How brands play into the deals equation
 
How brands play into the deals equation
30 OCTOBER 2017 8:24 AM

When it comes to new builds or hotel transactions, whether a hotel carries a flag and, if so, what brand it is, plays an important part in the decision-making process of developers and lenders.

PHOENIX—A crucial part of any decision to buy or build a new hotel is what brand it will be and what options that opens up for the developers and owners.

During the recent Hotel News Now Deals Roundtable, a group of hotel owners, lenders and brokers spoke about the importance of a hotel brand when it comes to gaining lenders’ approval and what that means for owners who are looking for an acquisition or construction project.

Hotels that can be reflagged are the best hotels to sell, CBRE Hotels SVP Nate Sahn said, because they will get interest from the buying community. There’s more opportunity when moving a hotel up a brand, he said, and hotels that lose flags or are “down-branded” create trickier deals.

“They require more equity going in,” he said. “If it’s going upstream, it’s great.”

Mark Kallenberger, founding principal at Kallenberger Jones & Company, said he hasn’t seen many down-brand deals work, with the only exception being a luxury property converting to an upper-upscale brand, and that’s only because it can reduce costs.

“Otherwise, it just doesn’t work,” he said. “Market image is so important.”

When down-branding a hotel, owners are looking at a minimum 30%-to-40% hit on revenue on day one, said Danny Givertz, SVP at Hunter Hotel Advisors. When acquiring an up-branded hotel, the numbers don’t have any bearing, he said, as they’re looking at price per key.

The conversation then turned to the role soft brands play in deal-making.

“Lenders are absolutely OK with those,” said Rushi Shah, principal and CEO of Aries Conlon Capital. “The reservation system is still there. Lenders get the story.”

The distribution—and its scale—is the key, said Michael Morton, VP of owner relations at Best Western Hotels & Resorts. An independent property will use an online travel agency, such as Expedia, and have a 20% margin there, he said. Moving to a brand company’s soft-brand collection offers the selling point of its distribution network.

“So if we can displace through a dot-com what you’re relying on from high-commission OTA stuff, that’s a plus,” he said. “Even if we don’t, worst-case scenario, they don’t book through a dot-com, which is impossible, you’re still saving 3% to 4%.”

Customers like that independent feel, he said, but developers and lenders like having the engine and support of a brand behind it.

For financing independent hotels, Shah said he can leverage up and deliver better net operating income. Lenders are underwriting 15%, he said.

Millennials play a big factor in the soft-brand guest profile, said Bob Rauch, president and CEO of RAR Hospitality. This guest demographic is comfortable with independent hotels. The debt piece works for soft brands, he said, and the equity player is comfortable.

Influences on deals
Guests’ loyalty isn’t to the brand, Kallenberger said, but to the parent chain. Having another hotel in a market doesn’t seem to cause as much damage as the others, and customers are more segmented. Travelers who are on the road 20 to 40 days a year are saving up their points for a family vacation, he said.

When making a deal, loyalty programs play a part in the underwriting process, said Bill DeForrest, president and CEO of Spire Hospitality. It’s about what his company can do to differentiate the property from others in the market, he said, and seeing the distribution in one brand family might be less in a market than other brand families.

“I can create a point of difference with other brands there, deliver a different experience,” he said. “That has worked for us. It’s part of the overall strategy.”

While loyalty programs don’t drive a deal, they do indicate what the property’s ability to outperform might be, DeForrest said. The ability for people to have different choices within a brand family is there, he said. It’s a matter of figuring out how to build something that might be different.

Areas of protection
From a lender standpoint, having an area of protection around branded hotels is a plus, said Steve Martens, president of The Martens Companies. There are ways developers can mitigate that, he said.

It’s dependent upon the situation, Sahn said. It doesn’t come up too often, but it does have to do with the quality control at the brand level.

“If quality control isn’t there, then people can have a little bit of concern,” he said.

Morton said that while guest demand continues to embrace the number of hotel brands, eventually there will be a breaking point.

“It’s cutting the pie smaller and smaller and smaller,” he said. “At what point does it not be feasible?”

Differentiation
The product seems to have become a commodity, Morton said. Every brand has a great bed and a great shower, so it can be tough to find differentiation.

The product has to be right, DeForrest said. Once the product is competitive, it’s all about programming.

“I think from our standpoint, because of the environment we compete in, good select-service assets with a fully utilized brand partner, they pay a lot more, 15%, most going to the brand,” he said. “Are you fully utilizing that? Are you efficient with your business once you get it in the door? Full service is really about making sure the product is right. You can do that in a bigger full-service operation.”

There is a whole bucket of variables to consider, said Bill Blackham, president and CEO of Condor Hospitality Trust. When evaluating a market, his company considers what brands and products are and aren’t there, he said. Then, Condor officials take a hard look at the physical asset itself and the relevancy to the demographic profile of the customer coming into the marketplace.

Everyone on the investment side has spent a lot of time enamored with the Hilton Garden Inn product, Blackham said. By now, everyone has seen the new generation of the brand, and it’s dramatically different from the prior model.

“What happens now if you own one of the old ones?” he asked. “Why has that happened? We’re seeing across all the brands an acceleration of trying to keep the brand relevant to the larger mass of the customer base. What are those guest preferences? How do you make it feel more independent, more soft-branded?”

That is extremely important to his company, Blackham said. All hotel products today are focused in terms of design and guest experiences.

The night before sending out a letter of intent, Blackham said he stays a night at the hotel. He said he goes in late to make sure no one knows who he is, and in the morning, he speaks with guests to find out what they have to say about their stay.

“I think, for us, that is a hugely important ingredient for underwriting a hotel,” he said. “It’s sort of been our cornerstone in investment.”

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