Tighter Financing Reins In Extended-Stay Expansion

<B> Tighter Financing Reins In Extended-Stay Expansion</B>

By Lynn Woods


The drying up of equity funding last August has caused a shift in the development plans of many extended-stay hotel companies. Tight for credit, the upstart long-term hoteliers have cut back their plans and shifted to franchising as the path to future expansion.

"Last summer, the real estate market went south and it's been very difficult to get capital for large-dollar projects," said Seth Christian, vice president of operations at Suburban Lodges of America, based in Atlanta. "Anybody in real estate couldn't raise money on Wall Street anymore. All the lines of credit were tapped at one time, so the credit stopped. Lower interest rates were also a factor in discouraging lenders from continuing lines of credit."

Predicting that Wall Street will shy away from the hotel industry "for some time," Christian said that new construction at Suburban Lodges, which has 104 hotels, is limited to seven properties this year, less than half the 16 properties the company built last year. However, 13 additional hotels are being developed by franchisees, a slight reduction from the 15 franchised hotels that opened in 1998.

Suburban Lodges' recent acquisition of GuestHouse International LLC, a chain of 45 franchised properties, is part of the company's strategy to expand by franchising. "GuestHouse is a pure franchise company," Christian said. "We can sell another flag without having to buy any real estate. We're looking to grow with less capital business."

<B><CENTER>Expansion Slowdown</CENTER></B>

Candlewood Hotel Co., a mid-tier extended-stay chain of 71 properties with an average length of stay of 18 nights, also is proceeding more cautiously. This year, it expects to open 12 hotels, two of them franchised, compared with 38 openings last year.

"We're changing our strategy," said vice president of franchising services Gina-Lynne Scharoun. "Our company development has slowed down, and we've hired a field sales team for franchising. In 2000, franchised hotels will exceed corporate-owned openings."

Scharoun noted that while the vast majority of Candlewood's guests are business travelers, the company now is beginning to target seniors to broaden its customer base. Heavily geared to suburban locations, as are most extended-stay brands, Candlewood also is investigating downtown locations, although development in these areas is "more difficult and time consuming."

Despite the slowdown, Scharoun said the chain was doing well, with average occupancies at 70 percent, a very respectable showing considering that it includes a number of new hotels that opened in the fourth quarter of last year. Candlewood also increased its rates across the board by $8 last winter.

Homewood Suites, an upscale chain owned by Promus Hotel Corp., with 82 properties and an average stay of four to five nights, is competing with a proliferation of extended-stay hotel chains.

"A lot of companies have jumped into the midscale tier," said vice president and brand manager Doug McCorkle. "We've got individual markets where there are 5,000 rooms."

Despite occupancies averaging 76 percent last year and the continuing increases in the chain's revenue per available room, he said, "they're not as strong as they were in the past." Development plans have not been put on hold, and the chain, which has not experienced difficulties getting capital because of the Promus name and reputation, plans to have 100 hotels open by the second quarter of next year. But Homewood is seeking to gain efficiencies through a redesign of its product.

"We want to be smarter in the way we build so we can get a better return on our investment for developers," McCorkle said. "We're configuring our suites more efficiently, so there's no wasted square footage. Our goal is to reduce our cost per key by $7,000," resulting in a total cost of $75,000 per key, versus the current $82,000.

Other extended-stay brands that are expanding through franchising are AmeriSuites, Baymont Inns and Suites, and Villager Lodge. AmeriSuites, which has 94 properties, is opening only three hotels this year, but it has signed 17 franchise agreements and has another 23 applications. "Franchisees are fueling more growth," said AmeriSuites senior vice president of marketing John Leavitt. "We'll develop six to 10 hotels ourselves each year."

Formerly known as Budgetel, Baymont Inns & Suites, a division of The Marcus Corp., also plans to grow through franchising. Currently, 63 of its 160 locations are franchised. Last month, it transferred five company-owned properties in Michigan to a franchisor, and it has approved franchise development projects in 10 states during the first quarter of 1999.

Villager Lodge, owned by Cendant, is a franchised chain of 125 properties. With 75 to 100 new projects in the pipeline, more than 50 of them scheduled to open this year, this is a brand that shows no sign of slowing down.

Other brands that still are going strong are Choice Hotels International's two entries, Comfort Suites and Mainstay Suites. Comfort Suites opened 25 properties last year and plans to open another 30 this year, bringing its total to about 250. Mainstay Suites has 40 properties under development, almost double the 26 currently open.

<CENTER><B>Analysts See Supply Peaking In 2000</B></CENTER>

Most analysts said that despite the softening of supply in some markets, extended-stay should continue to grow for the next year or so, at which point demand for the product is expected to peak and catch up with supply.

"The falloff in development is most prominent in the lower tier," which has experienced explosive growth over the past two years, said Cristina Ampil, senior lodging economist at PricewaterhouseCoopers. "Instead of a doubling of supply growth, we'll see only a 26 percent increase in growth this year."

Analysts noted that economic factors affecting the segment have impacted the entire hotel industry, and that the softening is limited to particular markets.

"The recent crunch in capital markets contracted the back end of the development pipeline for all hotels," according to Daniel Lesser, senior director of the hospitality industry at Cushman Wakefield in New York. "It's driven on a submarket basis."

Most affected are Atlanta, Dallas and Phoenix, which have undergone a frenzy of building by low-tier extended-stay companies in the past couple of years.

In greater Boston, Princeton Properties just completed building a Hawthorne Suites in Chelmsford and has a second under construction. But president Terry Flahive has no plans to build a third. Asked how much pent-up demand for extended-stay rooms exists in the market, he said, "personally, I think we're there. The economy has slowed a bit," just as the area has become saturated with extended-stay properties. Flahive mentioned four other brands that have built hotels in the area just in the past four months.

In other markets, such as Westchester County, N.Y., extended-stay has yet to make a mark, Lesser noted.

Not every hotel executive is convinced of the invincibility of the extended-stay product. Country Inns & Suites, owned by Carlson Companies of Minneapolis, diversified from all-suite hotels to a combination standard room-and-suite product. The shift occurred after the company discovered that the all-suite guest "is not a broad-based customer," said president Paul Kirwin.

All-suite guests consist of two types of travelers, according to Kirwin: the person seeking accommodations for a long-term stay, and the guest looking for an alternative to a room at a traditional full-service hotel. "A lot of times you have to offer the suite at a lower price because there simply aren't enough of the travelers described above," he said.

Another drawback to all-suites is that the large rooms make them "very expensive to build. In the last year, we've had fewer franchisees and developers seek the all-suite brand."

Particularly over the next five years, when occupancies are expected to decline or stay flat, "flexibility and adaptation to local conditions is critical" for survival, Kirwin said. "As national occupancy declines by a half point, each market becomes more competitive. You can't sell two-bedroom suites at the value of a room with two beds. You need a mix of room types."

But other industry insiders noted that the economy all-suite product, at least, brings good returns to investors. "These hotels have 40 to 50 percent bottom-line profit margins, compared to 20 to 30 percent for full-service hotels," said Gregory Hartmann, managing director at hotel consultancy HVS International in Boulder, Colo. "If a person is staying 30 to 40 days, it's easier to clean the room and they only check in once."

Hotel industry analysts said a third of the demand for all hotels in the United States is for extended-stay, defined as stays of five or more nights, although the segment contributes only 3 to 5 percent of the total supply.

"Extended stay is just a teeny percentage of all rooms. The supply is growing really fast, yet it's still nowhere close to demand. The majority of people are staying at full-service hotels," said Chris Klauda, director of research at D.K. Shifflet & Associates Ltd., a research firm based in McLean, Va.

Hartmann said the demand for all-suite extended-stay properties is probably closer to 10 percent, since the bulk of the demand is for less than seven nights and many shorter-term travelers may choose not to switch from full-service traditional hotels to extended-stays.

Indeed, citing statistics from the U.S. Travel Data Center, Peggy Berg, president of The Highland Group hotel consulting company in Atlanta, said that while demand for stays of four to nine nights was 24 percent, stays of 10 or more nights constitute only 4 percent of total demand for rooms.

Those figures would seem to indicate that demand is slanted toward the more expensive, upper-tier all-suites, which appeal to a broader customer base: "As the price goes up, the average length of stay goes down and the percentage of transient business goes up," Berg said.

She said growth in supply for extended-stay in 1999 was pretty evenly distributed across price categories, with 45,000 rooms under construction--12,000 budget, 6,000 economy, 14,000 midprice and 13,000 upscale. "The increase for midprice and budget is greatest, but those segments have the fewest rooms to begin with," she said.

Indeed, D.K. Shifflet statistics show a fairly even distribution of room nights across the price tiers for 1998. The upscale category accounted for 97 million room nights, the upper moderate and moderate accounted for 107 million room nights, and the lower moderate and budget accounted for 86 million room nights.

Compared with other hotel segments, the extended-stay segment is doing well, particularly at the top tier. While occupancy levels in the extended-stay segment have fallen, in 1998 they exceeded the 63.3 percent average of the hotel industry as a whole, according to Smith Travel Research.

In 1998, the occupancy rate for the lower-price segment was 67.2 percent, a 2.5 decrease from the year before. In the first quarter of 1999, however, it had dropped to a new low of 63.6 percent. That's a long way from the peak level of 74.1 percent it experienced in 1995.

The upper-tier segment saw much higher levels. In 1998, it was 77.9 percent, a 2.1 percent decrease from the year before. In the first quarter of 1999, the level was 75.3 percent, still significantly above the industry average. Peak occupancy was 82.5 percent in 1994.

The drop in part reflects the proliferation of brand-new properties, which typically start with low occupancy rates that increase as they build up business.

"A year or two from now, the occupancy level will be higher," Hartmann said. "When you aggregate all extended-stay hotels, including 100 new hotels at 70 percent occupancy, the whole average comes down because of this lag."

Interest in extended-stay properties continues to grow in corporate travel departments, which in many cases include them in their hotel programs. "Because more suite properties are opening up, availability is never a problem," said Michael Martlaro at American Express Travel in Phoenix. "Our clients use extended-stay for recruitment and relocation. It is definitely growing.