Why hotel conversions are a proven play to refresh product and bump up revenue

A rendering of the Signature Inn in Cocoa, Fla.

Renovating and converting hotels is a proven way to take an asset upmarket and grow revenue.

It's a strategy RLH Corporation is embracing, especially after its acquisition of Vantage Hospitality last year. The company began combing through Vantage’s trove of economy hotels, looking for opportunities to convert assets to its newly relaunched Signature and Signature Inn brands.

Amanda Marcello, VP of brand development at RLHC, said the company has identified the Americas Best Value Inn brand as a source for conversions to Signature, which has been resuscitated to breathe new life into economy motels and hotels by fusing higher-level design and boutique sensibilities while retaining the price sensitivity and amenities of an upper-economy hotel.

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“Coincidentally, many ABVI hotels are exterior corridor motels and hotels, so they are a natural fit for what we want to do with Signature,” Marcello said. “Through Signature, we are reaching in a different direction with an economy product. We are giving more exposure to a product for people that would, based on price and value, prefer something more stylish.”

Bruce Ford, SVP and director of global business development at Lodging Econometrics, said flipping brands within a hotel company’s own umbrella has been a common strategy for years, but he suggested it may become more widespread in the future. Ford pointed to the industry’s high level of supply and growing construction and labor costs as signs that conversions from within a brand’s portfolio may build steam. However, he also said that RLHC’s acquisition of Vantage puts it in a unique position where it now has access to more than 1,000 ABVI properties alone for conversions.

“The Signature program is built around the renaissance of the motel concept, they want to make it cool again,” Ford said. “I’m sure there are some ABVI assets that, through strategic renovations, could ascend to that. Any responsible owner out there who sees a path to charging $15 to $20 more per night in a market will jump to try to… make it work.”

Marriott’s Delta brand could benefit from Sheraton hotels listed to convert.​​​​

Trading Places

Converting from within your own portfolio is not a simple task. Because ABVI was a collection of economy hotels looking for affiliation, the brand consists of a variety of different building types and configurations. This complicates the conversion process because not every one of these hotels is created equal.

RLHC also is considering independent hotels and motels for inclusion in Signature Inn, but the independent economy hotel market yields few attractive opportunities. Marcello said finding appropriate properties for Signature conversions is a challenge as the supply of exterior-corridor motels dwindles due to taking on incremental upgrades over the years.

Additionally, as guest expectations continue to rise, economy hotels are forced to grapple with a different challenge entirely when considering conversions. Marcello said that high-end markets, such as Chicago, San Francisco and New York City, record average rates that are markedly high for the economy segment, almost to the level of midscale hotels. For this reason, it is sometimes difficult for economy hotels to attract bookings due to how close their rates are to the next chain scale.

These issues, in tandem, explain why RLHC is being picky with its first 20 Signature Inns.

“Getting out of the cookie-cutter mold is great for the economy segment,” Marcello said. “People are looking for more bang for their buck, and they want the best possible deal regardless of what level product it is.”

One company familiar with the search for conversion-ready hotels is Choice Hotels International. The company’s Quality Inn brand has experienced essentially 34 months of uninterrupted growth, recently opening its 1,500th hotel in the U.S. Caragh McLaughlin, head of brand strategy for Quality, Clarion, Econo Lodge, Rodeway and Suburban Extended Stay at Choice, said the key to sustaining such a large number of conversions is through its value proposition and consistency, as well as the resources it offers to prospective Quality Inn operators.

“Choice offers extensive resources, from in-market support to help with conversion process to tools that assist with improving ongoing daily operations. When joining the system, owners also gain instant brand awareness,” McLaughlin said.

According to Ford, these resources are necessary to facilitate a conversion at the economy level, where owners and operators often don’t have the resources to convert on their own. In the case of RLHC, it said it plans to open between 15 and 20 Signature Inn properties by 2019, and Marcello said key money is available for this first wave of conversions to ease them into the process. Marcello also said reduced fees for the first year of operation are on the bargaining table, as well as opening and transitional support.

“For our first Signature hotels we will be holding hands and helping owners in the process,” Marcello said. “We plan on being part of that project opening team.”

The Best Western Premier College Station in Bryan, Texas

All In

Within Best Western Hotels & Resorts, the primary brands targeted for interior conversions are the company’s core Best Western hotels, which are most often converted into Best Western Plus hotels. Plus hotels, coincidentally, are being converted into Best Western Premier properties, but until recently this wasn’t a priority. Roughly five years ago, Best Western Plus’ impetus was shifted to primarily facilitate new construction.

Ron Pohl, COO at Best Western Hotels & Resorts, said the current development climate has made new construction slightly less common due to increasing costs. Recent natural disasters, such as hurricanes Harvey and Irma, have shifted development resources appropriately to the southern U.S. This, in addition to rising labor expenses, leads Pohl to estimate that construction costs could rise 5 percent to 10 percent over the next few years.

“We are still targeting 60 percent for new construction with Best Western Plus, but we were initially targeting 80 to 90 percent,” Pohl said. “Over 50 percent of our new deals are still new construction, but when costs go up, rates go up. As long as the math works out for all parties involved, we will move forward with a plan, but it’s becoming more difficult to find.”

These factors, as well as the hospitality industry’s tendency to follow trends en masse, will make for an interesting conversions market in 2018.

“Marriott and Starwood are already doing the same thing... with the Sheraton brand,” Ford said. “It’s an interesting question that owners have to ask themselves. Should Sheratons remain as they are, shift upmarket to Delta or convert to a Four Points? Some of this shift is merger-related, but not all of it.”

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