Regional economy hotel assets, brands could be targeted

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Low-cost hotel chains could see properties under their brands sold to larger hotel operators, private equity groups and real estate investment trusts, industry sources told mergermarket.

Many of these economy properties are in disrepair and struggling with short-term debt. Some could be acquired for their locations and upgraded to mid- or upper-tier properties; others may be renovated and kept as economy, in an effort to attract today’s more cost-conscious travelers, the sources agreed.

The market is seeing an “unprecedented” amount of defaults in the sector as hotel executives anticipated a recovery at this time that didn’t come, said Patrick Mullinix, vice president of Business Development at America’s Best Value Inn, a division of private Vantage Hospitality Group. The industry consensus today, according to Mullinix, is “If you need to liquidate, you either do it now and be happy with the valuation you get or be prepared to wait at least 18-24 months and hope for a full recovery. There is no middle ground.”

Most economy hotel chains are 100% franchised, and as a result, a second industry executive said he didn’t believe publicly-traded companies such as New Jersey-based Wyndham Worldwide and Silver Springs, Maryland-based Choice Hotels International would sell whole brands such as Days Inn and Econo Lodge, respectively, if the properties are drastically underperforming. In fact, Wyndham is adding economy brands, according to David Loeb, senior research analyst and managing director of RW Baird. In June, Wyndham announced it would buy European economy brand Tryp for USD 43m from Sol Melia, after purchasing Baymont in the US from La Quinta, which is owned by Blackstone, Loeb noted.

Most chains that do sell would likely be “forced” to let go of individual properties due to a lack of debt financing, both Mullinix and the second executive agreed. Smaller chains with fewer than 100 units are particularly vulnerable to takeovers, Mullinix added. Small private regional chains with five to 25 hotels are also attractive targets, a third industry source added.

According to a ranking by research firm STR, 19 economy chains have fewer than 25 hotels. Of these, the majority are independently owned. The largest of the group – Sun Suites, Passport Inn, Key West Inn and Budget Suites of America – have 18 hotels or more.

Large brand-name chains could acquire economy properties to refurbish and rebrand under their own umbrellas, the third industry source said. Potential buyers include Starwood, Hilton and Hyatt, he noted. Loeb also suggested Intercontinental and Marriott could be interested in consolidating economy properties. Upper economy and mid-tier hotels could also show interest, such as Microtel, said Mullinix, who also mentioned Wyndham, Holiday Inn, Hampton Inn and Best Western as potential buyers.

But Mullinix did say many struggling operators are reluctant to sell. Valuations that were USD 45,000-USD 55,000 per guest room before the recession are now at USD 10,000-USD 15,000, according to him. Plus, Mullinix and a second industry source agreed that “lenders are showing more leniency”, allowing many operators to restructure rather than allow properties to go into foreclosure. “Banks are opting to work with companies. Restructuring is a prevailing trend,” Mullinix maintained.

For those properties that do come to market, REITs could be interested, the first industry source said. Because REITs are not allowed to own or operate branded hotel companies, they would buy the real estate, Loeb said. But REITs are mainly interested in mid-range or higher-end properties in urban areas as opposed to economy hotels, Loeb added.

Another possibility is for an investment bank or a large hotel company to create a special purpose acquisition company and take it public, the third source said. The company’s purpose would be to acquire low-cost chains, the source suggested. In a similar vein, he cited Summit Hotel Properties REIT (NYSE: INN), which had an IPO in February and is acquiring mid-priced chains.

The second executive noted his own private, mainly non-branded hotel management company, through a third-party investment group, has made an offer and is likely to close on a deal for “one of the largest economy hotels in the US.” The target is being divested by one of the major economy chains, according to the second executive, who said his company was attracted to the hotel’s location. If purchased, the property will be renovated and added as another private label hotel-resort.

The second executive said he thought the industry might see more sales than expected. With some room rates falling even lower than USD 35 per night, “I don’t know how the heck (some economy hotels) are surviving.”

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