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If there is one saving grace in the current lodging market downturn it’s that new supply is proceeding at a measured pace, thereby giving hoteliers hope that when the economy eventually turns, they will not be competing with a swell of new product. Yet the major franchise companies depend on new development to grow their brand distribution. To get an understanding of how franchise companies can expand even in this parched capital environment, GlobeSt.com spoke to James F. Anhut, senior vice president and chief development officer, the Americas, for InterContinental Hotels Group in Atlanta, at the recent New York University International Hospitality Industry Investment Conference at the Waldorf-Astoria in New York City.

Anhut oversees development for IHG’s seven brands in North America, which includes the upscale InterContinental Hotels & Resorts and Crowne Plaza flags, as well as Hotel Indigo, a boutique offering. In the extended-stay segment, IHG franchises the high end Staybridge Suites and the mid-scale Candlewood Suites. And of course, the iconic Holiday Inn and Holiday Inn Express chains are within its franchise family. All told, there are 4,222 hotels carrying the company’s flags across the globe. Anhut talked about IHG’s pipeline for new projects and how it’s holding up in today’s climate.

GlobeSt.com: Can you give us an update on InterContinental Hotels’ development activities?

Anhut: The company still maintains the world’s largest distribution of hotels, and also the world’s largest hotel pipeline. This environment we face now, needless to say, is challenging. The velocity of deals has slowed in terms of the people coming into the franchise system. But as an enterprise, we have about 1,700 hotels in the pipeline across the globe that are to be developed. So we feel pretty comfortable about the growth prospects from the perspective of unit distribution over the next couple of years despite the slowdown in the economy.

GlobeSt.com: Are franchisees able to get financing?

Anhut: There is no doubt that capital for new development and renovations is constrained. That’s not a North American or US phenomenon, that’s global. That has the effect of slowing things down. That doesn’t mean deals won’t get done. It just means it may take a bit longer. In a lot instances, especially in our power alley of mainstream brands, such as Staybridge, Candlewood, Holiday Inn and Holiday Inn Express, those deals are still getting done with more regional or community lenders that are more relationship driven, albeit with higher equity requirements and maybe slightly different underwriting in regards to terms, pricing, length, etc. As a result, the deal volumes and transactions are slowing down. But they are still getting done. If one out of every three or four deals gets done that is in our pipeline, that is still a lot of growth that is built into a 1,700-hotel pipeline. I draw optimism from the developer community that we work with because they remain pretty upbeat and optimistic.

What a lot of people haven’t talked about in this environment is the lowering cost to construct. We’ve heard numbers quoted from 15% to 25% less to develop a hotel project today. These are long-term assets that have a depreciable life for 30-plus years and have realistic lives of much longer than that. So if you can build it at a 20% to 25% lower basis than somebody who built a hotel two to three years ago, then you’ve got a competitive advantage from a couple of aspects. It affects your ability to price and when it comes time to refinance or maybe trade the hotel down the road, your basis is lower to start with than somebody who opened as recently as a year or two ago. Our franchisees are in the business of developing, owning and operating hotels. They are looking much longer term. We are staring down some pretty challenging times right now, but the business remains one that has the potential to grow long term. Demand is down today, fewer people are traveling, but the long-term trend is up in terms of the number of people who will have the wherewithal to travel in the next couple of decades. Just look at the emerging markets and the emerging middle class.

GlobeSt.com: Is most of your development in the mid-scale area?

Anhut: It’s dominated by Holiday Inn and Holiday Inn Express. Of those 1,700 hotels, 1,100 are Holiday Inn or Holiday Inn Express. The next wave would be Staybridge and Candlewoods, with another 300 between the two of them. Then you add Crowne Plaza, Hotel Indigo and InterContinental behind that in terms of the number of projects signed.

These aren’t deals we are dreaming about. Those are deals that people have actually put money into, invested in a franchise and committed to a management contract with us. Because of that, I feel pretty confident about the future and the ability to grow the pipeline. The capital requirements for the majority of the projects in the pipeline are not in the hundreds of millions, they are in the tens of millions. People can raise that kind of money, even if they need more equity than they did earlier. So when the equity goes up by 10%, 20% or maybe 30%, you are not out there looking for $30 million to $70 million. You are looking for $2 million to $5 million. It’s more likely those deals will get done than some of the high-end projects that have huge capital requirements and long lead times.

GlobeSt.com: What percentage of that 1,700 will get built?

Anhut: There is a relatively small amount of attrition from our pipeline. What’s beginning to happen now is that deals are stretching a bit longer in terms of the amount of time it would take to develop, and it’s not because of entitlements or aligning contractors or things like that. It comes down to financing in most instances. So if a lead time is, say, 18 months for a project, it might be slipping a month or two or three while people are working toward that. People ask, How many deals are falling out? There are really not that many. People don’t sign a license agreement with you because they think you are nice guys. They want to build a hotel.

When we come to them and ask, “When are you going to get it built?” They say they have the entitlements and approvals from the municipality, but they need more time to obtain the funds. And we give them the time to do that. We are not going to put a gun to their head and say, We are going to resell that market to somebody else, especially if they have done all that work. It would be foolish for us to do that and start all over again. The timelines are stretching a bit, but I don’t see any incremental higher attrition in the pipeline as a result or people totally giving up.

We have a couple of markets where people bought franchises where they thought other development was going to happen around them, such as retail and residential and maybe some light industrial. That’s not happening, so they are not going to do the deal. We allow them to exit the pipeline. But again, we aren’t seeing any huge upswings in those kinds of situations. It’s pretty steady. We monitor that closely and we’re cautious. We don’t sign deals with people that we know won’t get it done. People who have established track records with us or other franchise companies—they will get it done.

GlobeSt.com: In what markets is the majority of your pipeline?

Anhut: The majority of the pipeline is in North America. It remains a huge growth opportunity for us. We tend to look at other parts of the world and say, Look at all the growth that is going on. But the bottom line is the US is still a very vibrant economic engine.

The UK, China, Germany and some of the bigger economies remain pretty viable growth vehicles for us. Strategically, we’ve chosen to grow our footprint where we already have scale. We are looking at smaller markets, but the bottom line is there is still a lot of growth to be had in the Americas, Asia Pacific, China and the UK. So we are doing that.In terms of the exact locations, it’s hard to generalize, because it’s different for different product. Mainstream product is growing primarily in secondary markets, so it’s Holiday Inn and Holiday Inn Express along the highways. Staybridges are closer to the major metropolitan areas where you have relocation and training and appropriate business segments for that product type. Similarly, Candlewood is distributed a bit more widely in some of the smaller markets because its cost is lower compared to Staybridge and the operating model is a bit less sophisticated than Staybridge.

We are making pretty good inroads with Hotel Indigo, Crowne Plaza and InterContinental into some of the bigger city markets, not always through new construction. We are seeing the conversion of existing hotel product that may be under-flagged from the perspective of the owner or under renovated from the perspective of the market, and in this environment there is an opportunity to come back as a bigger hotel. We haven’t widely distributed those relative to some of our bigger competitors in some of the key higher barrier markets like New York City. We have a second InterContinental under construction off of Times Square. We are opening a Hotel Indigo in Chelsea in Manhattan. We opened a Hotel Indigo in London and Costa Rica recently, and have deals in Shanghai and more in London in the works. We are starting to see that hotel make it into that kind of vibrant city center area, which is apropos of the brand. It’s not for roadways.

GlobeSt.com: Is there a recovery under way?

Anhut: We are seeing a bottoming out of the declines in RevPAR, which I guess is encouraging. We are ever optimistic in this business. Should I be worried? This is a bad one, no doubt. People are suffering and people are losing their jobs so I don’t want to dismiss it as being I’m not concerned. I am. But on the other hand, if you take this longer-term perspective, we’ll get through this and our company is in a good position to do that from a balance sheet and brand perspective. From the perspective of somebody who is trying to manipulate the real estate or the opportunity to make insane short-term gain, those guys are going to get hurt. And some of them are, in terms of the way those projects were financed. Their timing was bad. Their horizon was three to five, may be seven years at the most.

The guys that aren’t sweating this moment in time are those that have a longer-term perspective, didn’t overleverage and reinvested along the way in terms of capital improvements. Those guys are weathering the storm pretty well. They can afford to take a pretty big hit on the top line and still retain their employees and keep morale high and deliver guest service. Those that have backed themselves in the corner by overleveraging or over-improving properties, they will have some tough times, which will create opportunities for others. This is the time the guys with the longer-term view can create a lot of value in their businesses if they can take advantage of some buying opportunities.

The hotels won’t go away. They are fixed assets and they are not going to go away. Somebody will make a go of those that do end up trading. I would be concerned in our business if at a conference like this people were saying that there will hotels coming back to banks, keys on tables. I would be worried if nobody wants to buy those. What we are hearing is that there are these big equity pools just waiting to pounce and when that door opens there will be a lot of sophisticated guys with a lot of capital that are going to pounce because they realize that, long term, hospitality is a good business and there are some pretty good returns in the long term. I’m optimistic, but we have to sort through some challenges.

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