Roadside Hotels Could Draw Investor Interest From a Biden Boost for Infrastructure

Most of the world’s major hotel companies reported first quarter earnings over the last two weeks, and executives largely focused on expected record levels of summer leisure travel.

But the CEOs of the only two companies to post a profit — Wyndham and Choice Hotels — also focused their rosy outlook on another potential growth driver: U.S. President Joe Biden’s $2 trillion infrastructure package.

“We’re really excited,” Wyndham CEO Geoff Ballotti said. “Whatever shape the country’s infrastructure plans might take, our teams are working at trying to find new infrastructure accounts.”

Wyndham, with brands like Ramada and Days Inn, and Choice Hotels, with Comfort and Woodspring Suites, both have extensive portfolios of roadside hotels. More than 4,000 Choice Hotels properties in the U.S. are located within a mile of an interstate highway exit. These are the kind of hotels construction companies would likely book blocks of rooms for employees to stay while they work on rebuilding nearby highways.

Ballotti and Choice Hotels CEO Patrick Pacious indicated on their respective earnings calls they expect more bookings from construction crews at their hotels, especially extended-stay brands, in the event the infrastructure bill passes.

Business from construction companies continued through the pandemic, and it is currently close to 2019 levels, Pacious said. But the infrastructure plan — which calls for improvements to roads, airports, bridges, and tunnels — could push that demand to record levels.

“The more investment the country puts into those assets, the better off it is for productivity and for our business as a whole,” Pacious said.

Another Selling Point: The strong forecast for hotel performance as a result of a passed infrastructure deal produces more than optimism at Choice and Wyndham’s respective headquarters.

Both are among the most eager hotel companies to sign new deals with owners of existing hotels, especially in light of slowed down new construction in the U.S. These so-called conversion deals accounted for 70 percent of the hotels Wyndham opened in the first quarter. It was more than 80 percent at Choice Hotels.

But there has to be a strong pitch to win over current hotel owners and maintain deal momentum.

Both companies sometimes use “key money,” a financial incentive to convince potential owners to take on a brand affiliation. The infrastructure pop in business will also help sway potential franchisees, especially for the company’s extended-stay brands.

Investors like Starwood Capital and Blackstone flocked to the extended-stay sector during the pandemic due to brands like Extended Stay America and Choice’s WoodSpring Suites maintaining relatively high occupancy rates even during the worst months of the health crisis. Brands in this sector generally attract frontline construction workers as well as medical staff.

Years of infrastructure spending and build-out will keep customers coming in and investors wanting more product.

“This could be a multi-year phenomenon,” Ryan Severino, chief economist at JLL, said via email. “I think the expansion in the economy stays well above pre-pandemic capacity for at least the next few years. That would be a boon to all businesses, but certainly to the hotel business as people take vacations, businesses travel recovers, etc. I don’t see this as a one-year anomaly.”

Construction Outreach: Biden met with Republican leaders last week in hopes of gathering bipartisan support, but the infrastructure bill is certainly not a done deal. That isn’t stopping companies like Wyndham from laying the foundation for business if the bill does move forward.

The company is looking to expand its construction corporate client roster through its Wyndham Direct corporate booking channel as well as make inroads with logistics companies that might also benefit from the bill.

“So many of the [what we call] pick-and-shovel infrastructure companies that are out there that we’d expect to benefit are already customers of ours,” Ballotti said. “We’re seeing great success at winning more bids and gaining more share.”

Limited Opportunity

The U.S. Internal Revenue Service Friday announced it wouldn’t expand eligibility for Opportunity Zones, a debated real estate development incentive program enacted by the Trump administration’s 2017 tax reform.

The Opportunity Zone program aimed to boost development in what the U.S. Department of Treasury deemed in 2018 and 2019 as 8,700 low-income census tracts. Developers across a variety of commercial real estate sectors hoped they might be able to expand into additional areas considering last year’s census in the U.S.

But Opportunity Zones “were established at the time they were designated and are not subject to change,” the IRS said in a Friday Statement, per a Bloomberg report.

Mixed Benefits: The program’s intent on paper was to pump cash into neglected neighborhoods, but Opportunity Zones get criticized for delivering major financial incentives to established developers rather than helping low-income individuals. The measure enables a developer to defer, or even get an exemption from, capital gains taxes based on how long they hold onto the asset.

Hotels like the upcoming Virgin Hotel in New Orleans, funded by former Trump advisor Anthony Scaramucci’s investment firm SkyBridge Capital, qualify for Opportunity Zone incentives. A $600 million Portland, Oregon, Ritz-Carlton — where condo prices are expected to break city records and go for as much as $1,900 per square foot — under construction also qualified for the funds.

Cleanup Coming: The Trump administration wanted to expand the program, but the Biden administration appears to want to limit its scope considering criticism regarding who really benefits.

It should be noted real estate analysts say the opportunity zone program doesn’t do enough to make bad deals work financially. Instead, it’s more of a boost to projects on the fence. However, glitzy projects like a Ritz-Carlton or Virgin Hotel in hot markets like New Orleans and Portland are obvious head scratchers for a tax program aimed at helping poor neighborhoods.

“There’s some cleanup to be done,” John Moriarty, an IRS associate chief counsel, said — per Bloomberg Tax — last week on an American Bar Association webinar. “There is still work to be done in that area.”

Domestic vs. International Brands in China

Except for a winter surge of new coronavirus cases, China led the world in terms of the hotel industry recovering from the worst of the pandemic. It’s uncertain when international borders will reopen, so China’s domestic tourism market has exploded.

Marriott’s leisure business in China is now above pre-pandemic levels, and even corporate travel in March surpassed 2019 levels by 5 percent, the company’s CEO Tony Capuano said last week on an investor call.

Market fundamentals like will almost certainly stir more development interest in the years to come, especially as limited financing and soaring construction costs in the U.S. is expected to curtail ground-up hotel construction there.

Wyndham has a 62,000-room development pipeline in China. Hilton has a development agreement with property developer Country Garden to build more than 1,000 Home 2 Suites properties across the country. But don’t discount domestic brands in China like Huazhu and the smaller Atour.

“Ever since they decided to rebalance the domestic economy towards more internal consumption, domestic tourism has grown tremendously and given more opportunities for the domestic brands to grow,” Nicolas Graf, associate dean at New York University’s Jonathan M. Tisch Center of Hospitality, told Skift last week. “I don’t see the Chinese firms growing internationally in the very short-term. I think it’s going to take a few more years of them building inside and getting more comfortable [about] investing abroad.”

East Meets West: It may seem like a bad time for Chinese companies to pursue a public listing in the U.S. Geopolitical tensions between the two countries runs high, and billionaire investor Jack Ma’s Ant Group faced intense scrutiny by Chinese regulators ahead of its planned debut on the markets in Shanghai and Hong Kong. That IPO was later pulled days before its expected launch.

But Chinese hotel companies may have no better choice than to go public in the U.S. if they want to raise capital to expand back home.

Atour currently has more than 600 hotels across more than 170 Chinese cities, according to its website. More than 900 additional hotels are planned, but the Shanghai-based company is competing with U.S.-based hotel firms wanting into the highly lucrative market.

Heading to the U.S. for an IPO enables a company like Atour the ability to quickly raise capital and deploy for expansion. Atour’s reported IPO could value the company at as much as $2 billion, according to CNBC. The company plans to raise as much as $300 million through the process.

“Listing in the U.S., one of the largest and most liquid capital markets, provides [Atour] with the necessary capital to expand [back in China],” Peng Liu, a professor from Cornell University’s School of Hotel Administration, told Skift last week.

Extended Stay America’s Shareholder Spat Heats Up

Extended Stay America leaders responded Friday to criticism from some of its largest shareholders who said a planned $6 billion takeover from Blackstone and Starwood Capital was too low of an offer. The deal is expected to close on June 11, assuming shareholders approve the bid during a June 8 vote.

“The transaction marks the culmination of [Extended Stay America’s] thorough, multi-year actions to explore value-enhancing alternatives, during which time only Blackstone and Starwood emerged as interested parties despite proactive outreach to others and [Extended Stay America’s] publicly acknowledged “strategic review” process in 2019,” the company said in a letter to shareholders.

Shareholders like family wealth fund Tarsadia Capital and private equity firm Hawk Ridge Capital were the first to go public with their opposition. Other shareholders like SouthernSun Asset Management LLC, River Road Asset Management, and Cooke & Bieler LP later joined in the opposition, citing bad timing and a lowball offer.

Given the hotel industry’s ongoing recovery from the pandemic and the resiliency of the extended-stay hotel sector during the crisis, the opposing group to the deal felt there was upside in maintaining ownership of the company rather than sell.

It later emerged in a prospectus filing with the U.S. Securities and Exchange Commission two members of Extended Stay America’s real estate trust board, Neil Brown and Simon Turner, also opposed the acquisition for the same reason.

Extended Stay America refuted the claims, arguing $6 billion is a fair price and that it went through years of review to find a strong buyer. The company made a point of calling out Tarsadia’s opposing complaints.

“Extended Stay welcomes open communication with its shareholders and constructive input toward the shared goal of enhancing shareholder value,” the company continued in its letter to shareholders. “However, many of Tarsadia’s claims are misleading, as detailed in the letter, and provide no credible alternative path to value creation.”

The Booming Big Apple

New York City leads the U.S. in hotel construction and even hotel openings despite its catastrophic decline in tourism and business travel for the duration of the pandemic.

Nearly 80 hotels with more than 13,000 rooms combined are expected to open by the end of the year, according to STR in the Wall Street Journal. It’s a shift in development tune from last year when analysts predicted as much as 20 percent — or 25,000 rooms — would permanently shutter across the city as a result of the pandemic.

Analysts and executives almost welcomed the grim news last year, as the city was seen as an oversupplied market where owners had limited pricing power. But even supply cuts weren’t expected to be enough to boost profit margins in the largest U.S. city, which has some of the highest construction and labor costs in the country.

“New York is a unique place. It’ll come back, but it doesn’t mean the owners will be the same or that the buildings will have the same use,” Pebblebrook Hotel Trust CEO Jon Bortz told Skift last year. “I’m not surmising the demise of New York, I just think it’ll be hard to make money in the hotel business for a while.”

New York City’s roughly 54 percent average hotel occupancy at the beginning of the month was below the 57 percent national average, according to STR. But developers appear to be taking the long view by building in anticipation of a full recovery.

The city has the largest development pipeline of any city in the U.S., with 145 projects with a combined 24,762 rooms currently under construction, according to Lodging Econometrics. Los Angeles has the second-largest with 144 projects, or 23,994 rooms.