Sunburst Hospitality Corporation Business Information, Profile, and History

Company Perspectives:

By consistently applying proven systems and service principles, continuously innovating, and adjusting for the industry cycles, we provide superior lodging experiences for our guests, rewarding opportunities for our associates and solid returns for our investors.

History of Sunburst Hospitality Corporation

Sunburst Hospitality Corporation is one of the top ten publicly owned real estate companies involved in building and managing hotels in the United States. As of October 1998, Sunburst owned and operated 86 hotels with 11,850 rooms in 27 states and had 11 more hotels and 1,114 rooms under construction or development. The company's hotels served primarily the mid-priced segment of the market and included the Clarion, Quality, Comfort Inn, MainStay, Econo Lodge, and Roadway brands. Sunburst was spun off from Choice Hotels in October 1997, becoming Choice's largest franchisee in the process.

Early History

Sunburst Hospitality Corp. was a direct descendant of one of the oldest lodging chains in the country, Quality Courts. In the early 1940s, motels were known as roadside tourist camps and had an unsavory reputation. That opinion was reinforced by FBI Director J. Edgar Hoover, who wrote in American magazine that "a majority of the 35,000 tourist camps in the U.S. threaten the peace and welfare of the communities upon which these camps have fastened themselves and all of us who form the motoring public. Many of them are not only hideouts and meeting places, but actual bases of operations from which gangs of desperadoes prey upon the surrounding territory."

To counter that image, a group of independent motel owners and operators formed Quality Courts United, Inc., a nonprofit membership corporation, in 1941. The organization established standards for and policed the industry while also promoting and marketing its members' motels. In January 1963, it reincorporated as a for-profit corporation called Quality Courts Motels and changed from a membership to a franchise structure. In April, the company made its first stock offering, selling shares to member motel owners and operators and their employees.

One of those shareholders was Stewart Bainum, whose Park Consolidated Motels, Inc. operated five motels franchised under the Quality Courts Motels name. Bainum was a college dropout and former plumbing contractor. After World War II, he moved from Chicago to the Washington, D.C., suburbs to take advantage of the building boom in the area and entered the construction business. In 1960, he built a nursing home in Wheaton, Maryland, a D.C. suburb, and three years later he went into the motel business. Within five years he was president of Park Consolidated Motels, Inc., based in Silver Spring, Maryland.

In April 1968, Bainum merged Quality Courts with his motel company and also incorporated his nursing home business as Manor Care, Inc. He moved Quality Courts' headquarters from Florida to Maryland and became president and chief executive officer. Within a few months the company announced that it was running 422 motels--12 of which were company-owned with the rest franchised--and was planning to expand into the western part of the country and Canada where there were fewer motels.

The 1970s: From Boom to Almost Bust

As the motel industry enjoyed a boom, Quality Courts established an international division which soon had four motels under development, in Belgium, Germany, and Canada. With properties in 33 states, the company looked beyond motels to related fields, acquiring Revere Furniture and Equipment Company, which sold motel furniture and supplies, and Contempo Associates, a motel interior design firm. In addition, the company's construction subsidiary won a contract to build military housing. Profits were strong, and Quality Courts built a new headquarters and a showroom for Revere in Silver Spring.

Late in 1972, Quality changed its name to Quality Inns International, Inc. to reflect its broader scope of business. However, the "international" portion of the business, and the plans to open 20 hotels in Europe, were stalled by the oil embargo in 1973-74 and the economic downturn that followed. Quality Inns canceled its European expansion plans, stopped construction on projects underway, sold properties most affected by the gas shortage, and worked to strengthen relations with its franchise operators.

During 1976, as deficits grew, the company discontinued The Revere Group and sold other real estate holdings, cutting Quality Inns' losses in half by the end of 1976. At the same time, the company launched a national TV and magazine advertising campaign and initiated a major franchising program, which brought Chicago's illustrious Blackstone Hotel into the chain.

By 1977, revenues were up and Quality Inns was the tenth largest American hotel chain based on number of rooms. In 1978, the company purchased the Royale Inns of America chain and formed a joint venture with a Mexican bank to open 40 motels in Mexico. The following year, Quality Inns became the world's seventh largest lodging chain, with 324 owned and franchised properties.

1980-86: A Merger and Expansion

In 1980, Bainum hired Robert Hazard, Jr., as president and CEO and Gerald Petitt as executive vice-president and chief operating officer. The two men had worked together at IBM, American Express, and more recently at Best Western, which, within a six-year period Hazard had expanded from 800 hotels to 2,600. The company they were to head was considered an also-ran among the top chains, with 350 properties and some 40,000 rooms.

In December, Bainum completed the merger of his nursing home and motel businesses in a $37 million deal in which Manor Care acquired Quality Inns, forming a $125 million lodging conglomerate. The Washington Post called the new company "an instant success," noting that within six months the original $7 stock price was worth more than $40. During 1981, Manor Care reorganized as a holding company for three subsidiaries: Quality Inns, Inc., which owned and operated hotels; Quality Inns International, Inc., which franchised hotels under the Quality Inn name; and Manor Healthcare Corporation.

The new hotel management team set out to double the size of Quality Inns in three years. Hazard and Petitt pioneered the concept of segmenting the market, dividing their hotels and motels into three separate chains serving different types of travelers. The Quality Inn brand was assigned to medium-priced properties. For expense account customers and luxury tours, the company created the full-service, deluxe Quality Royale brand. Those who watched their travel budget were serviced by the new, low-priced Comfort Inn brand.

To ensure that all three sectors would live up to the Quality name, the company instituted a strict quality-control system and dropped 30 franchises for failing to measure up. In their first year at Quality Inns International, Hazard and Petitt added 10,168 rooms to the chain. In the meantime, Manor Care's other hotel subsidiary, Quality Inns, Inc., was operating 28 company-owned hotels as a franchisee and looking for a president.

Early in 1982, a $2 million computerized reservation system went into operation to generate more business for the chain. In November, the company had 615 hotels and motels, making it the third largest chain in the industry. That number was achieved even as the company dropped 150 hotels. Most of the additions were existing hotels, and many of these were lured from other chains.

In 1984, Manor Care increased its holdings in the hotel industry when it became the largest shareholder in a British chain of hotels, with nearly a one-third stake in Prince of Wales Hotels, P.L.C. This purchase provided the company with a toehold in Europe, from which to launch further expansion. That summer, the company's SUNBURST reservation system set a new company record, booking $10.85 million in a single month, and Quality announced all-suite prototypes for each of its hotel brands. "We are breaking new ground in the all-suite war by being the first major lodging chain to introduce a mid-priced all-suite product and luxury-budget all suite product simultaneously," a company press release announced.

Quality Inns International continued to innovate, introducing smoke-free rooms and Prime Time, a senior discount program good at all its hotels. The company also increased its international business.

1987-88: Management Change and Shifting Emphases

In 1987, founder Stewart Bainum turned over control of Manor Care to his son, Stewart Bainum, Jr. The new chairman continued the company's emphasis on the healthcare side of the business, selling four hotels and Manor Care's stake in the Prince of Wales hotel chain in England.

During the end of the decade, Quality added new offerings at both ends of the lodging business. For the upscale market, Quality formed Clarion Hotels and Resorts, a joint venture with the Associated Inns and Restaurants Company of America (AIRCOA). The new arrangement merged the franchise operations of Quality's four Royale hotels with the 33 Clarion Hotels owned by AIRCOA and provided the properties with worldwide marketing and reservation systems. "We're not entering a market by building a building, but by providing services to luxury hotels that are already built," Petitt told the Washington Post in a 1987 article.

For the budget end of the market, Quality introduced McSleep Inn, with rooms renting for $20 to $29 a night. In 1987, after a year-long legal battle with McDonald's, Quality Inns renamed the chain Sleep Inn. The case made legal history as the first time a court granted McDonald's trademark rights outside the food industry. The budget segment of the lodging industry, with rooms averaging $32 a night, was big news in the business. According to a 1989 article in the New York Times, while hotel rooms overall had increased by only two percent a year since 1981, the number of budget rooms grew by 20 percent in 1988, with a projected growth in 1989 of 17 percent. The demand led to consolidation, with the big chains buying smaller budget operations. Quality Inns International joined in the hunt.

1990-94

Following an unsuccessful bid to buy the Ramada and Howard Johnson hotel franchises in the summer of 1990, Manor Care did acquire the Rodeway Inns International franchise system, with 148 budget motels, for nearly $15 million. Quality Inns International, was now the largest hotel franchise system in the world, and in July the company changed the subsidiary's name to Choice Hotels International, Inc. to reflect the wider lodging options it offered.

Manor Care's hotel buying binge continued that fall, when it completed the acquisition of Econo Lodges of America, with 615 motels, along with 85 related Friendship Inns, for $60 million. With seven brand names, including Quality, Comfort, Clarion, Sleep, Econo Lodge, Friendship, and Rodeway Inns, Choice now held one quarter of the low-cost hotel room market. The company began heavy television advertising efforts, with ads featuring celebrities popping out of suitcases. As Choice Chairman Robert C. Hazard, Jr., told Forbes, "Our goal is 1 million hotel rooms and 10,000 hotels worldwide by the year 2000."

The rapid pace of acquisitions left Choice with the daunting task of integrating the new chains into its old system. The main link between the disparate parts became a new $5 million computerized reservation program. Rather than have franchises competing with each other for business, as so often occurred in hotel companies with segmented brands, Choice reservation clerks had information about all the company's brands in a city or area, and kept customers within the Choice system.

Choice's fastest-growing brand was Comfort Inn, which had become a giant chain in its own right. In 1993 the company opened its 1,000th Comfort Inn. Fiscal 1994 was Choice's best to date, as it added 325 hotels. Its chains represented one in every ten hotels in the United States. Overseas, Choice hotels now numbered 600; guests could even ride an elephant to the Quality property in the Himalayas. Three things were credited with the success: the reservation system, national advertising, and the quality control program.

Meanwhile, the hotel division was buying more hotels and had spent over $125 million in cash since 1992, to acquire 26 properties, bringing the total under management to 51. The new properties were renovated and turned into hotels in each of Choice's market segments or converted into assisted living facilities for Manor Care. Donald J. Landry, Quality Inns president, predicted the subsidiary would double its acquisitions in the next year. "We are an all-cash, quick-close buyer, with a record of closing the deals we place under contract," he told National Mortgage News in a December 1994 article. He added, "Our 'deep pockets' enable us to close in a timely manner without financing or leaseback contingencies and to renovate, refurbish and reposition properties as needed."

The division was also testing different, less expensive ways to serve food to hotel guests. In Dallas, for example, a mini-food court, named Choice Picks, offered guests well known brands of pizzas, coffees, and sandwiches. In Mobile, Alabama, the division eliminated its full banquet kitchen, opting to buy food for banquets already prepared: food had only to be heated in a special oven. Both concepts reduced inventory and personnel costs.

In December 1994, Manor Care reorganized its structure once again. It consolidated Quality Inns, Inc. and its 51 properties with the Choice Hotels International Inc. and created a single business dealing with lodging. In fiscal 1994, franchise revenues were $161 million, with the company-owned hotels bringing in another $78 million. Dan Landry became president of Choice Hotels International, and Robert Hazard, Jr., and Gerald Petitt were named co-chairmen.

1995-96: Spinoff from Manor Care

Landry began repositioning Choice as a hospitality company, not just a huge franchiser. "We want to be the market leader serving those who serve travelers," he said in a May 1995 Lodging Hospitality article, meaning everything from car rental companies to cruise lines. He worked to increase brand awareness, introduced some of the food service innovations tested in the company-owned hotels, phased out the Friendship brand, and announced a new brand, MainStay Suites. This was an extended stay hotel with daily rates of $40 to $60. That concept was targeted at people wanting lodging for longer periods of time.

On November 1, 1996, deciding its future lay in the healthcare business, Manor Care spun off the $342 million Choice Hotels International subsidiary. That new publicly owned company, with some 3,145 hotels worldwide, was the second largest hotel company in the world. William Floyd, an executive from Taco Bell, was named CEO of Choice Hotels International, with Landry remaining as president and COO.

Spinoff from Choice Hotels International

Within a few months, Choice management decided to separate the real estate management operations from the franchising operations, following a new trend in the lodging industry. On October 16, 1997, Sunburst Hospitality Corporation began trading shares on the New York Stock Exchange. At the time, it owned and operated 76 hotels in the United States and had 20 more under development. The overseas hotels it previously owned were spun off with Choice's franchising business.

The new company developed, owned, and managed hotels. Within a year it had increased its number of hotels to 86, with 11 more being built or under development in 27 states, and was the number one owner/developer of MainStay Suites, the extended stay concept Landry introduced three years earlier. However, the stock market drop in 1998 halted the development plans for MainStay. The company announced it had sold one property and identified others it might sell. Although all its properties were Choice brands, Sunburst was not limited in the hotels it owned. Despite the economy and the overbuilding in the industry, Sunburst's hotels were individually successful, and the MainStay concept appeared to be a popular option, meeting a specific need.

Principal Subsidiaries: Boulevard Motel Corp.; Cactus Hotel Corp.; Choice Management & Realty Services, Inc.; Comfort California, Inc.; Gulf Hotel Corp.; QCM Beverages; Sunburst Hotel Corp.