fewer larger hotels in a particular catchment might mean we decide to change the number of smaller hotels in that catchment, or we might be able to add extensions. There's work still to be done to work out the detail of that, Leo. That's something we do on an ongoing basis. You know, as we've got more information, we'll let you know.
In our current pipeline, it's pretty much new. Extensions are an ace for us that most other companies don't have because we have freehold premises. So, you know, 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 permission, 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, you know, when to close another hotel nearby and therefore maximize the revenue opportunity in the catchment is in your own hands.
We control the development of them, so actually we know when they're quick, so you can have extra rooms in you know, six months as opposed to having to wait three years to build a brand new hotel. They are much lower risk because we already know hotels are full two or three days a week when we decide to build an extension. It's a lower risk opportunity. 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.
Okay. All very helpful. Thank you very much.
Thank you.
The next question comes from Alex Brignall from Redburn. Please go ahead.
Hi, Alex.
Morning. Thanks very much for taking the questions and congrats, Alison. I have three just to be traditional. Just on supply, I guess the question in a couple of ways. You talked about the independent assets being short and/or very sharp this time around. Do 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 of some distressed sales of assets. It's difficult to convert them into much else. Then they could sort of come back afterwards. There's a rebound in those, you know, much smaller properties. On the other side of things, again, you talked about the lags because of, you know, 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 conversion of a signing into an opening goes up in the air when your financing costs go up so much. You know, how that works for you, whether there's the opportunity of some assets that have sort of come back to market that were in someone else's pipeline or whether you've seen construction stopped or projects stopped and how that might affect your opportunity. Then Hemant, one for you, just because sometimes might not be alone in doing the inflation for next year, given the amount of moving parts.
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-off for this year but maybe were also expected to be one-off last year in terms of payments. Could you just give us a little bridge of what overall inflation or 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.
Okay, Alex. Let me start with independent and supply and exits. When we do the network planning exercise that we talk about and we put numbers out into public domain, it is a very careful exercise because we know the numbers are going out into the public domain. Also we are banking a lot on planning around those things. 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 has happened to supply.
One of the things they do is check whether the supply really has gone or whether it's, you know, gonna come back into the market, whether it's gonna be refurbished, you know, with some capital spend, and come back into the market as a more vibrant competitor. The numbers that we've given you are the ones where we believe they're not coming back. 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. 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 guise or as a new competitor.
In terms of your second question about the reduction in franchise, I think the franchise model's probably feeling pretty stressed. If I think about how that model works, you know, 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're the freeholder, or they're paying rent and their rent probably going up if they're leasing it. Their operating costs have gone up really quite significantly. You know, there is a preponderance of franchise more in bigger cities and London and the South East, where particularly labor the labor pool is tighter. They're not quite as regionally based, for example, as we are.
I suspect, you know, with energy, labor, food and beverage and everything else, increasing in price is quite a stressed operating model. They're still getting probably the vast majority of bookings through an OTA, who even with the brand opportunity, they'll be using OTAs, who will be taking a, you know, big chunk of commission off of every sale. And so, you know, when you take that in the round, it's probably quite stressed, and that's why you will be seeing, you know, lower sign-ups and potentially, you know, single asset sales. We will always look at single asset sales, and if they're in our rifle shot, then, we'll be interested. But we don't overpay, and we don't have a different returns hurdle for those.
You know, we can often organically do our own thing and fill our own pipeline. We have history of doing single site acquisitions from franchise owners, even in the very recent past. They certainly are of interest to us and give us an opportunity. The other reason, you know, 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. 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. Similarly, your cost base has gone up so much that you literally cannot withstand it. 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've really filled occupancy. 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.
Okay, that's really helpful. Thank you.
Final point was for Hemant.
On costs. Actually on costs, today in our announcement, we've 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's 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. That takes our year-on-year inflation for this year to about 10%-11%. That's another GBP 30 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 GBP 15 million on team member pay based on the announcement you'll have seen over the last few weeks. GBP 10 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 it for different purposes. You know, that's a one-off that won't annualize. And then the other GBP 5 million is accelerating a pay increase, which with the living wage increases annually, you know, will in theory be built into models for next year. It's accelerating that. That's not anything new. It's just an acceleration of cost. We're also accelerating GBP 15 million of IT and marketing costs.
Specifically, we're investing in a new reservation system which will unlock future commercial opportunities. We're also taking the opportunity, based on you know, how we feel versus the competitors versus the competitor situation as well to put our foot down and put some more money into marketing as well. Whether those costs are ones that we'll annualize into next year, I'm not really ready to talk about next year's giving guidance yet on next year's cost because obviously there's still quite a lot of uncertainty in cost inflation. What I can talk about is utilities. We're 70% hedged now for next year, as mentioned earlier on, which is a collective GBP 20 million crystallization of cost. Then plus another GBP 20 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 GBP 25 million cost in terms of improvements in interest costs, as well with high levels of deposits obviously and higher interest rates, offsetting and a bit of notional pension interest within that. I think we'll know a lot more when we announce our next set of quarterly results in January. We'll be able to give much better guidance in terms of what we think will happen with cost base for next year. Beyond what we've said in terms of the base inflation that we've built in, I'm not saying anything else is particularly applying to next year.
And final piece is just the underlying cost savings figure that you've been doing continuously. I didn't see how granular you had made that on an annual basis and what it might be for this year and next. I'm not sure if I've missed that or whether you just have the long-term targets.
We did GBP 40 million last year, and so which was off of a GBP 100 million three-year target. We just rolled the three-year target forward for the next three years, GBP 100 million. I would say at this stage is if you just made it a third, a third, a 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. Other times we can just make savings in procurement or in a labor model or similar. I just cut it three ways and use that for modeling purposes.
Fantastic. Thank you very much.
Thanks, Alex.
Our next question is from Tim Barrett at Numis. Please go ahead.
Hi, Tim.
Thank you. Well, hi. Morning both of you, 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 to put a more specific timetable on how you're gonna get there? Coming back on leverage, is investment grade basically still 3.5x? 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 x. I just wondered by how much. Thanks very much.
Tim. Okay, Tim. Yeah, no, you will never, ever entice me to put a timescale. It took me 12-18 months on arrival here in 2015, 2016 to get away from having a room target by month virtually, and the whole dysfunction that gives your organization in terms of the push at the end of a year to hit a room number target without which, you know, confidence in the business drops, people running in and out of hotels, yeah, on the 29th of February with beds trying to get them open. No, you will never get me to do that. Also, you know, the reason it's ultimately dysfunctional, of course, is we've got choices about capital allocation.
You know, in one year we may choose to do a lot in the U.K. because the right opportunities have come with great returns profiles and we want to do more, and there'll be, you know, other times where Germany or other places are where we want to put our money and where the returns profile will be higher. 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. We don't want for opportunity, that's for sure. I think, Hemant will talk about the leverage. Yes, we're obviously, I think it's 3.7x r ather than 3.5x is the leverage number that we have got. Slightly higher than what we used to use, Tim. We're a long way off it. Let Hemant-
Yeah. I mean, Tim, yeah, it's 3.7x because post IFRS update to the target. As agreed with Fitch, who are our rating agency, 3.7x is in theory the upward threshold, the target that we'd be aiming for. Yeah, at the moment, as of half year, we're at 2.8x, as you mentioned. I'm not gonna speculate in terms of what, you know, what that might look like going forward. Again, that's the point, I suppose, of giving the capital allocation framework. You know, that overall is the target we're aiming for.
There are the other variables here are very much, you know, our ambitions in terms of investment and our view of the market conditions, which obviously at the moment, as we've mentioned, already quite variable. I'm not gonna give you more in terms of, you know, what that run rate might look like. You know, obviously we're in a position where we're below that, so we do want to run efficient balance sheet, as we mentioned already.
Plenty of headroom. Thank you, Tim.
Yeah. That's helpful. Thank you both.
Our next question comes from Ivor Jones at Peel Hunt. Please go ahead.
Hi, Ivor.
Hi. Good morning. Don't forget those of us you're leaving behind. On the real estate market, sort of an extension of of Alex's question, you seem to have a better balance sheet than some property companies. Is there an opportunity for you to to buy an existing leasehold? Specifically, could you talk about the 5 The Strand project that you said is a GBP 200 million project. Was that freehold? Do you release the capital back out of it? Is that part of structure and are there another? Could there be another couple of GBP 200 million pounders t hat drove you into London, or was that a very particular circumstance? Thank you.
Okay. Brilliant. Thank you very much for the question. I'll let Hemant deal with the first bit of it, but 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 of you who know London well, it's just off Trafalgar Square, between Charing Cross station, along that little walkway into Trafalgar Square. It is quite the most astonishingly good showcase location for a Premier Inn property. It'll be a hub property by Premier Inn. It is a property we've coveted for some time. It is not the first time we've attempted to acquire it.
We've had several goes over the course of the last few years. Yes, it is a freehold. 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. You know, obviously, that is a number of years away. It'll be opening probably early 2027. It's a long term. We always will have. It's a big hotel, but we have other hotels which are bigger, so we're used to operating big hotels and we have got other big hub hotels. Don't think it's out of kilter with the estate, it isn't. 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 huge opportunity in London. We are still underweight in London, so this is a great opportunity. Hub in London has performed brilliantly for us, so no reason to suppose that this one will not. Of course, yes, we can, if we choose to, release capital at various points in the development cycle.
You'll have seen us do that with other properties in London, and forward from. Usually when it's much lower risk and the yield for us therefore is better and we get a lower rental payment as well from an operating profit perspective. Yeah, that is an available option to us. I would hope actually the next few years might bring us more opportunities for developments in London than we've had. You know, the last few years, it's been very difficult to buy freehold in London, and that may ease up over the coming period.
Okay. Your question on whether we would potentially buy back. I mean, actually, just in relation to the point that Alison just made, it really does depend on the yield, property yields. It's exactly the same as when we make tactical sale and leasebacks. We'll make the decision based on that particular property at the time in terms of yield and cash flows that you know and make the decision on that basis to make sure it's most advantageous to us. It works the other way around. In theory, not against buying back in if the opportunity allows, it would all depend on whether that was a sensible decision in terms of cash flows based on yields. Which I think what you'd expect us to say.
Yes. Returns profile and all that. Good. Thank you, Ivor.
Our last question comes from Desmond Taljaard from L+R Hotels. Please go ahead.
Good morning, Desmond.
Apologies. Desmond, your line is now open.
Hello? Hello?
Oh, morning, Desmond. Hi. We can hear you now, Desmond.
Yeah. Sorry. I think my asterisk one ran out of time, so thank you. Well done. A great performance so far this year. I'm trying to get an understanding of how your lease estate is performing. I wonder if you could give an indication further breakdown that excellent page 46 of your release today that shows EBITDA split by freehold and leasehold in the U.K. and Germany. Also the extent the average EBITDA to rent coverage in those markets for the lease estate.
Okay. I think, Desmond, probably the best way of doing this is taking this offline, actually, and talking to you directly about your specific question. I mean, we probably we won't be able to release information below this level, necessarily, 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.
Just to get a sense how profitable the lease estate is, obviously, versus the freehold estate.
Yeah.
Yeah. Well, they are possible. Let's pick it up on. I don't know whether this is helpful, but with a sort of an overview, and this might be helpful in terms of how we think about the properties. We don't mind whether we have freehold or leasehold. It's one of the beauties actually of our ability to get the right location is a lot of other people we're competing for hotel development sites they can't buy freehold or they have to have leasehold 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.
We set them in a manner which makes sure that we take account of the lease obligations and liabilities that we have. A lease-adjusted returns hurdle. Because they both work for us and they both give us the right level of returns in the portfolio and they're profitable, we don't mind which we do. Let's pick up your more specific questions and see whether we can answer those when we see you later this week.
Okay. A quick general question about, I understood you spent GBP 1 billion to date on the German portfolio, and I think you've opened about 7,500. What's the overall cost to have opened the roughly, excuse me, I would say about 14,500 rooms by the time you get to the current pipeline? What will your basis be when the last of that hotel pipeline is opened?
That's a GBP 1 billion investment that we've made.
Oh, that's it. Yeah. I thought you said GBP 1 billion to date.
No, it includes the pipeline.
Yeah, it won't include conversion costs. There'll be conversion costs still to come as we open the pipeline going forward, but we've committed to GBP 1 billion so far.
Where our pipeline is being developed by a developer, obviously we aren't paying for that. If we acquire it or in M&A and convert, then future M&A conversion costs aren't yet in there. Broadly speaking, that GBP 1 billion investment is covering what, you know, what we've got today in opening and committed.
Okay. The 14,500 leased and owned will be, you'll be in for GBP 1 billion when that last 38-
Yes. Broadly speaking.
Plus any conversion costs, yes.
Okay.
All right. Thanks a lot.
That's great. Thank you.
Thank you.
I think we may have come to the end of the Q&A. I would 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 detail. Thanks, everybody. Have a great day. Thank you.
This concludes today's conference call. Thank you for dialing in. You may now disconnect your lines.