A trade war in recent months spurred uncertainty not seen in the global financial markets since the start of the pandemic.
But it’s not all dark clouds, despite downward revisions to many hotel companies’ financial estimates through the end of the year.
All the major hotel groups like Marriott International, Hilton, IHG Hotels & Resorts, Hyatt and Accor reported first-quarter earnings in recent weeks. While still showing profitability, each of the major hotel CEOs cautioned of uncertainty in the market putting a damper on expectations for travel through the end of this year.
However, there were still rays of development optimism that shined through the various degrees of dimming outlooks.
Downturns tend to usher in a boost to conversions, deals where owners of existing hotels convert to a new brand affiliation (or take on a brand affiliation for the first time). The deals are typically a lot more affordable than ground-up construction and can even woo investors and new financing based on banks preferring the stability that comes with a brand affiliation and all the benefits like loyalty and booking distribution. The hotel will theoretically see an uptick in business thanks to its presence on a Marriott Bonvoy or Hilton Honors platform—each of which have north of 200 million members—the thinking goes.
“People, in good times, they want to do conversions with us,” Hilton CEO Christopher Nassetta said on an earnings call late last month. “In more uncertain times, they really want to do conversions with us because they want the safety and the comfort being in a system like ours that has hundreds of millions of loyalty members and drive such strong commercial performance.”
Conversion Strength
Based on the first three months of this year, it is clear conversions are a popular way to build one’s hotel platform amid uncertainty and already high construction costs. IHG CEO Elie Maalouf reported 40 percent of the company’s signings in the first quarter of this year were conversions while Nassetta reported 40 percent of the Hilton’s first quarter openings were conversions—especially with the DoubleTree and Spark brands. Conversions represented about a third of the openings and signings in the first quarter at Marriott, per company CEO Anthony Capuano.
Prior conventional wisdom was that conversions were a signal of a down cycle and that an increase in new-build hotels was a sign of economic boom times. But times could be changing due to market shifts, especially as it relates to the U.S. where most of these companies have the bulk of their existing portfolios.
Supply growth has been limited in the U.S. relative to the rest of the world amid soaring construction costs even prior to the pandemic. This doesn’t mean there’s no new hotel construction taking place in the U.S., but Wall Street performance runs on rooms growth—and conversions are an easier way to fuel such growth.
Thus, there has been an uptick in conversion-friendly brands, ranging from so-called “soft” brands that cater to boutique properties a la Marriott’s Autograph Collection, Hyatt’s Unbound Collection and Hilton’s Curio Collection or more affordable offerings that can be a way for a midscale hotel owner to tap into a bigger distribution platform a la Hilton’s Spark, Marriott’s City Express and Four Points Flex, IHG’s Garner and Holiday Inn Express, or Hyatt’s new Hyatt Select.
“The nimbleness of the organization and the creativity, not in terms of budging on quality or standards, but the speed with which we are evaluating and executing against conversions, I throw all of that into the blender together and it causes me to be really optimistic about conversion volume being more of a steady state as opposed to a cyclical component of our development story,” Capuano said this month on Marriott’s earnings call.
Read more on Hotel Management's sister site Hospitality Investor.