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At Holiday Inn, Shift Is Happening Despite Credit Crunch

DALLAS, TX — October 29, 2007 — The InterContinental Hotels Group annual Americas Investors and Leadership Conference in Dallas this past week offered a potent reminder of the natural optimism shared by hoteliers in general and Holiday Inn owners in particular. The conference focused on the comprehensive $1 billion makeover of the iconic full-service Holiday Inn and limited-service Holiday Inn Express brands. Brand leadership pounded home messages of change with repeated mantras; "Change is Inn", "Evolution of an Icon", and "Shift Happens".

Holiday Inn Re-branding ImageThroughout the conference franchise leadership girded the audience of 4,300 owners and operators for change; more thorough inspection processes, a harder line on guest satisfaction scores, and further culling of properties that no longer meet expanding brand standards.

Over the past three and a half years alone InterContinental has expelled 539 Holiday Inn and Express-branded properties from the network. John Merkin, Americas Holiday Inn Brand Management SVP, repeatedly made the point that expulsions would continue until each property in the network met the new standards of "quality, consistency, and modernization".

The noticeable lack of cocktail party griping among attendees further demonstrated owner buy-in (or silent kowtowing) toward the pricey product improvements that promise continued profitability across the Holiday Inn network. It's not clear whether franchisees understood the average cost of complying with the new brand standards might average over $300,000 per property.

Capital Availability for Re-Branding

As someone in the lending business, my ears were especially tuned for discussions surrounding hotel capital availability. In fact, the conference shared only passing mention of higher hotel mortgage interest rates and higher equity infusion requirements.

Owners building new hotels should be able to roll the additional brand refresh costs into their construction/mini-perm loans. Owners of existing properties looking to finance the refresh expense will face different decisions. If the current financing involves a conduit/CMBS loan, owners need to refer to the original loan commitment to understand if secondary (mezzanine) financing is allowed.

If the current mortgage is through a conventional lender the owner may be able to take on additional debt to finance all or a portion of the refresh cost.

Either way, owners should take the opportunity to review the competitiveness of their current mortgage program and consider if refinancing is the best way to pay for the refresh costs. Lenders generally favor the Holiday Inn and Express brands; so even under the current difficult commercial lending environment franchisees should find competitive loan pricing and terms. In addition, lenders should assign value to Holiday Inn's repositioning in their underwriting, further benefiting owners.

Elements of Re-Branding

More than an urgent call to arms to play catch-up with competitors that have already launched branding refresh programs, Holiday Inn's initiative came across more as a genuine, well-researched, thoughtfully-crafted rollout that promises to fundamentally redefine the 55-year old franchise.

For starters, both brands will update their logos with a more contemporary look. But that's just the more cosmetic change; other changes lean toward the "experiential".

Both brands will have their own new "Welcome Experience": Trendy monument signs and exterior, branded lighting (spring grass green for Holiday Inn, twilight blue for Express),"green" landscaping, signature lobby scents and music, and an un-cluttered, edgy lobby design with stylish furniture.

Other experiential improvements include significantly upgraded bedding, less in-room signage (clutter), streamlined broadband/internet cordage, and a redesigned bathroom similar to those of higher-end brands.

Other changes are less cosmetic but contribute to the whole new Holiday Inn vision. InterContinental's Hotel Quality organization will roll out a stringent new evaluation process including higher minimum guest satisfaction score thresholds and required "Stay Real" service-culture staff training to improve hospitable guest service. Only those properties that pass the upgraded QA process and implement all of the new brand standards will be awarded the new Holiday Inn or Express sign.

Change Takes Time

Over 1,383 hotels have signed up to join the Holiday Inn and Express networks over the past three and a half years, so there are a record number of franchisees ready to take on the newly available flags. The round applause Merkin received at each mention of further expulsions lead me to believe owners were fully bought-in to the notion of more business through consistency across the whole network.

While new-build hotels opening in the first half of 2008 will be the first to feature the new features, it will take until the first quarter of 2010 before all 4,500 existing and pipeline properties complete the extensive re-branding process.

Post-Conference Realities

I share InterContinental's optimism for Holiday Inn's future. However, I feel the current capital market environment will come to play prominently in the day-to-day, post-conference realities of franchisees. Some of the 1,000 pipeline hotels will no longer pencil out due to the higher cost of capital, it will be difficult for some existing owners to finance the required renovations, and it's unknown how much, if any, value the repositioning will add in an environment of rising cap rates.

Like they said at the conference, "Shift Happens".

* This article can also be viewed at http://www.larkinhf.com/news/.

About Larkin Hospitality Finance

Larkin Hospitality Finance (www.larkinhf.com) is a national investment banking firm focused exclusively on meeting the debt financing needs of hotel owners and developers. Whether it's financing a ground-up new hotel construction, refinancing an existing lodging property, acquiring an independent hotel, or repositioning a flagged/branded asset, Larkin provides competitive loan programs.

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