((Automated translation by Reuters, please see disclaimer https://bit.ly/rtrsauto)) by Doyinsola Oladipo and Aishwarya Jain
Independent hotel operators and large global chains are increasingly tied up in franchise agreements as high interest rates have hit the hotel industry, slowing the construction of new hotels.
For large chains, new franchise agreements resulting from conversions make it possible to satisfy investors by opening new hotels in the short term. For their part, independent and unbranded hotels like to move to franchise agreements because it gives them better access to potential bookings and cheaper financing from lenders.
“Historically, overall conversions accounted for 10 to 20 percent of rooms coming into the system; today it’s probably closer to 40 percent,” said Patrick Scholes, equity analyst at Truist.
For US-based Marriott International MAR.O , conversions in 2023 accounted for 40% of organic room signings, double the 20% rate recorded the previous year. Half of French company Accor ACCP.SA’s hotel openings last year were through conversions. This is consistent with trends across the industry.
“In an environment where debt markets for new construction are somewhat constrained, the importance of conversions is heightened,” Anthony Capuano, Marriott’s chief executive, said during an earnings conference call early in the year.
Hoteliers benefited from the rise in “revenge travel” after the pandemic receded. However, the economic rebound has also led to a rise in interest rates, making life more difficult for small farmers who rely on loans to finance their operations.
About 1,980 hotels will open in 2023, up from 2,730 in 2019, according to hotel development information firm Lodging Econometrics.
“Access to hotel financing, particularly in South America, is currently limited as many hotels have had difficulty meeting their debts during the pandemic,” said Fernanda L’Hopital, Director of Advisory and Valuation for South America within the hospitality consulting company HVS.
A branded hotel may be more attractive to owners who are refinancing their loans or facing a “wall of maturities” that have been pushed back, said Robin Farley, an equity analyst at UBS.
About $217 billion in hotel loans are expected to mature globally by 2025, said Zach Demuth, global head of hotels and hospitality research at JLL.
These loans are likely to be refinanced at higher interest rates. In the United States, interest rates for new branded hotels are between 6.75% and 8.25%, compared to 5% to 6% before the pandemic, said Shivan Perera, senior vice president of debt and participations in the real estate bank Avana Capital. Unbranded carriers typically have slightly higher rates, between 7 and 9 percent.
Brand-affiliated hotels have lower cash flow risk than independent hotels, according to a 2022 Cornell University study of 4,000 hotels over a 20-year period.
“Good brands, their loyalty program, their reservation system, generally make a property run better, which is often a requirement of the bank,” said UBS’s Mr. Farley.
In Europe, property interest rates are around 6% and 8%, compared to 2.5% to 3% before the pandemic, said Tim Barbrook, head of debt advisory at HVS London. For branded hotels, rates are around 0.25% lower.
some people have had 13 years of extremely low interest rates,” said Tim Barbrook. “They’re coming out of fixed rate loans and into a much higher rate environment. Many of our customers would like to be able to simply extend the facilities they already have
Large operators have launched “soft” and conversion brands aimed at attracting independents. These brands help drive net unit growth, analysts say.
Hilton’s franchise and licensing revenue grew 14.6% year-over-year in 2023 and 38.5% in 2022, while Marriott’s grew 13% in 2023 and 40% year-over-year. % in 2022.
“Every hundred or thousand additional rooms matter because there are franchise fees associated with them,” said Jan Freitag, director of U.S. hospitality at analytics firm CoStar.
One such brand is Hilton’s “Spark” chain, announced for January 2023. For smaller operators, a conversion allows them to access customers who rely exclusively on the chains’ loyalty programs to book rooms.
“We would never have done [la conversion] if we hadn’t been able to do it with Hilton,” said Lou Carrier, chief executive of Distinctive Hospitality Group, a development company that opened the first Spark hotel in Connecticut. “Within the first two months, more than 45 % of hotel guests were Hilton Honors members. I found this remarkable