HOTEL SECTOR IN FRANCHISE DEALS
Independent operators, global chains partner up to weather sluggish hospitality industry
INDEPENDENT hotel operators and giant global chains are increasingly linking up in franchise agreements as high-interest rates have slammed the hospitality industry, slowing down new hotel construction.
For big chains, new franchise agreements from conversions keep investors happy by opening new hotels in the short term.
Meanwhile, independent, unbranded hotels like switching to franchise agreements because it gives them greater access to potential bookings and cheaper financing from lenders.
“Historically, global conversions have been 10 to 20 per cent of the rooms entering the system, today it is probably closer to 40 per cent,” said Truist equity analyst Patrick Scholes
For United States-based Marriott International, conversions last year accounted for 40 per cent of organic room signings — double the 20 per cent rate a year earlier.
Half of France-based Accor’s hotel openings last year were through conversions, which matches trends across the industry.
“In a climate where the debt markets for new construction are somewhat constricted, the importance of conversions is elevated,” Marriott chief executive officer Anthony Capuano said on an earnings call earlier this year.
Hotel operators benefited from the surge in “revenge travel” as the pandemic receded.
However, the economic rebound also brought higher interest rates, making life more difficult for smaller operators who rely on capital borrowing to fund their operations.
Roughly 1,980 hotels opened last year, down from 2,730 in 2019, according to hotel development intelligence firm Lodging Econometrics.
A branded hotel may be more appealing to owners refinancing loans or facing a “wall of maturities” that were pushed back, said UBS equity analyst Robin Farley.
Approximately US$217 billion in hotel loans are slated to mature globally by next year, said JLL global head of hotels and hospitality research Zach Demuth.
Those loans are likely to be refinanced at higher interest rates.
In the US, interest rates for new branded hotels are between 6.75 per cent to 8.25 per cent, up from 5.0 to 6.0 per cent before the pandemic, said Shivan Perera, senior
vice-president of debts and participations at real estate lender Avana Capital.
Unbranded operators generally have higher rates between 7.0 and 9.0 per cent.
Brand-affiliated hotels have a lower cash-flow risk than independent hotels, according to a 2022 Cornell University study based on 4,000 hotels over 20 years.
In Europe, real estate interest rates are trending at around 6.0 to 8.0 per cent, up from 2.5 to 3.0 per cent before the pandemic, said HVS London head of debt advisory Tim Barbrook.
For branded hotels, rates are about 0.25 per cent lower.
Large operators have launched “soft” and conversion brands aimed at picking up independents. Those brands help boost net unit growth, analysts said.
Hilton’s franchise and licensing fee revenue rose 14.6 per cent year-over-year in 2023 and 38.5 per cent in 2022, while Marriott’s were up 13 per cent last year and 40 per cent in 2022.