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Financial incentives convince owners to reflag
February 5 2013

Franchisors increasingly are floating key money, sliver equity and performance guarantees to incentivize owners to add their brand flags.

Highlights
  • FelCor Lodging Trust landed a $100-million NOI guarantee to reflag eight former Holiday Inn hotels to Wyndham Hotels and Resorts.
  • Key money was an integral part of a deal Choice Hotels International closed in January, securing contracts to reflag 46 properties owned by Colony Capital.
  • Choice also used financial incentives to jump-start its European expansion in January when it signed a nine-hotel deal with Akkeron Hotels Group.
By Jason Q. Freed
Contributing Editor, Tech Impact Report

REPORT FROM THE U.S.—As evidenced by three major agreements thus far in 2013, hotel franchisors are upping the ante in convincing owners to join their brand families by offering financial incentives.

Such incentives can come in various forms, from key money to sliver equity to performance guarantees from franchisors that also manage.

FelCor Lodging Trust in January announced it will rebrand, renovate and reposition eight Holiday Inn hotels to the Wyndham Hotels and Resorts brand effective 1 March. The agreement included a $100-million guarantee from Wyndham Worldwide over the 10-year term of the agreement, with an annual guarantee of up to $21.5 million that ensures a minimum annual net operating income for the eight hotels.

Stephen Schafer, VP of investor relations for FelCor, said the NOI guarantee was the foundation of the deal.

“The guarantee level is above what the hotels ever did as Holiday Inns, so we’re basically guaranteed a return on our investment—the termination fees and the incremental capital—that we just couldn’t say no to,” he said.

FelCor will pay $30.7 million to InterContinental Hotels Group to terminate its management agreements on the eight properties.

“When we were in discussions with Wyndham, we had to look at what our investment in doing this was and we needed a return on that,” Schafer said. “If we just rebranded these and the next downturn hits, it looks like a bad deal for us. This ensures even through a significant downturn we’re going to earn a return on investment that’s above the cost of capital, and it’s close to 20%. So it’s a home run for us.”

From Wyndham’s perspective, the deal helps the company attain immediate distribution in premier, urban gateway markets where Wyndham Hotels and Resorts doesn’t have a presence. The hotels are located in Boston, Houston, New Orleans, Philadelphia, Pittsburgh, San Diego and Santa Monica, California.

“This agreement supports our overall strategy to expand the upscale Wyndham Hotels and Resorts brand in key gateway cities while also supporting the growth of Wyndham Hotel Group’s management business,” Eric Danziger, president and CEO of Wyndham Hotel Group, wrote in an email to HotelNewsNow.com.

The deal “brings significant additions to the Wyndham brand portfolio and greatly expands its geographical distribution in the U.S.—it brings our flagship hotel brand back to top markets across the country and also adds great properties and locations to our managed portfolio,” Danziger continued. “Furthermore, it allows Wyndham Hotel Group to quickly increase the Wyndham brand’s presence with quality product in key markets with high barriers to entry without laying out significant capital, which would otherwise be required in order to grow in these cities at this pace through ownership and extensive renovation of properties.”

This isn’t the first time Wyndham has offered an NOI guarantee. Company executives signed an agreement with Hospitality Properties Trust in 2012 to manage and rebrand 20 hotels under the Wyndham Hotels and Resorts and Hawthorn Suites by Wyndham brands that included a guarantee. The company is “always open to exploring different ways in which we can come to agreements with partners to help support our global expansion strategy,” Danziger said.

In addition to the NOI guarantee, FelCor also received $10 million in key money from Wyndham to renovate and “upbrand” the hotels.

Choice antes up
Management performance guarantees are still pretty rare, however, and must be a strategic move for all parties involved. A more prevalent incentive, according to Dave Johnson, president and CEO of Aimbridge Hospitality, is brands using their balance sheet to offer either key money or sliver equity.

Key money was an integral part of a deal Choice Hotels International closed in January, securing contracts to reflag 46 properties owned by Colony Capital and Aimbridge. The properties will fly the Quality Inn, Comfort Inn and Econo Lodge brand flags.

Key money is capital paid when a property opens, and owners typically use the funds as equity. “A forgivable loan is basically what it is,” said David Pepper, senior VP of global development for Choice. “It burns off over 10 years … usually about $25,000 a year.”

“Key money is as clean as anything,” added Choice’s CEO Steve Joyce. “It’s usually going to the improvement of the property, which is good for both sides. It usually implies a long-term burn off, which means both sides are making a commitment.”

Johnson said the fact that a number of franchisors launched new brands amid a time of slow development led them to look to their balance sheet to spur growth. Offering key money or sliver equity helps a brand “enter new markets without the high development costs.”

“Both Choice and Wyndham worked with us in key money to help the transaction occur. We were extremely satisfied with both brands,” Johnson said.

Choice also used financial incentives to jump-start its European expansion in January when it signed a nine-hotel deal with Akkeron Hotels Group, a U.K.-based operator with 34 hotels. Akkeron will add flags to the nine formerly independent properties.

The Akkeron deal will increase Choice’s U.K. presence by nearly 25% by adding 611 guestrooms to its portfolio. It was completed in large part because Choice provided an undisclosed amount of mezzanine financing, which represents the first time it has leveraged its balance sheet in Europe, according to Joyce.

Joyce is no stranger to leveraging Choice’s balance sheet to incentivize owners, however. The company has been using a $250-million fund to co-invest in Cambria Suites properties since May 2011.

“We are substantially into that allocation,” Joyce said. “We’ve recycled some of that already. We have plenty of capital to help build the pipeline.”
Choice’s preferred financing vehicles for the Cambria Suites brand are mezzanine financing, sliver equity or a corporate guarantee, Pepper said.

“It lowers the amount of equity a developer needs to use to get open,” he said. “We’ll probably be using that until we get to 100 hotels for the Cambria brand.”

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