Hotel Development & Investment Analysis Management & Franchising Columbia University Master of Science Real Estate Development December 1, 2016 Br anded vs. Non‐ br anded Rooms Branded 49% Non- Europe branded 51% 41% 65% 59% N. America 35% Asia 51% 58% Pacific 49% 42% 38% S. America 42% Middle East Africa 62% 58% Recent Brand Additions . Curio—A Collection by Hilton, a soft brand; . Canopy by Hilton, the company’s lifestyle entry; . Tribute, by Starwood, a soft brand . Vib, another lifestyle product, this one from Best Western International; . BW Premier Collection, Best Western’s attempt at a soft brand; . Hotel RL, a 3-star brand from Red Lion Hotels & Resorts; . Niccolo by Marco Polo, a brand extension; . Hub by Premier Inn, a budget brand from Whitbread; . Pendry Hotels, an upper-end lifestyle flag from Montage Hotels & Resorts; . VieVage, a lifestyle brand from Auberge Resorts; and . WaterWalk, a hybrid extended-stay hotel/apartment complex from serial brand creator Jack DeBoer Overview First significant hotel franchising arrangement began in 1950’s with Kemmons Wilson and his Holiday Inn chain. In general, the U.S. hotel industry has tended to favor the chain approach during the past 20 years, according to data from STR. In 1990, only 57% of the country’s room supply was branded. Today, that number is 65-70%. STR data shows a general trend that branded hotels perform better than independent hotels. However, convention hotels seem to perform better as independents. It is unclear if the top-line revenue premium is enough to make up the franchise fees in all instances. A comparison of the financial results for the first two operating years of 104 franchised and independent hotels in the United Kingdom found that the performance picture for franchise properties was overall not superior to that of independent properties. For full-service hotels (those in higher chain scales), the data revealed an early advantage in RevPAR for franchise properties, but that difference faded as time went on. For limited-service hotels, the independents experienced stronger RevPAR from six months after opening through two years after opening. While branded properties experience significantly higher occupancy rate during the different phases of the economic cycle, independent hotels experience significantly higher average daily rate (ADR) and rooms revenues per available room (RevPAR) during the same time period. While branded hotels are faced with various payments attributable to the brand, such as royalty payments and other franchise fees, those fees do not have a deleterious effect on net operating income (NOI) compared to NOI for independent hotels, suggesting that independent hotels are unable to bring their ADR and RevPAR premiums to the bottom line despite their savings in franchise expenses. The end results indicate similar NOI for branded hotels and independent hotels during economic expansion, but significantly higher NOI for branded hotels during economic recession. Who’s Building? Holiday Inn Express 30,558 Hampton Inn & Suites 21,286 Residence Inn 19,241 Fairfield Inn 19,148 Home2 Suites 18,973 Courtyard 17,250 Hilton Garden Inn 15,445 TownePlace Suites 12,851 Homewood Suites 12,750 Springhill Suites 11,611 Holiday Inn 11,508 La Quinta Inns & Suites 11,497 Hampton Inn 8,836 Staybridge Suites 8,527 Hyatt Place 7,208 *US Pipeline, Under Contract Pipeline by Brand June 2015 Largest Brands – By Rooms United States US Brand/Parent Rank Company Rooms Properties Owned Franchised Managed 1Hampton Hotels 174,056 1,789 1 1,756 32 2Best Western 160,815 1,971 0 0 0 3Holiday Inn Express 149,097 1,755 0 1,753 2 Marriott Hotels & 4Resorts 142,078 351 1 191 159 5Days Inn 125,797 1,626 0 1,626 0 6Holiday Inn 118,513 668 1 645 22 7Courtyard 113,692 807 1 544 262 8Super 8 108,828 1,805 0 1,805 0 9Comfort Inn 108,777 1,392 0 1,392 0 10Hilton Hotels & Resorts 100,811 252 18 188 41 Largest Management Companies – By Rooms – United States Total Rank US Brand/Parent Company Rooms Properties Rooms Properties Rooms 1Interstate Hotels 1,921 6 61,027 348 62,948 2White Lodging Services 3,588 12 20,261 147 23,849 3Pillar Hotels 0 0 21,300 222 21,300 4GF Management 2,811 14 18,195 115 21,006 5TPG Hospitality 0 0 17,103 63 17,103 6Pyramid Hotel Group 317 2 16,583 317 16,900 7Aimbridge Hospitality 0 0 16,625 80 16,625 8Crescent Hotels 1,165 4 14,231 61 15,396 9Remington 199 1 13,997 69 14,196 10Davidson 0 0 13,215 46 13,215 Operating Models Franchised, Owner-Managed Typical among economy-to-mid-tier limited-service hotels Franchised, Third-Party Managed Most popular model Generally not encumbered by management contract “Manchise” – Brand affiliated and managed Major brands Boutique brands Franchise When evaluating a potential hotel franchise, one of the important economic considerations is the structure and amount of the franchise fees. Second only to payroll, franchise fees represent one of the largest operating expenses for most hotels. Hotel franchise fees are compensation paid by the franchisee to the franchisor for the use of the brand’s name, logo, goodwill, marketing, and referral and reservation systems. Franchise fees normally include an initial fee with the franchise application, plus continuing fees paid periodically throughout the term of the agreement. Fee Breakdown Initial Fee: Typically, the initial fee takes the form of a minimum dollar amount based on a hotel’s room count. For example, the initial fee may be a minimum of $45,000 plus $300 per room for each room over 150. Thus, a hotel with 125 rooms would pay $360/room and a hotel with 200 rooms would pay $300/room. All franchisors collect a royalty fee, which represents compensation for the use of the brand’s trade name, service marks and associated logos, goodwill, and other franchise services. Some of the Full- Service brands charge royalty fees on food and beverage revenues; these range between 2 to 3% of total F&B revenue. Advertising or Marketing Contribution Fee: Brandwide advertising and marketing consist of national or regional advertising in various types of media, the development and distribution of a brand directory, and marketing geared toward specific groups and segments. In many instances, the advertising or marketing contribution fee goes into a fund that is administered by the franchisor on behalf of all members of the brand. Reservation Fee: If the franchise brand has a reservation system, the reservation fee supports the cost of operating the central office, telephones, computers, and reservation personnel. The reservation fee contains all distribution-related fees, including fees payable to third parties, such as travel agents and distributors. Our study takes into account only those distribution fees that have been quantified in the Uniform Franchise Offering Circulars (UFOC) or Franchise Disclosure Document (FDD) prepared by each franchisor. Frequent Traveler Program Fee: Some franchisors offer incentive programs that reward guests for frequent stays; these programs are designed to encourage loyalty toward a brand. The cost of managing such programs is financed by frequent traveler assessments. Other Miscellaneous Fees: This category includes fees payable to the franchisor or third-party supplier(s) for additional system and technical support. It also includes fees related to training programs and national and regional annual conferences. Highest Franchise Cost (to Rooms Rev) Lowest Franchise Cost (to Rooms Rev) Franchise Fees – Extended Stay Franchise Fees – Limited Service Franchise Fees – Select & Full Service Franchise Fees Guide Which is the better business model—branded or independent? Occupancy – By Chain Scales Occupancy By Chain Scale 80% 75% 70% Overall Luxury 65% Upper Upscale Upscale Upper Midscale 60% Midscale Economy 55% Independent 50% 45% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ADR – By Chain Scale $350 $300 $250 Luxury $200 Upper Upscale Upscale Upper Midscale $150 Midscale Economy Independent $100 $50 $0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 RevPAR – By Chain Scale $300 $250 $200 $150 $100 $50 $0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Overall Luxury Upper Upscale Upscale Upper Midscale Midscale Economy Independent Independent Vs. Branded Hotel Brands provide : Strategic Marketing. Sales/Marketing/Distribution Comfort and a known quantity A brand is built-in loyalty, and a loyalty program creates an essence of reliability. Brands often have greater access to e-commerce, which drives costs down Brand standards (i.e. quality assurance); Facilitation of debt and equity financing (many lenders will not finance hotel construction or acquisition unless the property has a strong national brand). More stringent underwriting criteria, including lower loan-to-value ratios and higher interest rates, are common in the financing of an unflagged hotel Independents, on the other hand, provide: Freedom Flexibility Individuality Often lower cap rates upon exit Which Brand to Choose? A hotel should be positioned within the market to maximize its operating potential, and branding is a critical component of establishing the hotel’s positioning. Because different brands set different expectations in the consumer’s mind, the selection of a brand determines how the hotel will be perceived. The brand chosen will also directly affect the level of services and amenities offered, as well as the hotel’s price point, competitive set, cost of development or conversion, and cost of operation. The brand selected must convey an image commensurate with the physical product. Several brands should be researched and considered. Not infrequently, an owner’s first choice among brands may not be available, either because the brand is already represented in the subject hotel’s market or because of radius restrictions present in the chosen brand’s contracts with other owners.