With more than 650 hotels and 85,000 rooms and suites, Promus Hotel Corp. has already made a name for itself thanks to its Hampton Inn, Embassy Suites and Homewood Suites brands. And now Wall Street's listening.
Life has been a little hectic lately for Ray Schultz. As president and CEO of Promus Hotel Corp. in Memphis, Tenn., Schultz has been on the road a lot, selling Wall Street and the investment community on the virtues of Promus' core Embassy Suites, Hampton Inn, Hampton Inn & Suites and Homewood Suites brands.
"We've been inundated with presentations and analyst meetings, all of the things that you'd imagine a new public company would get hit with, especially one in an industry like lodging which is a hot industry on Wall Street today and with the reputations that our brands enjoy," says Schultz. "We've been spending an awful lot of the first three months as a new company in trying to acquaint the investment community about who we are, where we're going and what our plans are, and why we think we're better than most."
Technically, Promus is a "new public company, formed last July after The Promus Cos. Inc. spun off its hotel and entertainment properties into separate companies (the entertainment company became Harrah's Entertainment Inc.). Both Promus and Harrah's are traded on the New York Stock Exchange under the symbols PRH and HET, respectively.
What is the Promus message? Growth, from the ground up.
"We have a deeper backlog of new development going on today than we ever have in the history of our company," says Schultz. "We're going to open about 100 hotels this year and probably 150 next year. Most everything we're talking about other than in the Embassy brand is ground-up construction. The engine that's fueling most of this growth is the Hampton system. We'll open 90-plus Hampton Inns this year and probably over each of the next two or three years."
In the case of Hampton, the company's leading brand, for the first time on a nationally franchised level, here was a concept that combined a new-build structure with so-called "limited service" features and included free breakfast.
"It comes down to one word - value," says Schultz. "Hampton is a product we designed with a finish level of a mid- to upper-midscale hotel but without all of the add-ons of restaurant and bar, meeting space and convention space that most transient travelers never use, so we're able to build a much better guest room, a much better facility, offer free continental breakfast and offer the value that the full-service hotel just can't offer because of all the added baggage that it has. Plus, Hampton is a contemporary product. It's kind of our way of life today."
In a somewhat unique strategy, Promus owns many of its own hotel properties. "We are first and foremost a franchiser, but we believe in order to be the best franchiser we need to also be an owner and operator of our brands. So we operate over 100 of the hotels in our system, and we own hotels in each of our brands. We're not big into real estate, but we think owning and operating are important to leading our systems."
Though best known for its Hampton and Embassy Suites brands, much attention is now being paid to the company's newest product called Homewood Suites. Promus is positioning this brand to accommodate the extended-stay traveler (on the road for at least five days) as this segment of the traveling public experiences tremendous growth.
"We're investing right now in developing Homewood Suites for our own account because of the nature of that product," says Schultz. "It's a very high return-on-investment product. It's a system which required a little bit of feed money so to speak to get the ball rolling, and now we have the ball rolling both with our own investment in it as well as a significant amount of franchising going on in it."
Right now there are about 30 Homewood Suites open, but Schultz says that number will double in the next 12 to 18 months.
The Homewood Suites typically looks like an apartment community from the outside, with suites that include a separate bath, kitchen and living room.
"We find that the transient traveler has a high preference for this kind of accommodation over a standard hotel, and he's paying about the same price for a full residential suite as he does for a lower up scale hotel room at $80 to $90," says Schultz.
Promus also has been busy developing a new Hampton Inn & Suites concept, which combines a traditional Hampton Inn with a suite component.
"This fits into places where the market isn't deep enough for an all-suite hotel, a 100- to 150-key Homewood," says Schultz. "It allows you to mix these residential-style suites with normal Hampton rooms and create the flexible kind of product which allows you to market one-and two-bedroom suites or standard Hampton Inn rooms in a package."
"We and our developers think also that it'll just fit into so many more markets than an all-suite hotel. Smaller markets, niches in larger markets where instead of having to build 100 or 150 suites you can build 30 or 40 along with 50 or 60 guest rooms in a package, and it'll fit into a lot more markets."
So far Promus has four Hampton Inn & Suites up and running, "and they're just going gangbusters," says Schultz.
Of course with all of this new activity, industry watchers are concerned about overbuilding.
"Probably the thing that's important, because hotel developers are sort of like hog farmers, if availability of funds or the pork price stays high, then hotel developers will develop," says Schultz. "Fortunately the financial community, the bankers, have been holding tight to their financing. It's very difficult to get a hotel loan above 60% to 65% of value. Which means if you want to build a hotel today you have to put some of your own money into the project. I think the development is much more positive with solid market information than it was back in the '80s when they were doing a lot of tax shelter development. The availability of financing has been a governor on overbuilding."
And Wall Street has become a more active participant in the hospitality industry thanks to the real estate investment trust (REIT) vehicle. Recently Morgan Stanley's Neil Barsky upgraded Promus' stock from neutral to out-perform at 223/4, and raised the company's 1996 earnings estimate from $1.00 to $1.07 a share. It also increased its five-year growth projection from 22% to 25%.
Promus made recent news when it agreed to manage 18 hotels FelCor Suite Hotels is acquiring from Crowne Sterling Suites. Felcor will convert the hotels to Embassy Suites, which will be managed by Promus Hotels Inc., a subsidiary of PHC.
"We think the REITs are an interesting vehicle for our growth, because if you look at what we're doing with Felcor, two things are possible," says Schultz. "No. 1, we insist on managing the hotels that are within a REIT if we're going to invest in the REIT. And obviously we're interested in REITs that tend to have a lot of our brand hotels in them. Most of the hotel REITs do have our brand in them. Most of the REITs are structured to manage themselves, but FelCor is not. We manage all of their hotels, and they have principally concentrated on the Embassy brand."
Schultz sees other potential REIT link-ups in the future. "If we can develop a relationship with another REIT that is similar to that with one or more of our other brands, we might look favorably at doing that, if we are the manager of the hotels and if the REIT puts the real estate on their balance sheet," says Schultz.
So what about the future?
"We're constantly looking at what we need to do to be contemporary by the year 2000 and beyond. The gratifying thing is that we're right on stream with contemporary America, but there are things that are happening that we have to be cognizant of and make sure we incorporate in our existing hotels and in our new ones. Things for businessmen like better lighting in our rooms, bigger desks, high-speed data ports," says Schultz.
"We have to make sure at the same time, because the leisure market keeps growing, that our product is also capable of supporting the weekend tourist and leisure family travel in the summertime. Those are the kinds of things that drive our designs and our amenities. The underlying principal, though, is always that whatever we present, we're presenting value, and we want our customer to perceive us as greater value than any of our competitors."
Net income (3rd Q): $15.8 million ($0.31/share)
Embassy Suites 111 hotels, 26,254 rooms Hampton Inn 504 hotels, 56,010 rooms Homewood Suites 27 hotels, 2,905 rooms
Source: Promus 3rd Q 1995 report.