Choice Hotels grows through conversions

NEW YORK Fri Feb 19, 2010 6:21pm EST

NEW YORK (Reuters) - Choice Hotels International (CHH.N) is rolling out the welcome mat to cast-off Holiday Inns.

As Intercontinental Hotels Group (IHG.L) overhauls its Holiday Inn chain, many franchisees have found they no longer meet the new brand standards. To those properties, Choice has extended its arms.

"IHG's decision means that we can collect some of those hotels," Choice Chief Financial Officer David White said in an interview ahead of next week's Reuters Travel and Leisure Summit.

Choice, the world's sixth-largest hotel operator by hotel rooms, has relied heavily on new construction to fuel its expansion in recent years. But financing for new building has dried up, prompting the company to look to converting existing hotels to its brands.

Already, former Holiday Inns have found refuge under Choice's Econo Lodge and Quality Inn banners, White said. He added that a "decent amount" have converted to Choice hotels.

Unlike Choice Hotels, IHG doesn't have a lot of lower-end brand options to catch the Holiday Inns it is shedding, White said. Choice's hotels, which also include Comfort Inn and Sleep Inn, skew heavily toward economy and mid-tier properties.

"We have brands that span from the economy space with Econo Lodge all the way up to Cambria Suites in that lower-upscale space," White said.

But for conversion activity to increase, hotel deals have to pick up, White said. Just $2 billion of hotels changed hands in 2009, a 10-year low in deal activity, according to Jones Lang LaSalle.

In many cases, when a hotel changes hands, its brand may change as well.

Transactions could reach $3.5 billion this year, and activity is likely to start among economy and mid-tier hotels as opposed to pricier luxury hotels, analysts have said.

"We think there is going to be a point where you're going to see a dramatic increase in the number of conversion opportunities, especially in the mid-tier and economy space," White said. "That should be a positive catalyst for us."

LOOKING FOR BUYING OPPORTUNITY

In years past, some 75 percent of Choice's growth had been driven by freshly built hotels, according to Robert W. Baird analyst David Loeb.

Choice, which franchises more than 6,000 hotels, expects unit growth of 2 percent in 2010, slower than its historical average of 4 percent, Loeb said in a February 16 research note.

Hotels are "stepping up the rhetoric around rebranding because we will see less hotels built in the next few years," said PricewaterhouseCoopers hotel consultant Scott Berman.

Adding hotels through conversion is the most likely way a company like Choice can hope to grow, Berman added. Choice has also said it is interested in buying a hotel brand.

Franchise fees are the lifeblood for Silver Spring, Maryland-based Choice. The company extracts between 8 percent and 9 percent of annual gross room revenue in royalty, marketing and reservation fees from each hotel.

About half of this amount must be spent on infrastructure, White said. Choice is likely to overhaul its information technology and property management systems over the next six to 12 months to bring more business to its existing hotels.

Once that happens, it will pave the way for the company to add more hotels to its portfolios, especially abroad. Choice recently took full ownership of a joint venture in India, which will allow the company to franchise more hotels.

Choice is also vying to expand in countries in Europe, where the bulk of hotels tend to be independently run, White said.

"Most people say that in Europe you'll see a gradual shift of independent hotels into the branded hotel portfolios," White said. "We pretty well-positioned to capitalize on that trend."

(Reporting by Deepa Seetharaman; Editing by Richard Chang)