March 30, 2010 / 7:36 PM / 9 years ago

Plenty of room at the inn spells tension in hotel industry

SAVANNAH, Georgia (Reuters) - Top hotel companies might say the industry is poised for recovery, but Deepak “Dean” Patel has seen few signs of that at his Microtel Inn & Suites.

The 44-year-old investor in seven Georgia hotels has owned this particular property since 2005. Then, it was bustling with construction workers and weary “snowbirds” zooming down Interstate 95 to Florida.

But as the economy slowed last year, revenue at the hotel fell 40 percent from 2006 levels. And rising costs and demands imposed by Wyndham Worldwide Corp WYN.N, the hotel company that franchises the Microtel brand, are exacerbating his troubles.

“As it is, we are struggling to keep the lights on and pay the mortgage,” said Patel, one of the hotel’s three owners. “We have to put more hours into the business to survive.”

Industry experts say cases such as Patel’s are playing out across the country as hotel companies press franchisees to revamp properties to lure customers during a recovery. But the costs of these changes usually falls on the hotel owner.

Companies such as Wyndham, Marriott International Inc MAR.N and Starwood Hotels & Resorts Worldwide Inc HOT.N do not own much real estate. Instead, franchisees — often families or individuals — license the brands for their hotels.

Wyndham has asked its network of more than 7,000 hotels to replace property management systems to streamline its technology and meet the security standards of major credit card companies.

The average price of a new system is $12,500, Wyndham said, but the bills vary. Patel’s tops $19,000 — or 40 percent of his average monthly revenue last year — an amount he said is unaffordable.

“A lot of hotels are asking for capital upgrades: linen packages, signs updated, re-imaging, a brand overhaul,” said Tarun Patel, chairman of the Asian American Hotel Owners Association.

“If some things are deemed mission critical, then I think they should have some skin in the game,” added Patel, whose group represents 40 percent of hotels in the United States.

STRUGGLING FOR SURVIVAL

Last year, major hotel companies relaxed brand standards so franchisees could ride out the downturn. Not anymore.

At the Reuters Travel and Leisure Summit last month, Marriott Chief Operating Officer Arne Sorenson said the company might revoke branding from some properties under severe stress.

InterContinental Hotels Group Plc (IHG.L) has been renovating its Holiday Inn brand at a cost of $1 billion, with most of the money coming from hotel owners. Many hotels that do not meet the new standards are likely to be pushed out of the IHG network.

Brand owners are not going to allow their hotels to deteriorate and then be caught short when there is a recovery, said Mitesh Shah, chief executive officer of Noble Investment Group and president of Marriott’s North American owners advisory group.

“Comfort Inn is not going to lose market share to Red Roof,” he added.

Lodging shares have risen strongly in anticipation of a recovery. The shares of Wyndham — which recently tripled its dividend — trade at nearly 9 times year-ago levels, besting Marriott, which has risen 150 percent, and Starwood, which has nearly quintupled.

Major hotel operators posted profits in the most recent quarter that surpassed analyst expectations, but profits at individual hotels have not caught up.

AAHOA’s Tarun Patel said that, if an upgrade is vital, hotel franchisers should invest alongside owners, possibly by forgoing a portion of their franchise fees.

But experts say this rarely happens.

“The very basic nature of a franchise agreement is that it is very one-sided in favor of the franchise company,” said Stanley Turkel, a hotel consultant who has studied the relationships between franchise companies and hotels.

THE WYNDHAM CASE

In a March 1 memo, Wyndham said owners who fail to submit the paperwork and supporting payment for the new system by March 31 could risk being removed from the company’s reservation system. That would make a hotel invisible on Internet booking sites and could lead to an immediate drop in revenue.

But while Wyndham hotel owners acknowledge the need for the overhaul, they said the company should do more to defray the hefty cost.

AAHOA’s Patel said that, while some hotel companies outlined proposed changes some years ago, the market has changed dramatically in the past year.

“We have people who have lost hotels, their businesses, homes,” said Patel, who runs Pacific Hospitality Co, which invests in, manages and develops hotels. “We need our partners to work with us to ride this out.”

Keith Pierce, president of brand operations for Wyndham’s hotel group, says the company understands the plight of owners and has no plans to drop hotels that miss the March 31 deadline.

“This is not a money-making proposition for us,” Pierce said. “We’re in the business of supporting our franchisees.”

Wyndham will consider letting a hotel pay half the cost upfront and join a payment plan for the remainder, he added.

Reporting by Deepa Seetharaman; editing by Lisa Von Ahn and Andre Grenon

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