• Operators embrace skin in the game

"Hotels that lose flags lose value," was the warning given to owners at last week's Euromoney conference by Patrick Fitzgibbon, senior VP, development, Europe and Africa for Hilton Worldwide.

A not unexpected view for an operator, but one which was heard throughout the conference by bankers, agents and assorted consultants. While seeking protection in a brand is not a new stance in a downturn, there has been a shift towards the likes of Hilton putting more of their own resources into expanding their pipelines, with more ‘skin in the game'.

The move is less a shift back towards operators taking ownership stakes and more their providing support for the guarantees which help to attract development finance.

Fitzgibbon said that the group would consider a guarantee pool over three years to top up any shortfall and make sure debt servicing was secure. "In the past that was key money, now we use it in a different way.

"As the market has become more competitive, there has been a move to align operators and owners. As a brand we've worked more closely with developers to secure funding." The move is all the more attractive with a recovery bedding in.

"Almost all of what we're looking at today is low risk. Land prices are more reasonable, development costs are most sensible," said Fitzgibbon.

Martin Armitstead, senior VP development EMEA, Wyndham Hotel Group, who has been charged with expanding the group's portfolio in the region through its Wyndham, Ramada, Days Inn and Super 8 brands, said: "We do look at guarantees – transparency is key."

Andrew Shaw, Accor's development director, UK and Ireland, agreed: "We will still deploy Accor cash," he commented, to protect guarantees. He described the development market as "not closed, but very hard to extract debt out of".

The lack of available development debt has also seen operators look towards franchising to maintain their growth strategies, where there is less need for debt, as well as greater opportunities for conversions.

Franchising traditionally carries the risk that it will be harder to maintain brand standards and Fitzgibbon said Doubletree had defied expectations by keeping rigorous brand standards.

Accor, which has shifted focus more closely towards its franchise brands in Shaw's UK and Ireland patch, to Mercure and All Seasons, has also seen a shift in mindset when signing contracts, with Shaw adding: "We are looking for a robust franchise network so are looking to increased flexibility on terms."

Hilton has recently relaunched its European franchise agreement, although Fitzgibbon would not be drawn on the changes to terms. He instead commented that debt had come back "for the right deals in the right market".

The group has seen 75% of its deals with existing franchisees and, like Accor, plenty of business from conversions, with Fitzgibbon adding: "this cycle has led and influenced much of that activity".

 

HA Perspective: Margins on lending for hotel development are likely to be at least 300 basis points. And it remains exceptionally tight even at that price.

So it is no surprise to see brand owners focus on franchising down scale brands where new hotels can be financed for comparatively small sums (below the Eu10m mark) that are digestible to the restrained lending environment.

Pragmatism is also the rule when it comes to management contracts. Guarantees are being offered, although, of course, rarely routinely.

Having made the move to embrace the split of ‘bricks and brains' operators are reluctant to get back into the business of hotel ownership, apart from at sliver level. They are, however, providing their own money, particularly in key markets, to protect the guarantees which lenders are eager to see written into contracts.

Lack of cash has also seen them turn up the focus on their franchise brands, where expansion momentum can be maintained at a lower cost than their other flags. But franchise contracts are not likely to be radically adjusted by any of the big brand owners, unless for a major portfolio. How much slippage there proves to be in brand standards might prove to be another matter, particularly for conversions.

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