With hotel companies striving for net unit growth, ground up development on pause and owners looking to add value, conversions are the only game in town in today's environment.
The big players have made their interest clear through brand launches in recent years targeting independent and conversion opportunities, such as IHG’s Vignette Collection, Hilton’s conversion-focused brand Spark, and Accor’s Handwritten Collection.
However, “when we talk about conversion, it appears that we don’t necessarily need to have a soft brand or a very flexible brand to make it happen,” says Alexandra Goguet, vice president development France & BeNeLux, Marriott International.
A quarter of the rooms Marriott added to its portfolio in its first quarter were conversions, and although Delta and Four Points by Sheraton are its core conversion brands, with its soft Autograph and Luxury Collection and Tribute Portfolio brands targeting independents, she says any brands could be applied to conversions, offering the example of the former Muzentoren office in the Hague, which was last year converted into a dual-branded Residence Inn and Moxy.
“That is two very hard brands that are not supposed to be conversion brands, but if you put together the right team, you always find ways to implement the brand in the right way,” she says.
Not all brands are created equal
A cross-section of its global Autograph Collection properties saw nearly 40 per cent revpar growth in the three years post-conversion, she says, adding that increasing numbers of independent owners have shown interest in conversion and rebranding opportunities post-pandemic: “Our hotels suffered less than the independent hotels… and the recovery is much faster”.
Matt Lederer, hotel acquisitions director at real estate investor Castleforge, agrees that soft brands can offer the opportunity to move into the branded universe without huge changes or investment. But not all brands are created equal and deliver in the same way.
“Does it have the company name in the brand name? Because that can affect visibility and traction on third-party booking engines,” he says.
“How much value will the brand add? That will predominantly come down to: can it be delivered at a sensible budget, will the brand support the operating forecasts, or give us a chance to outperform those forecasts, and will that brand be accretive to liquidity at exit?”
Radisson Hotel Group vice president of development Valerie Schuermans says there must be brand awareness within the market for conversion potential: “We are actively growing our presence in Spain with the core brands so we don’t necessarily feel the momentum to introduce the conversion brand at this point in time,” she says. But in Italy, where Radisson has a stronger presence, there is more appetite from independent hoteliers and small, regional chains.
“We see more transactions than new developments… so in that respect, the conversion brand becomes a relevant tool to be a player,” she adds.
“It could be a long-term soft brand or a branding solution that you offer for the mid-term to cover this period of volatility and, say, after maybe three or five years, let’s reassess and see if we can convert the soft brand into one of the core brands. That is an approach we are doing as well in a number of assets which has proven to us a very interesting tool for that interim period.”
Conversion isn’t right for every asset
But while brands may have conversion potential, not every asset will. “You need to be able to bring something to the owner. In certain hotels you cannot do it. And you need to be able to provide a certain experience to the guest. You cannot convert anything and just put a brand on it and expect it to work,” explains Brice De Guitard, head of corporate development at Louvre Hotels Group.
“It’s not right for every opportunity,” agrees Lederer. “Commercially speaking, it depends what your rate potential is in a given situation. If you feel you can push that performance with a softer brand in place and that justifies the fees that you’re paying to be part of that system and have that brand above the door, then clearly, it’s accretive. But it’s not always the case.”
The flexibility of softer brands can also be a double-edged sword, potentially offering a smaller, shorter capex programme, meaning quicker stabilisation of the asset and a quicker exit, all of which are accretive to returns, says Lederer. However, flexible standards can also be more subjective and, if an owner interprets them differently to the brand, that means more back and forth and an extended capex programme.
But brands can provide tools that allow investors to stand a better chance of getting to their target returns, he says, and investors prefer a brand above the door, which is something to consider in terms of debt availability and the cost of that debt. Conversion also offers ESG potential to retain or repurpose some FF&E.
“We’re probably looking at how we can exit early to help returns in some situations… conversion brands help to do that,” he adds. “It’s interesting to look at the way other sectors are repricing at this point, the economic challenges they’re facing and how that might unlock conversion opportunities.”
Lederer suggests the opportunities to rebrand or convert may be limited currently, although Castleforge sees potential in offices, a market that he says is repricing faster than other asset classes. De Guitard, however, sees opportunity in the current context.
“Investors are more and more looking at returns of course, and this is where conversion brands can play a role,” he says, “it’s key to have that kind of tool, especially in mature markets like Europe where you don’t have so many greenfield opportunities.”
All those quoted in the article appeared on stage at the International Hospitality Investment Forum (IHIF) held in Berlin between May 15 and 17, in a session called: All Change: Assessing the Value of Conversion Brands.