Independent Vs. Brand Hotel Performance in Times of Sickness and Health

SORTING FACT FROM FICTION Independent vs. Brand Hotel Performance in Times of Sickness and Health

A White Paper from Preferred Hotels & Resorts and PHG Consulting EXECUTIVE SUMMARY 3. 2. 1. 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Upscale and Upscale, Upper Luxury, for States United the in performance hotel Independent and Brand, Soft Franchise Brand, Hard covers data The 2020. 7, March is iden paper, this of purposes the for crisis, which, the of start the since 2020 in and of 2019 year calendar full the both from data STR used wehotels, and Independent SoftBrands, Franchise Brands, Hard gap between theperformance illustrate To recovery. that impacted branding how and 2009 and 2008 in crisis financial previous the wake the in happened what asinvestigate well as claim, this refutes that data recent most the explore will we Below, haven.” a“saf are counterparts Brand Soft Franchise their and Brands Hard that perception erroneous the from gain to stand Barr like leader senior contrary, the to evidence much Despite data. marketplace verified with correspond not do however, claims, These brands.” big to the over convert hotels independent and brands weaker hotels branded biggest the in stay to to want going are “Customers they when that said BarrKeith CEOIHG call, Q1 Earnings Group Hotels Intercontinental the On the seek independents shift as enormous for prepare should industry The hotels. branded and independent exists between that line the blur will “COVID that saying as Dupree options. branding soft their to “flock” now will hotels these that suggesting even franchises major of several CEOs some with challenge, of a much too to be pandemic the found have hotels independent how about recently written been has Much Scovell , Managing Partner and Chief Investment Officer of Woodbine Development out of California, was recently quoted quoted recently was California, of out Development Woodbine of Officer Investment Chief and Partner , Managing safe haven safe of soft brands like Autograph, Curio Curio Autograph, like brands of soft — this will put headwinds on home on headwinds will this put etc …” are able to able are - sharing. We will also see see also will We sharing. travel again, again, travel tif ied as as ied of an e s CALENDAR YEAR 2019 Total U.S., Luxury, Upper Upscale & Upscale classes

The chart opposite regarding 2019 performance $250.00 shows that Independent hotels outperform both Soft Brands and Hard Brands (significantly) in terms of RevPAR, and significantly outperform $200.86 $200.07 Hard Brands in terms of ADR. $200.00 $176.51 The data clearly shows that Independent hotels are in a commanding position in terms of RevPAR $150.00 $134.84 and ADR penetration, thereby proving that they are $131.47 $129.78 the leader in top-line revenue results without the encumbrance or expense of a Franchise Soft Brand or Hard Brand contract. $100.00

However, part of the narrative pushed by major chains and financiers in the industry is that the $50.00 Hard Brands and Franchise Soft Brands offer more security and a reliable safe harbor in more

troubling times. But, what does data tell about this 2019 PERFORMANCE – is that claim validated when we look at the data? $- Franchise Soft Brand Hard Brand Independent

ADR RevPAR

40.00% 35.60% First, let’s look at occupancy figures since the 35.00% start on the crisis through to August 8, 2020. 29.27% 30.00% Contrary to the narrative we are hearing from 25.90% executives of the major franchises, the data 25.00% clearly shows that Franchise Soft Brands under-performed both their Hard Brand cousins and Independent hotels. 20.00%

During the period measured, Franchise Soft 15.00% Brands trailed Independents by nearly 10%

in occupancy. 10.00%

5.00%

0.00% Franchise Soft Brand Hard Brand Independent

Source: STR, © 2020 CoStar Realty Information, Inc. OCCUPANCY DURING THE PANDEMIC ADR DURING THE CRISIS Hard Brands suffer while Soft Brands and Independents show resilience MARCH 7TH – AUGUST 8TH, 2020

$145.00

$138.97 $140.00 $137.47 Independents still led the pack and saw $135.00 a premium of nearly US$20 over Hard Brands. While Franchise Soft Brands closed the gap on Independent Hotels for $130.00 the period measured, they were still ahead of their Hard Brand counterparts. $125.00 $119.45

$120.00 THE PANDEMIC $115.00

$110.00

ADR PERFORMANCE DURING $105.00 Franchise Soft Brand Hard Brand Independent

$60.00

Based on what we have already seen, it is not surprising that Independent hotels have $50.00 $48.23 significantly outperformed both the Hard Brands and Franchise Soft Brands when looking at the RevPAR figures for the same $40.00

D U R I N G $34.24 timeframe. $33.18

$30.00 For the period of March 7 through August 8, 2020, Independent hotels saw a US$14 RevPAR premium over Franchise Soft Brands $20.00

and more than US$15 over Hard Brands. THE PANDEMIC

REVPAR $10.00

$- Franchise Soft Brand Hard Brand Independent

200%

180%

160% When looking at the RevPar Premium for an Independent hotel, they have maintained their 140% position above 100% for nearly the entire duration 120% of the pandemic to date, peaking at 157% Premium over Franchise Soft Brands and a 100% massive 187% premium over Hard Brands. 80%

60%

40%

REVPAR PREMIUM THE INDEPENDENT 20%

5/2/2020 4/4/2020 5/9/2020 6/6/2020 7/4/2020 8/1/2020 8/8/2020

7/18/2020 3/14/2020 3/21/2020 3/28/2020 4/11/2020 4/18/2020 4/25/2020 5/16/2020 5/23/2020 5/30/2020 6/13/2020 6/20/2020 6/27/2020 7/11/2020 7/25/2020

Franchise Hard Brands Franchise Soft Brands The topline figures clearly show that Independent hotels are ahead of the pack during the COVID-19 pandemic, but what happens when we consider other factors, such as the cost of the branded contract or the encumbrance on the asset? Franchise Soft Brands vs. Preferred Hotels & Resorts As a guide, the table opposite, from the 2019 HVS Franchise Average Total Cost of Brand Affiliation Fee Guide, illustrates the costs associated with signing a franchise contract with a Soft Brand versus a contract with an as a Percentage of Gross Rooms Revenue Independent Soft Brand such as Preferred Hotels & Resorts.

14.0% To put it into real figures, as an example, a hotel with US$10M 12.3% in Gross Rooms Revenue would pay a Franchise Soft Brand 12.0% 11.2% up to US$1.23M in annual fees vs US$0.14M with a 10.5% 10.6% company like Preferred Hotels & Resorts – an 88% 10.0% difference. During the pandemic, as an example of one potential crisis when there are greater financial burdens being 8.0% placed on hotels, these additional fees charged by the Hard Brands and Franchise Soft Brands are a significant drain on a 6.0% hotel’s finances and could factor into a hotel’s ability to survive.

4.0% It is worth pointing out that a hotel that is purely independent (i.e. not part of a Hard Brand or Franchise Soft Brand nor a 2.0% 1.4% company such as Preferred Hotels & Resorts) would still incur

connectivity and transactional costs, equating to approximately 0.0% 0.75% of GRR. Preferred Hotels & Ascend Collection Autograph Luxury Collection Curio Resorts

In addition to these fees, Franchise Soft Brands bring an encumbrance of 15- to 20-year contracts to hotel owners. Source: HVS 2019 Franchise Fee Guide. Percentages denote total fee percentages The contracts are watertight, which means that owners essentially lose control of their properties for the duration, as

they are expected to maintain all brand standards regardless of COST AND ENCUMBRANCE FACTORS economic conditions or performance. In 2013, Preferred Hotels & Resorts commissioned HVS to investigate the comparative performance of Average Annual Compound Growth its independent hotel members through the 2009 RevPAR Growth 2009 to 2012 financial crisis. Preferred vs. Peer properties

Again using STR data, the study found that the hotels affiliated with the Preferred brand outpaced 12.00% their peer properties, the U.S. Major Markets, and

the U.S. Lodging Industry as a whole through the 10.00% 9.70% recovery, recording strong positive trends in terms of both the amount and the pace of RevPAR growth. 7.80% 7.90% 8.00% 6.70% As a result, the RGI levels achieved by member hotels of Preferred Hotels & Resorts against 6.00% their peer properties increased by more than five

points – from 99.1% in 2009 to 104.5% in 2012. 4.00%

Since then, Preferred’s member hotels have 2.00%

maintained this market position through to the start PREVIOUS CRISIS

RESULTS FROMof THEthe COVID-19 pandemic in March 2020. Given that the independent hotels affiliated with Preferred 0.00% Preferred Hotels & Peer Properties US Major Markets US Lodging Industry Hotels & Resorts are included in the data for Resorts Independent hotels in this paper, we would expect to see a similar, increased rate of growth coming out of this current crisis. Source: 2013 HVS Market study using STR data CONCLUSIONS Independent hotels traveling public favor mean that the psychographic shifts Demographic and Soft Brands Soft Brands Brands and Franchise alternatives of Hard over thegeneric 3. 2. 1. much be per performance joining Upscale Data even alternatives highlight global Demographic – struggle Franchise inventiveness restrictions Franchise Independents landscape cumbersome Independents room due confirms more more a and to after authorities Hard resilient to the . that And Soft changes Luxury Soft significant compete that on brand financial of needed the and Brand their brand have this Hard Brands over have brands during such fees traveling segments psychographic demand is own with . the more and Brands While or not restrictions to more are as this in force past their hotels’ succeed branding Franchise Conde a the deducted), freedom crisis there it fleeting public are and decade, Independent freedom rank Upper profitability and . Nast is better Franchise limitations shifts Therefore, the – no trend to favor others, Upscale Soft the and in Traveler, exact achieve rate to good – off . performance counterparts pivot When Brand Independent as and execute hierarchy here put Soft reasoning remaining hotels times and noted leaving Travel higher upon quickly considering are Brands due Luxury and affiliated in creative three them for for + – for no ADRs to recent in in independent Leisure especially hotels independent segment in why room . takeaway their bad, every - market with NetRevPAR , as independents strategies readers’ , hotels significantly for over and regard Hard Hard in will the hotels, theories times TripAdvisor hotels the in rather Brands Brands continue flexibility awards the when (revenue generic without of putting : are Upper would better crisis than and and the by so or to – Hotels affiliated with Hard Brands and What is certain is that hotel owners – especially in the Upper Upscale and Luxury segments – are better off without a restrictive agreement with a Hard Brand or Franchise Soft Brands… Franchise Soft Brand – regardless of the timing, market conditions, or any other factors – and that the ongoing narrative pushed by executives of these brands is will continue to struggle nothing more than misled propaganda to falsely reassure stakeholders.

to compete with their Where does this leave us? It is time to change the narrative and force a dialogue based upon data. It is time expose the fallacy of Hard Brands and Franchise Soft Independent Brands as a “Safe Harbor” in a down market and recognize that Independent hotels counterparts – especially have been on the rise in both popularity and performance over the past decade. It is CONCLUSIONS time Independent hotels get the respect they have worked so hard to deserve. in times of crisis. JONATHAN NEWBURY KATHLEEN CULLEN Executive Vice President Senior Vice President Preferred Hotels & Resorts PHG Consulting

Jonathan Newbury serves as Executive Vice President of Asia Pacific for Kathleen Cullen brings more than 25 years of diverse experience in the Preferred Hotels & Resorts. Originally from the United Kingdom, Jonathan now hospitality industry. Previously, her responsibilities ranged from holding lives in Chicago, but has previously lived in New York and major travel markets strategic senior leadership positions in the corporate offices of dynamic, fast- across Europe. paced, global hotel companies and owning her own consulting firm to authoring professional publications and working in varied operational departments on the Jonathan joined Preferred Hotels & Resorts in 2008 as Vice President of Brand property level. Development. After a year in that position, his strategic expertise and expert planning skills were called upon to oversee the company’s newly created e- Prior to joining PHG Consulting, a sister division to Preferred Hotels & Resorts, commerce department as Vice President of E-Commerce & Technology. In that Kathleen was Senior Vice President of Revenue & Distribution for Two Roads role, he implemented a completely customized global CRM, managed 20 Hospitality. In that role, she was responsible for the overall revenue strategies websites, launched two new branded websites and implemented a new website and increasing hotel market share for a portfolio of more than 75 hotels, as well dedicated to the MICE market. as optimizing the company’s revenue management foundation for all brands, including organizational set up, expert human resources and deployment, Prior to his current position, he served as the company’s Senior Vice President technology platform, tools, and connectivity. of Strategic Development for seven years, where he spearheaded a variety of global development initiatives that helped solidify a strong platform for the During her tenure Two Roads Hospitality, she was a key leader and held cross- ABOUT THE AUTHORSPreferred brand among hotel owners, operators, asset managers, and discipline responsibilities for all new hotel openings and transitions. management companies globally and fostering impressive retention in North America. Throughout his tenure with Preferred, he has helped fuel a 20% growth in the brand’s hotel portfolio.

Prior to joining Preferred Hotels & Resorts, Jonathan served as Vice President of Global Development for Small Luxury Hotels of the World, based in New York. Fluent in French, Newbury holds a B.A. (Hons) in Politics & Government from London Guildhall University.