A.CRE

Hotel “Flag”

An informal term used to denote an operating brand within the hotel industry. Marriott, Hilton, and Best Western are examples of “Flags” used by owners of hotel properties.

Putting ‘Hotel Flag’ in Context

Blue Ridge Hospitality Group, a real estate investment firm specializing in hospitality assets, recently acquired Queen City Suites by Hilton, a 150-key limited-service hotel located in the growing Charlotte, North Carolina market. The property benefits from its proximity to the Charlotte Douglas International Airport, several corporate headquarters, and popular attractions such as the NASCAR Hall of Fame.

The Role of the “Flag”

When evaluating potential acquisitions, Blue Ridge Hospitality Group identified the hotel’s operating brand, or “flag,” as a significant value driver. The Hilton flag provided immediate benefits:

  • Brand Recognition: Hilton’s strong brand name attracts loyal customers who are part of its global loyalty program, Hilton Honors. This helps maintain steady occupancy levels and room rates compared to non-branded competitors.
  • Operating Systems: The Hilton flag ensures access to streamlined reservation systems, quality assurance programs, and operational guidelines that enhance efficiency.
  • Marketing Power: Hilton’s global marketing campaigns and partnerships significantly increase the property’s visibility to potential guests.

Decision to Retain the Flag

The acquisition agreement included a review of the franchise agreement with Hilton. Blue Ridge Hospitality Group noted that the property had an existing 15-year franchise agreement with Hilton, requiring ongoing brand standard compliance. After evaluating the franchise fees—5% of gross room revenue and a 3% marketing fee—against the projected benefits of maintaining the Hilton flag, the firm opted to retain the brand.

Financial Context

Blue Ridge Hospitality Group purchased Queen City Suites for $21 million, with a forecasted Net Operating Income (NOI) of $1.75 million in year one. Retaining the Hilton flag was projected to support:

  • Steady Occupancy Rates: An average of 75% occupancy compared to 60-65% for comparable non-branded hotels in the area.
  • RevPAR Growth: A RevPAR (Revenue per Available Room) premium of 15% over the local competitive set due to the Hilton flag’s influence.

Hypothetical Calculation: RevPAR Impact

For context, the estimated annual room revenue with and without the Hilton flag was calculated as follows:

  • With Hilton Flag:
    ADR (Average Daily Rate): $140
    Occupancy Rate: 75%
    Annual Revenue = 150 rooms × 365 days × 75% × $140 = $5,737,500
  • Without Hilton Flag:
    ADR: $125
    Occupancy Rate: 65%
    Annual Revenue = 150 rooms × 365 days × 65% × $125 = $4,453,125

The Hilton flag resulted in an estimated annual revenue increase of $1,284,375, more than covering franchise fees and justifying its retention.

Related Content:
Click here to get this CRE Glossary in an eBook (PDF) format.
by