National Report – With the hotel transactions market chugging along at full steam, it’s inevitable that new owners will consider making changes in regard to any newly acquired asset’s management company. On the one hand, they may simply find fault with the job the existing operator has done. Or, they may just want to clean house as part of the broader change in ownership.
Yet recruiting the right management company comes with a host of strategic decisions that ultimately can affect how successful the acquisition turns out to be. Do you want a small management company or one of the megas? Is your preference for a manager with a concentrated regional focus or one with a wider, national—even global—footprint? And do you want an owner-operator or a strictly third-party operator?
These specific considerations are important, but it’s also important not to lose sight of the underlying nature of the owner-manager dynamic, according to Rick Frank, chief investment officer of Pillar Hotels & Resorts. “It’s a relationship business and works best when the owner and operator are in close communication. Owners of the hotels in our portfolio are welcome to be as hands-on as they want to be. We’re always cognizant that they rely on us to deliver the financial results they’re expecting,” Frank said.
Focusing on the owner is a given, confirmed Brian Young, SVP for development and acquisitions for Interstate Hotels & Resorts.
Not all owners are equally sophisticated. “Often, it’s not always clear to an owner how its management company’s operations teams are organized. So it’s our job to make it transparent,” Young said.
Under Pillar’s regional structure, for example, no more than seven or eight properties report to a single regional director. “At the same time, large operators have sophisticated systems beyond what smaller players can afford,” Frank said.
Similarly, large management companies are able to use their balance sheets strategically.
“Some owners want us to have skin in the game, often in the form of sliver equity, while others don’t,” Young said.
At the other end of the size spectrum is Kokua Hospitality, which has eight properties under management. As with Pillar and Interstate, its objective is to align its goals with the goals of its properties’ ownership, said Co-Chairman Maki Nakamura Bara.
She sees Kokua’s small scale as a competitive advantage. “Our size allows us to really focus on a problem with our full attention,” she said.
Bara is also president and co-founder of Chartres Lodging Group, an owner and asset manager. “As owners ourselves, we know the kinds of strategies and solutions we’d expect to see a management company propose. As asset managers as well, we also know the tension that can exist between an asset manager and an operator,” she said, adding that in the best cases, “that tension can be healthy and productive.”
As SVP of operations for Western North America for Hilton Worldwide, Tim Benolken oversees management of Hilton-branded properties in his region. Like his colleagues at traditional third-party management companies, Benolken views his relationship with the owners of his managed hotels as a partnership.
“The brand and the owner share values, strategies and financial goals as well as accountability, so it can make sense for them to work together,” he said. “Ultimately, it’s about adding value.”
Management company executives have long argued about the ideal length of a management agreement. For a generation, the prevailing wisdom was that “longer was better.”
Accordingly, traditionalists cheered in early October when Hilton Worldwide’s $1.95-billion sale of the Waldorf Astoria in New York came with a highly unusual 100-year management agreement for Hilton.
Five-year, seven-year or even 10-year agreements are much more common today. “Both parties want flexibility,” Young said. The 100-year agreement, in fact, was largely seen as evidence that the Waldorf’s new owner, a Chinese insurance company, viewed the acquisition as a long-term proposition.
“Owners are wary of locking in an operator for an extended period. While performance metrics are strong right now, it’s still a cyclical business,” Bara said.
Benolken said he is seeing a trend toward five-year agreements. “Five years might signal the owner’s interest in divesting the asset in that timeframe and allowing the next buyer to acquire the asset unencumbered with a management agreement,” he noted.
For their part, operators continue to fear the possibility of “being shown the door” at a moment’s notice. One way to avoid that scenario playing out is for the management company to have an equity stake in the asset, according to Young. “It can be a persuasive argument for having skin in the game,” he said.
As with every other aspect of the lodging industry, the Internet continues to influence the dynamic between owners and managers.
“Owners today can get performance data on their hotels on an almost daily basis,” Young said. “Especially for those owners that are hands-on, if they so choose, they can be in the know to a point hardly possible before. In effect, they can co-operate the hotel along with the management company.”
Bara, Benolken, Frank and Young all spoke during a session entitled “Management Companies: Putting Owners First” held at the Lodging Conference, in Phoenix, in October.
When it comes to marketing hotels to consumers, the stakes have been raised for management companies the past few years due to the rise in popularity of social media. Marketing plans prepared for owners every year now include a social media component, for example.
“Given our critical mass, we’re able to afford to have full-time people on staff creating social media programs and tracking the results,” Frank said.
Likewise, the fortunes of different social media tools continue to rise and fall, whether it is Facebook, TripAdvisor or Instagram, and that warrants tracking as well.