Big Hotel Chains and Unbranded-Hotel Owners Find They Need Each Other - Reuters

Excerpt from Reuters

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% of the rooms entering the system, today it is probably closer to 40%," said Patrick Scholes, Truist equity analyst.

For U.S.-based Marriott International (MAR.O), conversions in 2023 accounted for 40% of organic room signings, double the 20% rate a year earlier. Half of France-based Accor's hotel openings last year were through conversions. That 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’s CEO 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.

A branded hotel may be more appealing to owners refinancing loans or facing a "wall of maturities" that were pushed back, said Robin Farley, UBS equity analyst.

Approximately $217 billion in hotel loans are slated to mature globally by 2025, said Zach Demuth, JLL global head of hotels and hospitality research.

Those loans are likely to be refinanced at higher interest rates. In the U.S., interest rates for new branded hotels are between 6.75% to 8.25%, up from 5-6% before the pandemic, said Shivan Perera, senior vice president of debts and participations at real estate lender Avana Capital. Un-branded operators generally have slightly higher rates between 7% and 9%.

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.

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