Prime Hospitality Corporation

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Prime Hospitality Corporation

700 Route 46 East
Fairfield, New Jersey 07004
U.S.A.
Telephone: (973) 882-1010
Fax: (973) 882-8577
Web site: http://www.primehospitality.com

Public Company
Incorporated: 1969 as Prime Motor Inns Inc.
Employees: 6,903
Sales: $485.4 million (2001)
Stock Exchanges: New York
Ticker Symbol: PDQ
NAIC: 721110 Hotels (Except Casino Hotels) and Motels

Prime Hospitality Corporation is a major owner, operator, and franchiser of hotels. The company owns or franchises more than 240 hotels in 32 states. Prime has two main brands, Am-eriSuites and Wellesley Inn & Suites. AmeriSuites caters primarily to business travelers on long-term stays, and accommodations include kitchenettes, work space, complimentary breakfasts, and other amenities. Wellesley Inns are mid-priced hotels. The Wellesley Inn & Suites hotels offer a mix of suites similar to the AmeriSuites rooms, designed for stays of a week or more, along with more traditional hotel rooms for the business or leisure traveler. Prime Hospitality also operates hotels under contract to other chains. These are mostly upscale hotels owned by chains including Hilton, Radisson, and Sheraton. In addition, the company operates budget hotels under contract in four states. These belong primarily to national chains such as Days Inn, Howard Johnson, and Comfort Inn & Suites. Prime was a high-growth company in the 1980s, at one point one of the top three lodging chains in the country. The company went into and out of bankruptcy in the early 1990s, and has since concentrated on expanding its two core brands.

A Sleeper Going National in the 1980s

Prime Hospitality Corporation started out as the entrepreneurial dream of four New Jersey builders. Peter E. Simon, Melvin Taub, Samuel Brodie, and Herbert Kay began building and developing properties together in the 1950s. Their company specialized in building low-cost motels. They took the company public in 1969 as Prime Motor Inns, Inc. Prime Motor Inns was able to keep its costs down, building for less than its competitors. The company began to grow rapidly by the mid-1970s, with revenue increasing by 25 percent a year on average. By the early 1980s, Prime had built more than 70 motels for big national chains such as Sheraton, Holiday Inn, Ramada, and Howard Johnson. Although the company was publicly owned, its founders and their families controlled about 30 percent of the shares, and Prime was tightly run by its centralized management team. Prime began branching into hotel and motel management, and also grew through acquisition. In 1984 Prime bought American Motor Inns, Inc., a company that owned some 50 motels. Sales grew more than tenfold from the mid-1970s to the mid-1980s, with revenue of more than $300 million by 1985. Although Prime had grown rapidly and made millionaires of its founders, it was still little known in the hospitality industry. Then in 1985 Prime suddenly found itself one of the largest hotel chains in the country when it acquired the venerable chain Howard Johnson.

The Howard Johnson chain of motels and restaurants was an American classic, well known for the distinctive orange roofs on its buildings. But by the early 1980s the brand seemed hopelessly dated, and the company’s latest owner, British firm Imperial Group PLC, could do little to shake the chain back to life. Imperial had paid $630 million for Howard Johnson in 1980. In 1985 Prime Motor Inns picked up the chain for only $235 million. Prime took possession of the Howard Johnson name, 470 hotels, both company-owned and franchised, and 174 HoJo restaurants. Prime seemed to have come from nowhere to become a major player on the hospitality scene, set to rival Holiday Inn in the mid-priced market. The company invested some $70 million in refurbishing its company-owned Howard Johnsons and dropped franchisees who failed to make similar significant improvements. Prime began advertising the chain heavily to business travelers, and sold off some properties. The company was known as one of the most profitable hotel owners and operators in the mid-1980s, at a time when many of its competitors were seeing softening business conditions.

By 1988 revenue had surpassed $400 million, and income had quadrupled from five years earlier, to $77 million. The company was still basically run by its founders. Peter Simon had become chairman of the company, while his son David Simon became president and chief executive. Peter Simon’s nephew Joel Simon ran the firm’s hotel operating subsidiary, Prime Management Company. The company still had a staff of only about 200, and it had continued tight cost controls. Prime had built a reputation for smart moves by its successful handling of the moribund Howard Johnson chain. It also had picked up some small regional hotel chains in the late 1980s, including the Texas-based AmeriSuites, and the East Coast chain of 24 Wellesley Inns. In 1989 the company announced that it was buying the franchising operations of the Ramada Inn chain, which had close to 500 hotels. Ramada was restructuring in order to concentrate on its gaming and resort properties, and Prime picked up the domestic Ramada franchises for $180 million. The deal also gave Prime Ramada’s chain of budget hotels, called Rodeway, with 150 properties. After the deal went through, Prime was left with about 1,100 hotels and motels in its portfolio, making it either the second or third largest hotel franchiser in the United States. Aside from Howard Johnson and Ramada, Prime operated some 130 hotels under franchise to other top hoteliers including Hilton, Sheraton, Holiday Inn, and Marriott.

Reversals in the Early 1990s

After it took on the large Ramada chain, Prime also announced ambitious plans to begin building more new Howard Johnsons, hoping to open 50 hotels a year over the next five years. Everything seemed rosy for the company, which aimed to dominate the medium-priced hotel market soon, knocking off market leader Holiday Inn. The company’s stock had risen over the 1980s as Wall Street took note of its formidable profit picture. Its stock price climbed from $1 a share in 1980 to a high of $45 in 1987, and at the beginning of 1990 leveling off at around $23. Revenue had rocketed to more than $1.5 billion after the Ramada deal closed, and Prime seemed prepared to build on its success by adding on significantly to the Howard Johnson chain. Yet Prime’s foundation was not as solid as it looked. A downturn in the economy, particularly in the Northeast where Prime was strongest, and a loss of confidence by investors, combined to send the company into a quick spiral to bankruptcy.

One problem was that Prime was booking an increasing proportion of revenue from one-time property sales, construction fees, and from mortgages and notes receivable it held, and less from its core business. The company was involved in many complicated deals where it sold property by financing the seller, taking the bulk of the sale price in notes. The hospitality industry started to suffer in 1990, partially because of overbuilding, partially because of an overall weakening economy. This hit mid-priced hotels harder than others. Consumers were extremely sensitive to changes in room rates at the mid-price level, where an increase of two dollars was apparently enough to send travelers away in search of a better deal. So these hotels could not easily raise prices to cover rising costs. This meant that not only did Prime’s business suffer, but the franchisees and others in this segment of the industry to whom it had loaned money had trouble keeping up payments. Prime tried to raise money on Wall Street early in 1990, and was hit by tough questions about its loans and accounting. Within a matter of months, Prime’s long upward trend reversed. By May 1990 Prime was no longer talking about building more Howard Johnsons, but was instead selling 65 percent of the Howard Johnson and Ramada Inn franchise to a New York investment group for $140 million. For the quarter ending that March, the company reported a 98 percent drop in profit. The company had debt of at least $550 million, and it began to have trouble making payments. In September, Prime filed for Chapter 11 bankruptcy.

Under Chapter 11, the company could continue to operate as it worked out ways to pay its creditors. At this point it became clear that Prime needed to make drastic changes, and almost all of its top executives, including the founders, left or retired. David Simon stayed on, and hired a turnaround specialist, John Elwood, to get the company back on its feet. Elwood made financial changes that transformed the company into more of a traditional hotel operator and less of a real estate developer. Prime collected money owed it relating to its purchase of the Ramada franchise, and also bought back its own debt on the open market. By 1992, Prime, now renamed Prime Hospitality Corporation, had debt of only $270 million, and it was able to come out of bankruptcy. It booked four profitable quarters in 1993, and by 1994 the company was beginning to make expansion plans again. The company’s management grew less centralized during the bankruptcy, giving regional executives more independence and creative leeway. Prime worked on shoring up its restaurant operations, which it had previously run at a loss. The proximity of a restaurant was a big draw for a hotel, and Prime had run restaurants in spite of the difficulty of making them pay. But under the new management system, Prime’s restaurants were expected to at least break even. By 1994 the worst was behind Prime, and it began planning to bring its two remaining hotel chains, AmeriSuites and Wellesley, into national prominence.

Company Perspectives:

Prime Hospitality Corporation, one of the nation’s premiere lodging companies, owns, manages, develops and franchises 243 hotels throughout the United States. The Company owns and operates two proprietary brands, AmeriSuites (all-suites) and Wellesley Inns & Suites (limited service). Also within Prime’s portfolio are owned and/or managed hotels operated under franchise agreements with national hotel chains including Hilton, Radisson, Sheraton and Holiday Inn.

Chain Growth in the Late 1990s

The postbankruptcy Prime Hospitality was a much smaller company than it had been. Whereas it had been one of the largest hotel companies in terms of number of rooms, now it owned only the small Wellesley chain and the even smaller AmeriSuites. The suite hotel was a growing and profitable sector of the hospitality industry, pioneered by the Residence Inn chain in the 1970s and soon copied by a host of competitors in the late 1980s. Suite hotels catered to business travelers staying a week or more, and were a cross between a traditional hotel and an apartment complex. Suites came with kitchens or kitchenettes so that guests could cook and eat in their rooms, and in some cases were cheaper to run than ordinary hotels because long-term guests required less service. Prime considered selling its Wellesley chain in 1995 so that it could put all of its resources into expanding the AmeriSuites chain. But in 1996 Prime instead bought up the remaining Wellesley Inns it did not directly own. The chain at that time consisted of 30 hotels located in New Jersey, New York, Virginia, Maryland, Pennsylvania, and Florida. The next year, Prime bought a chain of extended-stay hotels called HomeGate in a stock deal worth about $134 million. HomeGate had only eight hotels open, but it had an additional 34 under development, with plans to build 20 or so more. The company ran out of funds to expand on its own and accepted the merger with Prime. Prime built and ran the HomeGate chain until 1999, when the hotels were converted to the Wellesley brand.

Meanwhile, the company was rapidly building new hotels. Although in the mid-1990s Prime had preferred to own its hotels, it began a push to recruit franchisees in 1998. By that time it had nearly 120 AmeriSuites open or due to open, and it looked for seasoned hoteliers to sign on to build more. Prime also owned 21 HomeGate hotels, with more than 40 more in the pipeline, and it also hoped to find franchisees for these and its Wellesley chain. But apparently the rate of growth was too much for Prime to sustain. For the third quarter of 1998, the company announced that earnings would be about 30 percent less than expected, and it expected much less new hotel development over 1999. The company had built some 90 hotels over the past two years. In an interview with National Real Estate Investor (October 1998), CEO David Simon called the frantic building spree “a pretty herculean task.” Simon resigned after the announcement of lowered profits, and he was followed a month later by John Elwood.

The company’s new chairman was A.F. Petrocelli. Petrocelli admitted that part of the problem with David Simon’s leadership was the perception that he had paid too much for the HomeGate chain. Hence Prime changed course in 1999, deciding to merge the HomeGate brand into the Wellesley Inns chain, now known as Wellesley Inns & Suites. The extended-stay category had become extremely competitive, and Prime seemed to have better results with running traditional hotels for transient travelers. In addition, this gave the company just two brands to focus on. Prime had received only one application for a HomeGate franchise since beginning its drive to recruit new hoteliers a year earlier. In 2000 the company again began heavy recruiting for franchisees, offering large financial incentives. The Wellesley chain had almost 70 hotels, many in Florida, Arizona, and Texas, and the company hoped to build up its presence in the Northeast.

Prime also moved to expand the AmeriSuites chain. In July 2000 the company closed a deal with ShoLodge to take over the leases of 27 of that firm’s Sumner Suites chain and convert them to AmeriSuites. Prime had almost 200 AmeriSuites either open or in development in late 2000, including the Sumner Suites conversions. Many new AmeriSuites were in urban areas. The chain hoped to pick up business travelers in Chicago, San Diego, Washington, D.C., and other thriving commercial centers. AmeriSuites featured large rooms with special amenities such as microwaves, refrigerators, silverware and dishes, and irons and ironing boards. Roughly 40 percent of AmeriSuites customers were women, many on business, and the chain made a special effort to please women travelers by boasting heightened security. The chain also tried to up its appeal to business travelers with Internet reservations and billing, reducing paperwork. Rooms also were equipped with high-speed Internet access.

The company spent an estimated $1 billion on building and converting AmeriSuites in the late 1990s into the new millennium. Some of this growth had been financed by selling off properties. In 2001 Prime hired a new vice-president for franchise sales in order to divest more of its own properties and bring in some 25 to 50 new franchisees a year. The company hoped to sell off more than 100 corporate-owned hotels over the next five years, to finance further growth and retire debt. By this time the company had cash reserves of $1.2 billion and seemed in good shape to expand its two brands and perhaps to acquire another. By mid-2002, Prime had 143 AmeriSuites in operation, with six more under construction and almost 60 franchise agreements hammered out for new properties. The company also had more than 75 hotels up and running in the Wellesley chain. Prime continued to offer incentives to attract new franchisees, as its growth strategy depended on attracting more to its chains.