After years of growing by building its own hotels or acquiring others facilities, WestCoast Hospitality Corp. expects that the biggest share of its growth now will come through franchising.


By growing that way, the Spokane-based company can build quickly a brand thats strong enough for it to compete against national hotel chains, says Stephen Barbieri, a WestCoast vice president and the com-panys spokesman.


Weve said that we expect to add eight to 18 new franchises this year. We do have quite a few that are close, Barbieri says.


Were starting to become a larger company, he says. To grow by building your own facilities requires a large capital outlay, which increases your debt load. We can grow much faster this way, and we dont have to get into higher debt levels.


WestCoast had been saying for some time that it expected the major part of its growth to begin coming through managing and franchising additional properties, rather than by building or acquiring facilities. Yet, most of the growth in its hotel division thus far has been through acquisitions, such as its purchase last December of 42 Red Lion Inns & Hotels and five DoubleTree Inns from Hilton Hotels Corp., of Beverly Hills, Calif.


When it announced its 2001 annual results in February, WestCoast said it had launched a development effort to attract new franchisees, and the company expects to add 10 percent to 20 percent more hotels to its current base of 93 properties during 2002.


It added, Red Lion Hotels & Inns has been very successful in attracting franchisees since the brand was re-launched in 1999, and the combined company expects to continue that success in targeted markets throughout the West and Midwest as well as into Canada and Mexico.


In its recently released 10-K annual report, WestCoast says it now has 39 franchised properties, 26 of which are Red Lion inns that were part of last years acquisition, plus an additional 10 properties it manages and 44 it owns. The latter number includes 19 Red Lions. In some cases, the company bought Red Lion-branded properties, and in other cases it bought franchise agreements.


During 2001, the company added a franchise affiliation that covers the Selkirk Lodge, at Schweitzer Mountain Resort, near Sandpoint, Idaho, and it also has franchised the White Pines Lodge, which is to open at Schweitzer in about a month. Both are condominium properties. The owners of the units can put their units into a rental pool so they can be rented through WestCoasts central reservations system. The two properties were developed by Harbor Resorts LLC, a subsidiary of Seattle-based Harbor Properties, which owns Schweitzer Mountain Resort.


Reservations upgrade planned


Franchising enables WestCoast to conserve its capital as it grows, so it can use its capital to do things such as invest in its reservations system or reinvest in lodging properties it already owns, rather than to build hotels and inns, Barbieri says.


In about a month, the company will announce an upgrade in its reservations system, and its 10-K lists the year in which each of the properties that it owns, manages, or franchises was last renovated. We dont want that list to get too stale, Barbieri says.


Conserving its capital helps WestCoast, which is listed on the New York Stock Exchange, to reach its prime goal of increasing by 20 percent a year its EBITDA, or earnings before interest, taxes, depreciation, and amortization, while keeping its debt in check, Barbieri says.


If were able to deliver on that, we feel that we can only be ignored so long as a good growth story, even though Wall Street traditionally hasnt liked hotel companies, he says. Also, he says, holding down its debt enables WestCoast to continue to have the ability to do acquisitions and to weather downturns.


When WestCoast franchises a hotel, it doesnt manage the property, but puts its name on the establishment. That benefits the property through name recognition and helps WestCoast to build its brand, Barbieri says. WestCoast also receives franchise royalty fees from the propertys owner.


In addition to its name, WestCoast provides marketing power through the efforts of its national sales staff and through cross marketing between the properties in its hotel division, Barbieri says.


When WestCoast manages a property, it operates the hotel, hires and supervises the staff, receives management fees, and has incentives for meeting operating-margin and profitability goals, Barbieri says.


Under management arrangements, WestCoast can derive revenue through its central services operation, which realizes economies of scale by making bulk purchases to supply numerous lodging facilities in the companys hotel division. Central services also provides support services to those properties.


To help the company build its brand, We very much would like to manage more properties with our name on them, Barbieri says. He says that if the companys brand wont be on a hotel, the company wont seek a management contract for the property as avidly as it would otherwise.


Of course, thanks to the Red Lion acquisition, WestCoast now has a second brand to build, and it will do that by putting the Red Lion name on its limited-service hotels, which dont have food service or meeting spaces, Barbieri says. Its WestCoast-branded establishments are full-service hotels, with both food service and meeting rooms. Strong interest has been received for both the WestCoast and Red Lion brands, the company said in its discussion in its most recent quarterly earnings statement of its intent to grow through franchising.


WestCoast links the properties it franchises or manages into its computerized reservation system, which tracks, almost in real time, inventories of available rooms at all of the properties in its hotel division, Barbieri says.


Online marketing of rooms


That information enables managers to make quick decisions, such as to adjust rates based on room-reservation trends, and to offer surplus rooms at discounts through giant Internet marketers such as Travelocity.com, Priceline.com, Or-bitz.com, and Expedia.com, Barbieri says.


Mammoth computerized networks that serve the travel industry, like Apollo, Sabre, and Galileo, feed the big Internet marketers information about available rooms that they have gathered from West-Coasts reservations system, Barbieri says.


They are pulling those rooms directly from our central reservations system, he says. Theyre querying our system for room availability and rates. Its incumbent on us to deliver that inventory to those sites and sell the rooms at the highest possible returns to the property owners.


To avoid driving its revenue per available room too low, WestCoast offers only a certain number of its rooms through such channels, Barbieri says. Still, he says, There is a place for those types of distributors. There are times when youre slow. Its a lot better to have your hotel room rented for $40 than to have it empty.


An average of 25 percent of the revenue its franchisees hotels receive comes through channels WestCoast provides, although some franchised establishments derive as much as 50 percent of their revenue through those channels, Barbieri says.


It depends on how they utilize us, he says. What we really want to bring to them is new businessnot 25 percent of what they already have.


While WestCoasts first choice is to grow through franchising, if another potential acquisition comes up, well look at it, Barbieri says. When the company reported its first-quarter earnings, it said it had doubled the size of its hotel division in the preceding 12 months while decreasing its overall debt.


WestCoast, formerly Cavanaughs Hospitality Corp., hadnt done franchising before it acquired Seattle-based WestCoast Hotels Inc. in early 2000 in a transaction that it valued at $61.4 million. Cavanaughs, aware that its own brand had limited name recognition, took on the WestCoast name, and the acquisition gave the Spokane company a total of 46 hotels, up from 19, and also brought it its first franchised hotels.


They had franchises and the internal structure to do those kinds of deals, Barbieri says. That structure included an approved uniform franchise offering circular, a document thats much like a stock circular and is required to do franchising, Barbieri says.


Manfred Gerling, who now heads WestCoasts franchising team, came from Red Lion when WestCoast acquired that company, and since it completed the Red Lion transaction, WestCoast has beefed up its franchising team to four people from one, Barbieri says.


The companys two-person development team, meanwhile, works on acquisitions and on developing new properties.


WestCoast says its also interested in making sliver investments, which it defines as equity investments of 20 percent or less in lodging facilities whose owners want WestCoast to buy an equity interest before they sign management or franchise agreements with the Spokane company. Such owners want assurances that WestCoast will pull on the same oar that theyre pulling on, Barbieri says.


Managing or franchising someone elses hotel requires that you communicate with them, and WestCoast is holding here this week its first meeting of all of the hotel general managers, sales directors, and property owners in its hotel division since it completed the Red Lion transaction.


During that session, the company will talk about operational things, sales strategies, and cross promotion, Barbieri says.