Amerihost Properties, Inc.

2400 East Devon Avenue
Suite 280
Des Plaines, Illinois 60018
U.S.A.
(847) 298-4500
Fax: (847) 298-4505
Web site: http://www.amerihostinn.com

Public Company
Incorporated: 1984 as Chicagoland Concessions, Inc.
Employees: 2,053
Sales: $68.6 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: HOST
NAIC: 72111 Hotels & Motels; 56133 Employee Leasing Services; 23332 Commercial & Institutional Building Construction; 531312 Nonresidential Property Managers

Amerihost Properties, Inc.—known for its fast-growing flagship chain AmeriHost Inns—owns and operates more than 90 hotels in 18 states, primarily located in the Midwest. Amerihost traditionally builds its AmeriHost Inn hotels near “demand centers” such as office parks, colleges, casinos, and regional outlet malls, in secondary and tertiary markets situated near sizable metropolitan areas. These areas tend to demonstrate a need for hotel rooms, with minimal existing competition. The company considers whether or not the target area has an active economic development program which would suggest long-term potential for lodging demand. Amerihost’s holdings include hotels with franchise affiliations, such as Days Inn, Hampton Inn, Holiday Inn, and Ramada Inn. AmeriHost Inn hotels became available for franchising through subsidiary AmeriHost Inn Franchising in 1999. Additionally, the company provides employee leasing and hotel management services to various hotels.

From Kiosks to Hotels: The 1980s

Andrew Torchia and Richard D’Onofrio founded the company, originally incorporated as Chicagoland Concessions, Inc. in 1984. The following year that name was changed to Amerihost Properties, Inc. Hotel industry veteran Andrew Torchia had formerly headed the office of regional development for Best Western International. He went on with D’Onofrio to form America Pop, a business that sold popcorn and soda from kiosks in the Chicago subways. Torchia and D’Onofrio’s kiosk business proved less successful than anticipated, which led to its sale in 1986. Focusing on the hotel industry the pair formed Amerihost Properties, Inc. and in 1987 built their first hotel in Sullivan, Indiana.

In 1988 hotel industry executive Michael Holtz was appointed company CEO and president. His credentials included a Master’s degree in Business Administration and a Bachelor of Science degree from Wright State University prior to his 16 years of experience in the areas of hotel operations, management, and renovation. Holtz had been a member of the company’s board of directors since 1985, and from 1985–88 served as the Company’s Treasurer and Secretary. He was responsible for the development and implementation of all company operations, including hotel development, finance, and management. Concentrating on smaller markets Holtz began building more hotels for Amerihost. He decided that the company could also expand through the purchase and revival of failed hotels. Holtz was confident that his experience would inform and implement a turnaround for previously unsuccessful hotel businesses, but despite 25 hotels in operation and rising revenues, Amerihost lost money in 1993. The company stepped up efforts to expand the AmeriHost Inn brand in overlooked markets in smaller towns and cities. Company executives felt that other brand affiliations were not so important in small-town America. Holtz told Bill Gillette of Hotel & Motel Management that “We’re looking for markets not where the population is especially low, but where there are good demand generators. There are probably about 1,500 of those markets out there.” Holtz explained that they learned early on that hotels in smaller markets do not necessarily benefit from an affiliation with a huge national brand, a realization that prompted the increased hoisting of the AmeriHost flag. “The savings of that nine percent [national-brand franchise fee] is a significant one,” according to Gillette’s interview with Torchia.

Cost-Effective Angle: The 1990s

The company also cut costs by methodically building identical hotel facilities. In Torchia’s words, “we know the cost of every board foot and every brick,” adding, “we’ve never been over budget on a project.” Each of its hotels cost about $2.2 million to build, about $20,000 less per room than the amount spent by competitors offering similar accommodations. AmeriHost continued to outperform national franchises in their regional tertiary markets (specializing in towns with a population of fewer than 20,000), while national franchises generally performed better at interstate highway locations. Unlike the franchises which tended to standardize everything including their marketing strategies, Amerihost took a less generic approach and customized its marketing programs for individual locations. Their efforts began to pay off. In 1994 Amerihost reported revenues of $43.3 million, a record-setting accomplishment.

As head of hotel development for Amerihost Properties, Chuck Barcus scouted for 20 towns in 1995 that hosted a steady stream of visitors but lacked modern hotels. He was interested in target towns located near popular attractions. Typically, in such small towns one hotel was enough; a second was overkill. The company preferred markets in which there was little competition, though in areas that were pro-growth. Barcus raced to identify prime locations before competing franchise salesmen from a dozen or so national chains found the good sites. On the average, only one of every 16 communities visited by Barcus was suitable for AmeriHost development. Some of the criteria he used in determining appropriate locations included towns with several developments such as an office park, a factory-outlet mall, a college, or possibly even a prison within four miles.

Unable to compete with the lower pricing at interstate hotel chains (AmeriHost charged between $55 and $65 summer rates and $45 to $55 in winter), the company offered extra services and ambiance: a light breakfast; a standard format two-story wood-paneled indoor pool area; a sauna, Jacuzzi and exercise room; and the latest electronic door locks. Guests at each of AmeriHost’s locations were consistently guaranteed these amenities. The company also borrowed a strategy from fast-food king McDonald’s. Amerihost encouraged its hotel managers to become a part of their community as a means of building a customer base through referrals. To generate goodwill Amerihost typically used only local bank financing, invited town residents to its openings, opened its swimming pools to senior citizens, offered its community rooms for business meetings, and contributed the gift of a night spent at its whirlpool suite for local charity auctions.

Expansion of Wholly Owned Operations: 1997

The implementation of a toll-free reservation system accompanied by a radio and print marketing campaign paid off immediately in increased sales. The company registered the phrase “The joy of relentless consistency,” maintaining that the consistently high level of service and quality enabled AmeriHost Inn hotels to receive the American Automobile Association’s (AAA) Three Diamond Rating at every hotel. The company implemented a policy of holding monthly meetings at different Amerihost venues, enabling managers to meet with leisure and business guests to determine what they wanted in hotel service and accommodations. The company’s extensive market research indicated that guests were most disappointed with the inconsistency of amenities and services available within the same hotel brand. The surveys acted as the foundation of the company’s development goals. Amerihost determined that its brand had a 98 percent return rate, suggesting that word of mouth should be recognized as a significant advertising tool.

Amerihost went public in the 1980s but rather than rely solely on Wall Street for financing its rapid expansion of the AmeriHost Inn brand, the company decided to negotiate new investments through joint venture partners. The company’s equity interest in each hotel ranged from five to 100 percent. Twenty-three new hotels were opened in 1997, of which 14 were wholly owned. Sacrificing short-term gains, the company saw its revenues fall from $68.3 million in 1996 to $62.7 million in 1997, primarily due to the new construction and start-up costs of the wholly owned operations. During this time the industry as a whole was experiencing significant growth and the long-term outlook appeared positive for AmeriHost Inns. The expansion afforded by joint venture partnerships allowed the company to gain 100 percent ownership of approximately one-half of the AmeriHost Inn hotels open or under construction by the end of 1997.

Company Perspectives:

The key to the future success of the AmeriHost Inn hotel brand is consistency in product and service. While the hotel industry is filled with numerous brand names, the traveling public is never sure what to expect when staying at a hotel for the first time, even when staying within the same hotel brand. Many of the major hotel chains have compromised consistency in product and service for the sake of growth. We believe in the importance of consistency and design, and operate our AmeriHost Inn hotels so that our guests experience the same high level of satisfaction at each hotel.

In June 1998, Amerihost Properties announced that it completed the sale of 26 wholly owned AmeriHost Inn hotels to PMC Commercial Trust—a Dallas, Texas real estate investment trust (REIT) that invested in real estate mortgages in the hotel industry—for $62.2 million, and began negotiating with them for the sale of four additional AmeriHost hotels. Amerihost entered into an agreement to lease back the 30 hotels for ten years at an initial fixed payment of $7.3 million annually. The fixed-rate lease allowed Amerihost to retain the upside earnings growth potential from the hotels, and allowed the company to continue concentrating on AmeriHost Inn brand hotels. A few months later Amerihost announced the purchase of 100 percent ownership of 15 AmeriHost Inn hotels from various joint venture partners, for a combined price of $37 million, including the assumption of approximately $27 million in mortgage debt. Amerihost realized benefits from increased revenue and earnings generated by these hotels as it gained greater flexibility in financing opportunities. The company planned “to sell most of its portfolio to one or several realestate investment trusts through sale-lease-back agreements,” according to a Hotel & Motel Management interview with Michael Holtz. Its aim was to retain and grow the AmeriHost Inn brand and primarily develop and manage hotels for others. The change in strategy meant that Amerihost would develop and construct for a fee AmeriHost Inns and other-branded properties primarily for REITs. If the property was not an AmeriHost Inn, the company would consider not leasing back the hotel to operate it. Holtz added that “if it was the home brand Amerihost was developing, it wants control—which means a sale-lease-back agreement with management control.”

In May 1999 Amerihost Properties announced commencement of a Dutch Auction self-tender offer to purchase for cash up to one million shares of its common stock. In a Dutch Auction the company sets a price range, and the stockholders have an opportunity to specify prices within that range at which they are willing to sell shares. That amount represented approximately 16 percent of its outstanding stock. The terms of the tender offer included a purchase price for each tendered share of not more than $4.00 per share, nor less than $3.375 per share net to the seller in cash.

Following the development of a franchising program, Amerihost initiated an aggressive growth campaign, which included the expansion of its concept into larger urban areas. The company planned to continue building approximately ten new, wholly owned AmeriHost Inns per year. Emphasizing quality, the goal was to become a broadly recognized mid-scale name brand, competitive with the larger mid-scale hotel chains.

The company sought franchisees willing to develop multiple properties and expected to have 50 underway in 36 states within the year. Hoist told Shannon McMullen of Hotel Business that “We’ve been receiving inquiries to develop AmeriHost Inn hotels from other parties but were concerned how to do it without compromising quality. That is why we carefully planned the franchising program and will be selective with franchisees.” Hoist explained that the company’s AAA three diamond rating demonstrated a high level of quality, which all franchisees must also agree to maintain. The company also added a 100 percent satisfaction guarantee for customers. The majority of the franchised hotels would be newly constructed, with two prototype choices ranging in size from 60 to 120 rooms. Design features included an indoor pool, a meeting room, an exercise room, electronic door locks, in-room coffee service, data ports in guest rooms, in-room on demand movies, and complimentary expanded continental breakfast. The company planned to include franchisees in major decision-making, requiring a 50 percent or more approval from the franchisee community before making changes.

Amerihost’s first franchisee was SJB Equities, Inc., a company that became Amerihost’s first joint-venture partner in 1989, involved with 14 AmeriHost Inn hotels in Ohio and West Virginia. Management projected a royalty stream of approximately five percent of room revenues, which would generate $40,000 per year per hotel in franchise fees for the typical 60-room hotel. Through franchising, Amerihost hoped to rapidly build the hotel brand, which would eventually be a significant source of recurring, fee-based income. The company outpaced the industry in 1998 with occupancy rates increasing 8.7 percent.

Analysts projected in 1998 that overall profits for the industry would continue to increase for the next several years, and Amerihost executives expressed confidence that its growth trend would continue. In an interview for Hospitality, Holtz remained assured of their formula: “Our standard is the standard, and that is the key ingredient of our concept!”