Ladies and gentlemen, good day, and welcome to the Lemon Tree Hotels Limited Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Anup Pujari from CDR India. Thank you, and over to you.
Thank you. Good afternoon, everyone, and thank you for joining us on Lemon Tree Hotels Q2 and H1 FY24 earnings conference call. We have with us Mr. Patanjali Keswani, Chairman and Managing Director, Mr. Kapil Sharma, Chief Financial Officer, and Mr. Vikramjit Singh, President of the company. We would like to begin the call with brief opening remarks from the management, following which we'll have the forum open for an interactive question and answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation that was shared with you earlier. I would now request Mr. Keswani to make his opening remarks.
Good afternoon, everyone, and thank you for joining us on the call. I will be covering the quarterly business highlights and the financial performance for Q2 FY 2024, post which we will open the forum for your questions and suggestions. In Q2, Lemon Tree continued its growth momentum from the previous year. Q2 FY 2024 has been the best ever Q2 performance in terms of gross ARR, revenue, EBITDA, PBT and PAT for Lemon Tree Hotels. This quarter, Lemon Tree's focus was on increasing occupancy and maximizing RevPAR. Q2 FY 2024 recorded a gross ARR of INR 5,268, which increased 7.1% year-on-year and increased 0.6% quarter-on-quarter. Occupancy also increased by 542 basis points year-on-year and 143 basis points quarter-on-quarter.
This translated into a RevPAR of INR 3,678, which increased 15.9% year-on-year and 2.6% quarter-on-quarter. Total revenue for the company in Q2 was INR 230.1 crores, which was higher by 16.6% year-on-year and 2.5% quarter-on-quarter. The net EBITDA margin of the company in Q2 FY 2024 stood at 45.5%, which decreased by 225 basis points versus Q2 FY 2023 and by 203 basis points versus Q1 FY 2024, mainly owing to planned increase in renovation expenses above that spent in Q2 FY 2023 and pre-operative expenses of Aurika Mumbai Skycity.
These two incremental expenses accounted for a total increase in expense of about INR 4.5 crores beyond Q2 FY 2023, which translated to a reduction in EBITDA margin by about 2 percentage points on revenue. The Keys portfolio also saw a drop in EBITDA margin percentage by nearly 5 percentage points year-on-year due to a significant increase in investment and renovation during Q2 FY 2024. Furthermore, the closing down of New Delhi during the G20 summit also impacted our hotels here, with most of the business of the event being diverted to five-star deluxe hotels, which is why you see a drop in our performance in New Delhi versus the industry. The PAT for Q2 FY 2024 grew by 36.3% year-on-year from INR 19.6 crores to INR 26.4 crores.
Our cash profit stood at INR 49 crore, which increased 10.4% year-over-year. Fees from managed and franchise contracts for third-party owned hotels stood at INR 10.4 crore in Q2 FY 2024, up 58% from INR 6.6 crore in Q2 2023. Total management fees for Lemon Tree were up 29% year-over-year at INR 24 crore compared to INR 12.1 crore in Q2 FY 2023. It's the wrong number. Hotel level revenue from the... Check this, I just want to see it. Hotel level revenue from the owned portfolio increased by 15% year-over-year on a same store basis, while the network revenue for Lemon Tree, that is total system revenue of owned and managed/franchised hotels, increased by 17% year-over-year. Total network revenue stood at INR 691 crore for H1 2024, as compared to INR 591 crore in H1 2023.
Just a correction, as far as management fee income went, in the previous quarter, FY 2023, it was INR 18.7 crores, which increased to INR 24 crores in this quarter. During the quarter, we signed 11 new management and franchise contracts, which added 639 rooms to our pipeline. As of 30th September 2023, our operational inventory comprised 95 hotels with 8,760 rooms, and our pipeline comprised 52 hotels with 4,092 rooms. As of now, we expect our operational inventory to be, over 105 hotels with over 10,000 rooms by the end of this financial year. I'm also happy to inform you about the launch of Aurika, Mumbai Skycity on 5th October 2023....
This hotel has 669 rooms and suites, and is currently the largest hotel by number of rooms in India. Some pictures in the investor presentation will give you an idea about the hotel's look and feel. With this, I come to the end of my opening remarks, and would ask the moderator to open the forum for any questions that you may have.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on a touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have our first question from the line of Jaiveer Shekhawat from Ambit Capital. Please go ahead.
Sure. Thanks for taking my question, and good afternoon, Mr. Keswani, and first of all, congratulations for opening of Aurika, Mumbai. So my first question is in relation to what you had earlier, in your earlier calls, mentioned about an expectation of 15%+ , kind of, for RevPAR growth over the next 2 to 3 years. And especially when I see your Lemon Tree Premier and Lemon Tree portfolio, you're already clocking 75%+ occupancy. I think Lemon Tree Premier, you're already touching 80%. So in that context, I mean, how do you see your ability to drive, say, an ADR growth of 10%-15% in order to meet that 15% RevPAR growth? Because your occupancies are already in line with what it used to be, even pre-COVID levels.
So see, when I spoke about this, I spoke about the system growth, that is the entire managed portfolio growth level. So if you notice, Aurika Hotels still is at very low occupancy levels.
Mm-hmm.
which was 49% in Q2 this year. If you look at the portfolio of Red Fox, it was at 69, and Keys by Lemon Tree was 59. So really, it's a twin strategy. We— Where possible, we will drive occupancies, and where occupancies are already peaking, we will look at driving weekend occupancies and higher ARRs during the weekdays. So it's a sum of the parts, really, but I am very confident that now, especially with the addition of Aurika, Mumbai, our own portfolio will show a minimum revenue growth of 15%, perhaps for the next 3-4 years, minimum growth.
Sure. Sure, and sir, on your overall debt levels, it seems to have increased over the last year. I understand it's because of the Aurika expansion as well. So one, where do you see it by the end of the year?
No, on the contrary. The real increase in debt was because of the unplanned acquisition of the CCPS, our share of the CCPS-
Yes.
-from APG. Because initially our plan was to inject assets to equalize our shareholding, but since that was not financially very viable, we instead opted for this. So that was about, how much was it? About INR 170 crores? Yeah, so that was the main reason. The majority of the debt increase was for that. I had also mentioned, if I remember right, here, I mean, one or two investor calls ago, that our debt would peak with the opening of Aurika.
Mm-hmm.
And then, with the cash flow of Aurika, it would automatically reduce. So it's really... Let's put it this way: Aurika is not earning yet what it can account, what it can take care of the debt side. Are you getting me?
Yes. Yes.
So it's a temporary, think of it as a, the equivalent of an overdraft till such time Aurika delivers, after which, we'll stabilize, as I said. But I would really like you to look at debt at the end of this financial year, really, rather than half year.
Sure. Sir, lastly, just to understand your perspective, now we understand on the supply side that it seems to be quite muted, but on the demand side, I mean, how much further room do you see from current levels before it starts sort of impacting demand due to unaffordability? And are you also seeing sort of people moving from upscale and luxury categories downwards, which is sort of supporting your current demand and pricing?
See, I would not look at it as movements up and down. Basically, I think with GDP growth, the percentage of discretionary consumption in the hotel space is growing. That's my broad observation. Obviously, a part of that will be in luxury, a part of that will be in mid-market, and a part of that will be in economy. And of course, there will be movements up and down that as and when you change pricing, then a consumer of a certain category might decide to move down because of affordability. I think, as I said, the good proxy to look at is airline traffic, because that has a direct correlation to hotel room demand.
I think for you, the most interesting indicator should be the number of airplanes ordered by the airlines, which implies a growth in supply and which is obviously predicated on a growth in demand. Then please look at the growth in supply of hotel rooms. So my best guess is that airline seat capacity will more than double in the next few years, whereas hotel capacity will probably increase by 15%. So that will automatically lead to a huge mismatch in terms of demand supply for hotels. And which is why I am quite sanguine that the next four or five years will be very good years for the hotel industry and across sectors. Now, price hikes are a simple function of demand supply, Jaiveer. So, we are only interested in filling our, you know, hotels.
If there is more demand, then obviously and naturally, we will reprice to fill our hotels, and not, and not look at demand beyond that.
Sure. Sure, I think this is very helpful. So wish you all the very best. Thank you.
Thank you.
Thank you. We take the next question from the line of Jinesh Joshi from Prabhudas Lilladher. Please go ahead.
Thanks for the opportunity. I have two questions. One is with respect to the booking from our own website, which have increased from about 2% to 7% in this quarter. So can you highlight what has led to growth in organic traffic for us?
Yeah. So, Jinesh, let me explain this. You know, over the COVID years, we had started investing a little time in looking at revamping our entire website and our loyalty program, which frankly, was not really operational during COVID, because as you know, there was really no demand. So what you are seeing is the result of our revamp of our website and our loyalty program, and this was really launched, I think, in January this year. So what you are seeing is a result really of some work in the last two years, but the output you are seeing is now really starting to show itself in our brand.com bookings. And as you would guess, it is the most efficient and cost-effective way of getting customer reservations.
It has the lowest cost, and it has the highest stickiness. So it is very encouraging for us. And in sync with our strategy to maximize retail traffic.
Got that. And sir, in the last quarter, you had highlighted that your power cost was high due to some power cuts in Gurgaon, and hence, you had to use DG sets where the per unit cost is high. But even if I look at this quarter, our run rate is more or less similar to what it was in 1Q. So has the situation not changed as yet? And what should be the steady state, the power and fuel run rate that one should be looking at?
So, see, typically, excluding Aurika, Mumbai, I would say as you look at last year, our winter revenue is typically, say, 1.2-1.25 the summer revenue, and costs more or less remain flat. In fact, power costs actually come down a little bit. So from that perspective, if... And I'm just speaking, you know, without really getting into the math of it, if our revenue was, say, what was our total revenue? It was-
Two thirty.
The previous quarter?
Two twenty-seven.
So it was, say, INR 460 crores. Then technically, and I'm—this is not guidance, we should do INR 1,000 crores of revenue of owned hotels this year. Are you with me? Now, you apply this, it is currently 8%, our power and fuel expenses. So if you look at 8%, then in winter, it will be 7%, and therefore, the weighted average, our power and fuel expenses will be about 7.5%, which is typically where we are quite comfortable with. After that, any increase in rate will drive the percentage down, not occupancy, because occupancy does lead to some level of power consumption. Am I being clear?
Yes, sir. That was pretty clear. One last question from my side with respect to Aurika. I mean, we have opened this hotel on fifth of October. So just wanted to kind of understand how's the feedback, how many rooms are we operating currently, and how are the ARRs trending? Because if we do a random check on some OTAs, especially this time around, the ARRs appear to be higher than what we have guided for FY 2026. So how should we be looking at the pricing trend as well?
What I can tell you is, Aurika Mumbai will be EBITDA positive from this quarter for sure. Okay? Now, if you look at the demand, we launched this hotel on October 5th. I think we did about 100 rooms a day, which is about 15% occupancy in October. The ARR was low for two reasons, because we had very little retail traffic. For retail traffic, it is an interesting chicken and egg situation. To build retail traffic, you need retail feedback. And October did not have much retail traffic because, A, it's a new hotel, and B, it was Dussehra, and so on and so forth. So we have really started building a base in this hotel of airline crew.
There are about 200 rooms of airline crew in this hotel, but that's a low-rate business, typically at about, I think, INR 7,000-INR 7,500. So it is really, think of it as a strategy to cover costs till we build our real long-term business, which is corporate and retail. My broad guess is that we will close Q3 at over 200 rooms a day, average. And ARR may be of over INR 8,500. So this ARR is deflated because a very significant section or segment of this 200 rooms per day will be crew. But I, what I'm very sure about is that Q4 will be a showstopper for Aurika.
Thank you so much, sir, and all the best for the future.
Thank you.
Thank you. Ladies and gentlemen, to ask a question, please press star and one on your phone now. We'll take the next question from the line of Santosh Sinha from Emkay Global. Please go ahead.
Thank you. Thanks for taking my question. My question is regarding the margin. In this quarter, we have seen some margin hit due to some planned expenses. My question is, what is the outlook and what are the margin levers that are there with the company? And how should we look it forward, going forward?
Santosh, see, as I said, look at it broadly as follows: There is a fixed cost element in our business which operates throughout the year. That is roughly half our total expenses, roughly. Then there is a variable cost, which is based on occupancy and consumption of food and number of bookings you get from online channels. That is roughly the other half. I'm just doing a simple 1-on-1 on hotel finance. If income in summer, and I'm again being very approximate, our income in summer is, say, INR 44, and INR 56 in winter. Your ex- and your year-round EBITDA is, say, 50%. Then in summer, obviously, your costs will be nearly equal to your costs in winter, but your income will be, you know, 25% lower.
Like in last year, I would just request you to have a look at our last year 4 quarters, and you will find our EBITDA in winter is always significantly higher than our EBITDA in summer, because of seasonality. So in winter, typically, occupancy and rates are higher. So to put it simply, I would have probably on a INR 44, you know, income in summer, an expense of, say, INR 24, and in winter, for a INR 56 revenue, I would have an expense of INR 26. Does that make sense?
Yeah, that is very helpful.
Now, all I had said was, I think I said this in earlier conference earnings calls also, that we will be. Because we are pretty sure about demand outpacing supply, at least for the next 3-4 years, we are renovating our entire portfolio because there was a. It's a catch-up, really, because we didn't do anything in the 2 years of COVID, and we did a little bit last year. So what you are seeing in Q1, Q2, Q3, and you will see in Q4, is significant investments in renovation, because ultimately we want to reprice our portfolio up, fairly significantly every year for the next 4 years. So that is, that is the reason you see a 2% hit in our EBITDA margins, because it is mostly due to renovation, increase in renovation.
So basically, this 2% is incremental renovation beyond normal renovation. And a part is, of course, I think a couple of INR crore is also because of, Aurika, pre-opening expenses in this quarter, which is again, about a percentage of revenue. So Q3 and Q4, Aurika Mumbai will be a deflator of the of the EBITDA margin, though on absolute basis, EBITDA INR crore will increase, because I do not expect in Q4, Aurika Mumbai to have an EBITDA of more than 35, maybe around 35%. So on a weighted average basis, it will obviously bring the EBITDA margin down.
That was helpful. Just one follow-up question. Whenever some property goes renovation, under renovation, what kind of ARR improvement do we generally see for that property?
After renovation?
Yes.
Well, we renovate on the basis of whatever we invest in renovation, we expect to recover in the following year. So really, we have a slightly different way of looking at renovation. We have what is called brand maintenance standards renovation, which is typically INR 2 lakhs - INR 3 lakhs a room, averaged out. And then we have in deep markets like Hyderabad, for example, we have significant renovations, which is like INR 8 lakhs a room, which is really where we think we can reprice to recover this INR 8 lakhs per room in that next following year. So this is a function of demand, supply, and our anticipation of it. So it depends on how much we invest. Sometimes we invest in a hotel just to maintain brand standards, and we do not expect too large an increase in revenue.
That is in the Keys portfolio, in half the Keys portfolio. In other hotels like Hyderabad or Keys, Bangalore and Keys Pune, you know, we will invest significant sums per room because we expect to recover that through a combination of pricing and of repricing and occupancy.
One last question regarding CapEx. So, what is your outlook on the CapEx? What kind of CapEx we can see for up to FY 26?
FY 2026, we will spend an incremental, well, we have already, we, I think this year we will spend maybe INR 50 crores on renovation. Next two years, we will spend another INR 100 crores, but there will be no other CapEx.
This is for, just for renovation or, construction of hotels also?
No, there is no planned construction of any other hotel other than Shimla, where I think it is totally another INR 20 crores - INR 25 crores left to open the hotel. I think we've already invested INR 30 crores into it, right?
Yes.
That is already there. So we will open Shimla. Now, we'll give a specific date after we review that project, because our focus was on Aurika Mumbai. The good news is Aurika Mumbai, probably we did not end up spending INR 950 crores. It will be closer to INR 900 crores. And we don't have any other CapEx. No, nothing. Yeah.
Uh-
So now what you will see is the CapEx cycle, fundamentally, Santosh, is over, and now it's all a question of sweating all these assets, in specifically Aurika, Mumbai. And that cash flow, I can, I think, with some certainty assure you, will be quite a pleasant surprise for next year. Or from Q4, actually.
Thank you. Thanks for taking my questions.
Thank you. We have our next question from the line of Rajiv from DAM Capital. Please go ahead.
Yeah, good afternoon, sir. Thanks for the opportunity. Sir, with regard to this, pre-opening expenses, this entire thing is charged in Q2, or there is some spillover in Q3 as well?
So we charged a total of about INR 2 crore, of which the majority, about INR 1.4 crore, was in Q2, to the P&L.
Sure. And with regard to this BCG project, the payout has already started or... And then how much is the quantum of the entire project?
Well, that is an NDA kind of thing. Let me put it this way: the understanding is, this is an investment in setting up a platform for ultimately which will ultimately be monetized by providing revenue management, sales, and cost control services, whether to our own hotels or to managed hotels or to franchised hotels or to other hotels. My broad understanding is that our entire investment in this project, we will look at... And this will be over 18-24 months, at the least, will lead to a return of 100% of investment every year.
Sure.
If we invest INR 100 in this entire assignment, we expect to increase our EBITDA by INR 100, once all the levers are in place. That will really be, frankly, from FY 2026, so I would, you know, not really like to talk about it today.
Sure. And with regard to your slide 11, where you have given this market segments breakup, if you reverse work the ARRs by segment, it looks like the airline bit is the most remunerative, at least for this quarter. Slightly confounding. Can you explain that?
Very good point. Thank you. So, Rajiv, here's the interesting thing. You know, when suppose, you know, airlines are price sensitive, so you can assume that in, this is a question of demand and supply. So because of increasing rates, some airlines are moving from five stars to mid-market. Let me put it this way: so if you, if, if your choice is between a branded five star or a branded four star, and the branded five star is offering, say, INR 10,000 as a rate to you, then the airline will shift to a branded, say, Lemon Tree Premier at INR 7,000. Are you getting me?
Yeah.
So we are also being a little opportunistic here. The interesting thing is, with the increase in demand in airline traffic, airlines are now getting into wet leases, which is temporary increases in supply, as I'm sure you know, by leasing planes with crew. So those crew have to be put somewhere.
Right.
We are very happy to offer that. The advantage of that is these are also prepaid businesses. So unlike normal airline business, in wet leases, we ask for 100% payment upfront, because it's a one-off, so to speak. I reckon that till the full supply of planes come into India, and I believe the order is over 1,000 planes or something, there will continue to be wet leases, and we will continue to offer, obviously, our rooms at an appropriate price to meet this demand. Once the full supply of aircraft are in place, then the wet lease business will disappear. What will come instead will be a very large demand for airline crew. My broad guess is airline crew will get repriced quite significantly and will become a relevant segment for the entire branded hotel industry, three star upwards.
Sure. So the point is because it's, I mean, higher by 25%, YoY, in terms of pricing, how much, let's say, juice is left on this particular bit? Or, are we risking that they will down price, go even further?
No, it will, it will keep getting repriced. What might happen is that if you are normally, like it has happened in Gurgaon, that, Lemon Tree, you know, earlier there were some crews staying with us, for example, in Lemon Tree Premier. I'm just giving you an interesting example. In Lemon Tree Premier, Delhi, I think last year it, it moved to Lemon Tree, Red Fox, Delhi. This year it has moved to Lemon Tree, Sector 60, Gurgaon, and maybe two years later it will shift to Red Fox, Sector 60, Gurgaon. Because, as demand increases in our higher value hotels, we keep repricing, and therefore, price-sensitive businesses like airline crew will step down into a lower brand of ours, because that becomes, affordable.
Fair point. And just an extension of the, on the retail side of the business, which you combine your OTA, web, and other FITs, let's say on a full year basis, YoY basis, that has increased only 5% in terms of... So earlier, the gap between, let's say, your corporate and FIT used to be 20%, corporate and retail used to be 20%, with retail being 20% premium, and that premium has collapsed to 4% or 5% now. Why the retail pricing is not, you know, working out, or-
Let's put it this way: Our whole strategy is to eliminate anomalies in segmental pricing. So if you look at Q2 FY 2023, let me just give you an example. Corporate ARR in Q2 FY 2023, after a 20% hike or 15% hike, was as low as INR 4,600. Now, in Q2 FY 2024, it has become nearly INR 5,000, so it has gone up by 8%. Our retail pricing has gone up only by 3%. So what we are really doing is, we are removing anomalies. We are removing the lower price. So when, when I say corporate pricing has gone up, it does not mean the same corporates are using us. When you take your price up, corporates, like airlines, are bulk buyers and price sensitive.
So when you take your average rate up, some of your previous demand disappears. The whole question is: How do you substitute it? Do you substitute it with more corporates, or do you substitute it with other segments? So broadly, our whole intent is to reprice our entire offerings. Segments will change when you reprice, and obviously, let me put it to you in a slightly different way. If there are two customers, one is at, you know, INR 40 and one is at INR 60, I am quite happy to remove the INR 40 guy and replace him with two INR 52 guys, by dropping the INR 60 price to INR 52. Am I making sense?
Yes.
So really, it is not static. I will be happy to drop my retail pricing to increase retail participation because the substitution, there is no cannibalization. In fact, the average increase in rate is still positive.
Yeah. Look, so the question was, because the gap between, let's say, corporate and retailers collapsed, the mix change benefit which you are getting, let's say, for the last three quarters, incrementally won't get. So now it's only basically if you get, let's say, corporate rate hikes, and retail would basically, you know, catch up on the same side.
So on the contrary, what you are not taking into account is, risk management. All my retail business is because of my brand. Most of my corporate business is because of my price. So as long as I keep increasing my retail demand, it is, it is actually a risk mitigation strategy, because these are customers who are sticky with me, whereas corporates are not sticky.
Sure. Yeah, that's, that's all my time. All the best.
Thank you. We have our next question from the line of Sumant Kumar from Motilal Oswal. Please go ahead.
Yeah. Hi, sir.
Uh, hi.
Can you talk about the INR 4.4 crore bifurcation for operating expense for Aurika in Mumbai?
4.4? Which number are we talking about?
We have a additional cost, as per the notes of account and PPT, INR 4.4 crore, we have additional cost for renovation and Aurika Hotel operating cost.
Okay, INR 1.4 crore is pre-op, and INR 3 crore is the increase in renovation expenses beyond Q2, what we spent in Q2 2023.
Okay. What is the employee cost has increased Q-over-Q. What is the additional in employee cost for this Aurika Hotel?
... This quarter? Well, most of this would be, this would be, employee costs. See, the reason are, if you see our waterfall, the reason payroll is showing a significant hike, and therefore reducing the flow through, I'm referring to slide 15, is multiple reasons.
Mm.
Change in minimum wages, which affects our salary. Because of profit, our bonus payouts have increased from, I think, 8.33%-20%.
Yeah.
We have also hired some more people in some departments which are linked to either revenue or to business development. We have done a fitment. We have done an ongoing fitment of wages because of inflation, and I think also because we did not do much in the three years, last three years. It's a combination of all this.
Okay. What is the incremental cost of Aurika this quarter?
In terms of staffing?
Employee, yeah, yeah. Staff cost.
We have about, you know, I don't have the exact number offhand, but-
Okay.
It should be about INR 4 crores.
Okay. Okay. And overall, ARR growth for Lemon Tree, when we talk about compared to other industry players, 7% ARR and the other players are reporting double-digit growth. So is it because of the lower, lower end of the hotels, or you say budget hotels, has a lesser pricing power at this, at this juncture compared to luxury? So this is the main reason for lower price ARR increase for this quarter?
No. It is to catch up on occupancy. Show that slide.
Okay. Okay.
Let me show you... No, show that slide of STR growth.
So where is- All India. How did that breakdown come? There is a slide, increase in ARR versus... Yeah, please go to slide 12, Sumant.
Okay. Yes, sir.
Now, is our strategy clearer here?
Yes.
If you look at it last year, we increased our prices more than competition.
Okay.
This year, we increased our occupancy by increasing price less than competition, but we achieved the same RevPAR.
Correct.
Right. So what is the purpose? The purpose is that when last year we increased prices, as I was explaining a little earlier, a bunch of our customers dropped off, the price-sensitive lot.
Okay.
So then you have to find new customers. Now, these new customers are here at this price point, which is whatever it is. Next year, my expectation is we will have a much stronger ability to reprice because the customers we have are less price-sensitive than last year, in the last year.
Thank you so much, sir.
Thank you.
Thank you. We have our next question from the line of Sumit Kumar from JM Financial. Please go ahead.
Hi. Good afternoon, sir. Thanks for taking my question, and congratulations on the opening of Aurika Hotel.
Thank you.
My question, one of them got answered in the previous one. The second question is, since you've already mentioned that, debt will be peaking out, and it will reduce from now on, which is basically the opening of the Aurika hotel, how-
Sorry, sir, we cannot hear you. Can you please speak louder?
Is this better?
Yeah, this is much better, Sumit.
Yeah. So I was asking about how are you looking at newer acquisitions in your own portfolio going forward, since you've mentioned that debt has peaked out and will be going down post-opening of the Mumbai Aurika?
So that's a bit of a tricky question in the sense, we are right now in the middle of defining a very clear capital allocation policy. So I think our board has been asking that now that your current CapEx cycle is over, because we've deployed, including Aurika, we have deployed or operationalized roughly INR 2,500 crores of what used to be CWIP. Between the new Lemon Tree Premier, the acquisition of Keys, and the opening of Aurika, so please note, all these operationalizations came into play in one year before COVID, and now one year, and now one and a half years after COVID. So now we need to sweat these INR 2,500 crores.
The way we look at it is, we need to define a very clear policy as to what is the hurdle rate, under which we will not make any investments in capital assets, and we would prefer to write off our debt. What is the ideal debt-to-equity ratio we feel mitigates all forms of risk? What is the ideal debt-to-EBITDA ratio? And how will we deploy? Because we expect to be significantly free cash flow positive from the following year onwards. So how will we deploy this cash? Will we distribute it? If so, how will we distribute it? Will it be dividends, you know, share buybacks? What is tax effective? ... Will we, you know, how much will we write our debt down to, and so on?
Broadly, without it being UPSI, let me say that the view is that we will bring our debt down as far as possible, maybe even to being debt free. And then, you know, any capital that we deploy in asset acquisitions should meet our weighted average cost of capital hurdle rate. Currently, the WACC is, I think, 14%, based on our debt equity ratio. Currently, I think is about 1.3 to 1?
Yeah.
But we reckon our debt equity ratio will drop dramatically in the next two years, and our debt to EBITDA will equalize also in the next two years. So basically, what we are saying is if today our debt to EBITDA is a little over 3x, we intend to bring it down to 2x and then 1x, hopefully in the next two years. And then after that, of course, the question is: what do we do with the, the free cash flow beyond that?
Sure, sir. My second question, if I may, what are your-- what is your sense on the Udaipur Aurika Hotel? Are you comfortable with the current state of operations, and what would be your strategy around that property?
So see, Aurika Udaipur, unlike most of our portfolio, is highly seasonal. So if our portfolio, I can say with some degree of certainty, winter revenue is 1.25x of summer revenue. In Aurika, I can say with certainty it is at least 2x of summer revenue, because it gets so much business in winter and relatively less in summer. So I am quite pleased, frankly, with Aurika's performance. There is still a catch-up because it is a new brand. It is operating in a different space to Lemon Tree's normal space.
But on an aggregate basis, although, you know, we focus on finding the right price, so our average daily rate is over INR 11,000 in summer in Aurika, and we've increased the occupancy to 50%, which I am told is a 10% premium over the industry in Udaipur at this level. So I think it's pretty good progress, and I would urge you to wait for Aurika's performance for the full year to have a look at it to get a better idea.
Sure, sir. Thanks for answering my question. All the best for the future.
Thank you.
Thank you. We have our next question from the line of Jayesh Shah from OHM Portfolio Equity Research. Please go ahead.
Hello, Mr. Keswani. Congratulations for great results.
Thank you.
My questions are, first of all, on renovation. Why is it that the renovation is kicking in in 2Q and 3Q, which are relatively, busier season compared to 1Q, which should be lowest for you?
Normally, Jayesh, Q2 is the lowest season. Last year was an anomaly where we did better in Q2 than Q1.
I see.
Number two, our renovation is not that we shut a hotel down. We are quite selective. I know in the past, certain, I think, analysts had mentioned that by shutting down inventory, we are likely to suffer a drop in occupancy. But if you notice our occupancy, although we shut, I think we shut 1,000 rooms this year, we did it in such a way that our occupancy actually went up by 5.5%. So see, we are very careful about renovation vis-a-vis loss opportunity cost. And if I say we will continue renovation in Q3 and Q4, it will be in those hotels which perhaps have higher demand in H1 than H2. For example, our Bangalore Keys hotels get a lot of IT employees in summer and less in winter.
So therefore, that renovation will continue on a larger scale. Some hotels like Delhi and, well, Delhi, certainly, which has high demand summer, winter, we will be more careful about the number of rooms we shut and how we shut them. So this is a mix and match combination. We try and do it without incurring a significant opportunity cost in terms of lost business or turn away business.
Okay. So I think you have answered my associated question on occupancy, which I was a bit confused. Coming back to the second one is, are you happy with the Keys hotel performance? Because we have not seen much improvement. I understand your rationale for Keys earlier, but, if the other hotels continue to be a drag, you continue to spend on renovation. Right now, what are your thoughts on Keys?
See, my point is that Keys to me is two portfolios. One is the juicy portfolio and one is the non-juicy portfolio. The juicy portfolio is 380 rooms in Bangalore and 100 rooms in Pune. The medium juicy portfolio is 100 rooms in Visakhapatnam, and the non-juicy portfolio is the Cochin, Ludhiana and Trivandrum, which is another 350 rooms. We are allocating investment in terms of renovation in all these hotels based on our expected return from that investment. The only hygiene factor we are after is to ensure that the brand standards are met, even if a hotel is not likely to give a great return. From a brand perspective, it must have a minimum standard. As far as Keys goes, the way I look at it is that we invested INR 600 crore in it.
I'm not taking into account holding costs, because if I do that, then any investment because of COVID would look odd. We are going to invest roughly, I would say about INR 40 crore in the Keys portfolio. You know, last year we did a bit, this year, next year and the following year. When this entire investment is made, I would expect that the Keys portfolio should give me a minimum return of 15% or INR 100 crore EBITDA. I think you will see that starting to play out, in another 6-9 months when we start opening these renovated rooms, and it's enough number of these renovated rooms across this portfolio. To put it simply, our target is to achieve INR 100 crore EBITDA from Keys, within the next, in a run rate.
You know, 12-18 months from now, you'll keep seeing an improvement in performance. In fact, even now, if you look at Keys, in the few hotels and floors which we renovated, there is a somewhat, you know, increase in occupancy. And you can see it from the last year. We haven't been able to really reprice the, the product, but we've been able to increase the occupancy. And going forward, I think you will see a combination of both. Once occupancy crosses say, 65%, you will see the gross ARR probably jumping to current, what's it called? Red Fox levels.
Right. That's very helpful. The third and the last, macro question is, you know, last year you focused on price side, this year you focused on occupancy. What would be the focus next year? Then, does it mean that by next year we are into the mid-cycle of the hotel, industry?
Yeah, I think we are getting into the mid-cycle, but I think there will be a hockey stick shift into upcycle. That will happen when some other demand segments, which are still extremely low compared to pre-COVID, also kick in. So if I look at demand segments, the foreign demand segment, which used to be 10-12% of our business, is still, I would reckon, if I... I don't have numbers, but I would say it is certainly less than 50% of pre-COVID. So that's a further hike in demand of 5-6% on inventory, probably more for Aurikas. I also expect there will be a fairly significant increase in corporate travel once this work from home stuff completely stops, which I think will happen now, perhaps, in the next 6-9 months.
I also think generally, as the GDP grows, there will be increase in consumption of mid-market hotel rooms, as happened in China between 2008 and 2015. So when all these levers come in, there is an increase in demand, and once we hit an occupancy, stable occupancy level of about 75%, we will look at repricing far more aggressively than we are doing today. And I think that should happen in the next, as I said, by next winter.
Finally, will you accelerate your pace of signing the new hotels now? Because the-
I can't hear you.
Mr. Shah? Mr. Shah, can you please repeat your question?
Can you hear me?
Mr. Shah, we are unable to hear you.
Oh, can you hear me?
Yes.
Yeah, now we can.
Yeah. Will you accelerate the pace of your signing the new hotels? Because we are pretty impressive in the last quarter.
Yeah. So we are actually going to... Well, internally, our business development team says that they will give us 15,000 rooms in the next 3 years, which is actually very little, in my opinion. But our view is very simple. We have said that our strategy is that by 2026, 70% of our portfolio should be managed/franchised, which means since our own portfolio is close to 6,000 rooms, there are 14,000 managed/franchise rooms in the pipeline. What we are really looking at is, typically in India, if you look at signings in the last 6 months, 50% of the signings are for what are called greenfield projects, which means you are signing the hotel today, but the management fees will come after 5 years, because these hotels have to be built.
Then there is Brownfield projects where you really have, say, a 2-year, 2.5-year window before you earn fees, and then conversion, which is typically under 1 year. So our focus is obviously in the sense that we are looking at all three segments to sign. We are also focusing a little more specifically on conversions, so that those fees flow in earlier. And we are looking at strategic locations or cities where due to an assessment based on airline traffic, based on network effect, based on, say, if we go to a city like, hypothetically, Kanpur, which flows, gives a lot of business to-... cities where we have hotels based on airline traffic data, then strategically, we would like to be physically present in those cities to drive that outbound traffic.
So it's a combination of many things, and we are, while we are opportunistic in the sense that any query that comes to us, we reactively go all out for it, and there are plenty of such queries. We are also proactive in reaching out to those cities, locations and hotels where it makes sense for us to have a flag immediately, and we get the fees fast. Does that answer the question?
Yes. Thank you very much, and best wishes.
Thank you.
Thank you. We have our next question from the line of Pallavi Deshpande from Sameeksha Capital. Please go ahead.
Hi. So I just wanted to understand, you know, the issue in Delhi, I understand, but, why, how come it's not affected the Gurgaon properties?
Because in during G20, they shut down Delhi. Airport to the city. Gurgaon is south, but from the airport to the center of the city on New Delhi, it was like, I don't know, it was a deserted city.
Right. Thanks. But in Calcutta, how many rooms we have last year, and how many rooms we have this year?
Calcutta, we have the same. We have a 139, 142 room, how many rooms here? 142 room hotel. And that's the same it is today as it was last year.
What would explain the decline in the ARR?
In, where?
Calcutta.
In Calcutta? Well, I think in Calcutta, we were looking at some level of, occupancy increase or something. You know, it was a new hotel. Calcutta, I think we opened one year before COVID, and we were trying to build up demand, and it is generally a price-sensitive market. But I must tell you that I was quite pleased to see that now, in the last couple of months, Calcutta has shown, well, certainly in October, a significant increase in ARR, so something is working. We are. I'm not sure exactly what.
Right, sir. Thank you, sir.
Thank you.
Thank you. We'll take our next question from the line of Nihal Mahesh Jham from Nuvama. Please go ahead.
Thank you so much. Good evening, Mr. Keswani. Couple of questions. One was in terms of our capital allocation. Once we're done with the renovation of the Keys portfolio, are we looking at launching further hotels under the Keys brand, or this is what we want to focus on?
Are you saying, see, Nihal, are you asking, are we looking at building, owning more Keys Hotels or just growing the portfolio?
Maybe building or even franchising. Preferably building from a capital allocation perspective.
From a capital allocation, there'll be zero capital deployed. It is only looking at expanding the Keys portfolio via the franchise route to those hotels where we feel the more stringent brand standards of Lemon Tree cannot be applied.
Got that. And the second question was that, pre-COVID, we had tied up for a student housing JV, which obviously, during COVID happened, we put on the back burner. Is there a thought of getting that back or any of those initiatives in the future?
See, we are, we are looking at it, but I think our main focus, as I mentioned earlier, too, in the last 18 months, has been on recovering from COVID, catching up in renovation in terms of product quality, opening Aurika Mumbai, and growing the business development portfolio. So I think that kind of captured the entire bandwidth of our management. Now, student, more than student living, co-house, co-living is a very interesting segment, and, there are. It's a, well, I would say an adjoining, you know, adjoining segment to where we are, and, could, and we could brand that also with the Lemon Tree brand, especially if it is built to purpose. So we are kind of... You know, we have some data on it, but I don't think our focus is on it immediately.
We may look at it maybe 6, 9, 10 months later, because unlike the hotel segment, the advantage of co-living is that it's more of an annuity business, so it actually risk mitigates your volatility of earnings in the hotel business. So from that perspective, I can say with some certainty we are going to look at it, but not right now.
Okay. This is very helpful. Thank you so much, and I wish you all the best.
Thank you.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to management for closing comments. Over to you.
Thank you, everybody, for listening in and for the questions and suggestions. I look forward to our interaction, actually, even more. I'm really looking forward to our interaction after Q4, when I can show you something about how Aurika Bombay performs.
Thank you, sir. On behalf of Lemon Tree Hotels, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.