Indies show might, but brands see conversion prospects
Indies show might, but brands see conversion prospects
26 AUGUST 2020 1:13 PM

Executives at hotel brand companies said the downturn presents opportunities to grow by adding their flags to struggling independent hotels, but not all indies are indeed struggling.

REPORT FROM THE U.S.—Hotel brands are quick to tout the benefits of the support a flag offers struggling independents, particularly during a downturn.

That argument might be less convincing in this particular downturn, driven by a drastic drop in travel demand due to the COVID-19 pandemic, in which smaller hotels are outperforming the big-box properties and franchise fees are more closely weighed against the value of branding.

Still, on second-quarter earnings calls with analysts, executives at the big hotel brand companies pinned much of their growth projections on the prospects of converting independent hotels. Some executives at real estate trusts that own both branded and independent hotels, meanwhile, highlighted the relative strength of the indies.

As Barry Bloom, President & CEO, Xenia Hotels & Resorts said: “Surprisingly the strongest performers include many of our smaller boutique hotel as our 15 hotels with fewer than 200 rooms have achieved approximately 39% occupancy while our 17 hotels with greater than 200 rooms have achieved approximately 19% occupancy.”

Here’s what other hotel executives said about conversion opportunities and their properties in the independent space.

Geoff Ballotti, president and CEO, Wyndham Hotels & Resorts
“We have a proven track record of growing our unit base even during times of economic difficulty. We do this by focusing our efforts on conversion opportunities and by leveraging the significant breadth and depth of benefit we could provide to potential owners, in being associated with the world’s largest hotel franchise system driven by a strong brand and strong value proposition. …

“Conversions improved dramatically in June as well, representing over 70% of our volume versus 57% a year ago. We were pleased with the pick-up in conversion activity as the quarter progressed, both on the signing and on the openings front. We expanded our soft-branded Trademark Collection by Wyndham, the fastest-growing brand in our portfolio, with independent hotel conversions across the United States, across Canada and Germany. …

“Additionally, we were thrilled with our continued international expansion of La Quinta adding two high quality independent conversions in Turkey. …

“Look at the addressable market that (STR, parent company of Hotel News Now) tracks in the United States with roughly 15,000 rooms … that we’re targeting and recall that over two times the independents right now are closed today versus economy or midscale branded hotels. Then you look at the international opportunity, which is even larger and less branded.

“We do think (conversions) will continue to increase, and we think the bigger opportunity is later this year or next year. So many independents right now are just trying to deal with their banks and with forbearance, and when they come up to that deadline, whether it’s later this year or whether it’s next year in Q1 or Q2, banks are going to be looking for a plan. They’re going to be looking for a reason that they should continue to work with that independent owner, and we want to be part of that plan. We want to be part of that plan because the independent owner is going to be able to show its bank that our brand delivers a RevPAR premium that delivers dramatically lower distribution costs and significant operating cost savings from procurement, from FF&E, from OS&E, from F&B, from technology, from the labor related to both of those and when you combine that with what our marketing program Wyndham Rewards drives right now, we continue to see an increasing share of occupancy. … We think our value proposition and pitch becomes a lot more compelling later this year and into the first and second quarter of next year.”

Keith Barr, CEO, InterContinental Hotels Group
“Recognizing the benefits of being part of a branded system, we are starting to see an increase in conversion activity from owners as well with an uplift in conversion signings during the half.

“When it comes to our new brands, we’ve talked before about the strategic approach we take when assessing the opportunities out there and we’ve seen momentum across these brands during the half.
Let me start with Avid. We’ve now signed over 200 hotels since launch nearly three years ago, and we continue to see strong interest from owners. There are 14 avid hotels now open, which are gaining great guest reviews, and seven openings were achieved in the half despite the challenging backdrop.

“The lower cost to build, staffing model and operating economics are appealing to owners in a more constrained macro environment but also to guests who look for the basics done exceptionally well. With around 90 hotels under construction or planning approved, we expect further openings throughout the rest of the year.

“Turning to our new all-suites brand, Atwell Suites, which launched the franchise sales last September. We continue to see interest from both existing and new owners with 19 franchise agreements signed or approved since launch. The first hotels are expected to break ground this year, and we’ll open in 2021 in markets such as Charlotte, Miami and Denver.

“Moving to upscale, where we’ve seen strong interest in our conversion brand, Voco. We signed 40 properties, including locations like The Hague, Paris and Melbourne since its launch in June 2018. …

“There were some very strong luxury signings in the half too, including for InterContinental in Fiji and Italy, both of which were conversion deals. For Kimpton, the signing of the Shanghai New Bund is a key step for developing the brand in the region. … The Regent Shanghai Pudong was converted and opened in just 45 days. …

“We continue to open and sign hotels on a weekly basis, and in some markets, we’re discussing more deals than ever before. The conversion opportunity is also a compelling one and we see strong opportunities across our brand portfolio. …

“On the conversion opportunity, it’s an interesting one. If you take a step back and think about the portfolio, the mainstream segment, the core of our business, is arguably the most resilient from a performance standpoint and a pipeline standpoint. …

“But financing is going to be the big question mark for the industry in the short term, understanding are banks willing to lend to new builds and so forth, things that aren’t already under construction? … What we did see is the biggest brands, strongest brands got financing first at the last recovery, and mainstream came through. A bit of luxury as well to the top end because of the residential component around it and the strength of the residential aspects … and conversions did come into play.

“The question is how will it offset parts of the pipeline that slowed down? It has the potential to do so, but it’s really hard to read it directly across in the midterm because, again, you’re going to see independent small hotels potentially want to come into a big branded player, which is what we’ve seen in the past. We now have more brands than we used to in the past, so we have more opportunity there.”

Arne Sorenson, President & CEO, Marriott International
“We’re probably putting less key money in than we’ve done in the past years for the projects that we are signing today. I think when we get to the conversion market in some respects—maybe this is a little bit of wishful thinking—but in some respects the relative value that is achieved by joining a portfolio like ours in a weaker market is more obvious. Therefore, the need for key money is less powerful than it would be in a stronger environment where everybody’s performing fine. Now whether we can turn that into actual terms of deals that are signed, obviously, depends on our deal makers and the way they negotiate those deals.”

Bruce Wardinski, President & CEO, Playa Hotels & Resorts
“If you go back to the beginning of Playa, one of our premises was that we felt we could be a consolidator in the all-inclusive space. You have these family owner-operators that were second generation going into third generation, and we thought it’s just a great opportunity. … These are not and there are no brand affiliations. These are brands that most people don’t really know or recognize and predominantly it’s been sold through tour operators, and it’s been a rate issue. … I think it’s a tremendous opportunity right now. …

“Will they have the financial wherewithal to reopen? I don’t think all of them will, and so, going forward, I think there are two benefits to Playa from this, from a medium-to-long-term strategic view. One is that there are going to be properties coming out of the system … that don’t reopen and that’s going to benefit us. Second, I think there’s going to be companies that are going to be forced and/or highly encouraged to sell, and I think the advantage Playa has as a public company will be the ability to execute on some of those transactions. And I think our model of rebranding, when we’ve done the rebranding to the Hyatt or Hilton brands, our case studies are tremendous, the success rate is tremendous. As we look at the opportunities going forward, the ability to rebrand these properties could really be positive for us, for the industry, for our business. It’s a positive in the long run for us. I don’t ever want to see someone else’s pain or suffering, but I think it could be like ‘Hey, let’s collaborate in some way, and we can both win.’ I think that’s what we want to pursue. And it’s really the opportunity for them and for us to do better and do better than the rest of the competition in the all-inclusive space.”

Thomas J. Baltimore, President & CEO, Park Hotels & Resorts
“The analogy that I would use is think about several years ago when everybody thought independent hotels in New York where the right thing to do, and everybody rushed to buy independent hotels. I don’t think that strategy worked out so well for many people. You won’t see a panic out of the Park team here. We believe with conviction in our current strategy. We’ll pivot; we’ll adjust; we’ll recycle noncore assets, and then we’ll continue to look at those other pockets and areas where there are growth opportunities.”

Jon Bortz, chairman, president and CEO, Pebblebrook Hotel Trust
“Perhaps even more important is that our smaller-sized lifestyle hotels, both the independent ones as well as the ones with major lifestyle brands, like Luxury Collection and W, are generally more attractive to transient customers, particularly leisure. And they historically have needed less group business to be successful. Our independent lifestyle hotels are also much more able to quickly adapt to new customer preferences. They’re more flexible in their operations, and they support lower fixed and variable costs in a low-occupancy environment, which is what we expect for at least the rest of this year.”

Pat Pacious, president and CEO, Choice Hotels International
“As for the upscale segment, our portfolio achieved impressive year-over-year growth in the second quarter, including a 37% increase in room count, outperformance in RevPAR change of over 7 percentage points versus the upscale segment and RevPAR share gains against local competitors. Contributing to our success is our proven conversion engine, which allows us to drive unit growth through down cycles. For example, the Ascend Hotel Collection was launched in 2008 during the Great Recession and is now the industry’s largest soft brand with over 370 hotels around the globe. We see significant opportunity for the Ascend Hotel Collection as we recover from the crisis, due to the brand’s low capital requirements for entry and strong value proposition for owners, driven by reduced customer acquisition costs.”

Dominic Dragisich, CFO, Choice Hotels International
“In the Great Recession, we saw that 80% to 90% of our openings actually came from conversions. So what you saw this year was slightly above historical, but especially over the course of the last two months, in particular, as COVID has become more widespread, you’ve actually seen that number of conversions begin to tick up a little bit more than even that two-thirds rate that you’ve seen historically speaking. And again, going back to Ascend properties and Comfort being bigger conversion engines for us now with that transformation complete, we see more revenue intense conversions happening as well. So we’re very optimistic about that.”

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