Deflagged hotels a boon for Preferred Hotels & Resorts

The Stafford Hotel in London used to be a Kempinski property, then joined Preferred Hotels & Resorts in 2014. Photo credit: Preferred Hotels & Resorts

Demand for unique, independent hotels and experiences is a windfall for groups like Preferred Hotels & Resorts, which has welcomed several new members that were once hard brands or part of other collections. Consider these three hotels that are now part of Preferred: The Trump SoHo, in Manhattan, was recently reborn as The Dominick; Le Richemond, in Geneva, Switzerland, jettisoned the Dorchester Collection; and The DeSoto in Savannah, Ga., used to fly the Hilton flag.

All of this, Philipp Weghmann, EVP of Europe for Preferred, said, is a sign of the growing strength and acceptance of independent hotels by the traveling public, and their appeal to owners. This is strikingly evident in the luxury space, where there has been a building momentum of hotels deflagging and joining collections such as Preferred, which lends sales, marketing and distribution services to more than 650 global hotels.

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More examples of this circumstance include the former Ritz-Carlton, Palm Beach, which became the Eau Palm Beach several years ago; the Pulitzer Amsterdam, which left the Luxury Collection; The Stafford London was with Kempinski for several years; and the Hotel Metropole in Geneva was a Swissotel for about a decade. All of these properties are now members of Preferred.

“The list goes on and on and on,” Weghmann said. To be sure, he displays conceit for Preferred, which has played in this independent collection space for many years, while companies like Marriott and Hilton are still relatively new to it, with their Autograph and Curio collections, respectively. (Both Marriott and Hilton now have more than one collection brand in their portfolios.) Weghmann doesn't pull any punches. “It means good times for us because we've been in the space for much longer [than other collections], so we're a lot better-equipped to service these hotels then a Marriott or a Hilton, or the other hard brands with their relatively new collections for independent hotels.”

The Appeal of Independence

Weghmann has seen a “huge appetite” from both owners and developers to go independent in recent years—a trend that he credits to several factors. “One is that they have realized that being with a hard brand does not necessarily guarantee superior performance anymore," he said, citing studies from companies like HVS and Horwath HTL, which have found strong occupancy and rates at independent properties. “Many times, it's actually the independent hotel that will perform better in RevPAR in a certain market than the flagged property,” he said.

While the revenue may not be higher than a branded hotel, Weghmann said, the costs can be—another factor that can whet investors' appetites for independent hotels. Franchise fees at a branded hotel can vary between 6 percent and 10 percent of revenue, Weghmann estimated, and higher still for a management contract. “With us, the cost is usually 1 to 3 percent of all rooms revenue, which is a very attractive proposition for a lot of owners,” he said. Lowering the membership fee allows the hotel’s revenue to “flow through to the bottom line,” he added.  

A third factor is contract duration, which also provides more flexibility for owners. Preferred's contracts are typically around five years, which can be well lower than what hard brands contract. Weghmann argued also that being tied down to a hard brand’s contract “encumbers” an asset, which can have an onerous impact on the sale of the hotel in the future. 

“The standards that the hard brands—the big hard brands, in particular—will give you are generally extremely rigid,” Weghmann said. “There's very little room for uniqueness because a lot of it is mandated by the brands and the brand standards.” A collection like Preferred, which does not own or directly operate any properties, is comparable to a franchise model, he argued, but can offer more flexibility for a hotel’s look and operations. For instance, “We will not tell them a minimum square surface for the different room types or where to buy their beds from or where to buy their lamps from," he said.

The soft product is a different story, however. “Our service standards are extremely demanding, very comparable to what the big brands have in place for their premium brands,” Weghmann said. “This is, obviously, where the hotels have to be extremely professional and hire the best of the best so they can deliver those service standards.” When considering a hotel for membership, Preferred's team will examine both the hotel's structure and its service levels—more than 1,500 touch points, Weghmann said. This can be a challenge for a new hotel, he added: “Some services you can only do after the opening.” In those cases, the team examines the backgrounds of the hotel's owner, operator, GM and other positions, and makes a decision based on how well those individuals have done in other properties.

The Appeal of Brand Support

Most of the hotels that drop their brands to join an independent collection are in primary and secondary cities, as well as some resorts. “As you go into tertiary cities and very remote resort destinations, there may be more of an advantage to be with a hard brand because they may potentially be able to help you market the destination a little bit more aggressively,” Weghmann acknowledged. “But in a lot of places, the independent hotel is really what the traveler is looking for and, therefore, as a hotel owner, you also want to be proposing that [rather than] proposing a cookie-cutter hotel.”

Of course, a branded hotel isn’t always “cookie-cutter,” Weghmann said. “They obviously have made incredible progress in hiring great designers and making the hotels more unique. But the traveler doesn't quite trust that yet. The traveler doesn't trust anything that remotely smells like a chain. They may trust it for quality, but they may not choose it for their travel because they're looking for something more individual, more unique—just like they see themselves and how they want to define themselves every day.” Chains, he added, are not attracting the increasingly powerful millennial generation.

If chains are not attracting independent-minded millenials, they are attracting lenders, who see a recognizable name as an added security for their investment. “The banks traditionally have viewed the hard brands as a guarantee for solid performance, and that made it a little harder for hotel developers to go with a soft brand,” he said. “That has changed, and there's enough information, enough studies out there now that show the strong performance of independent hotels.” As such, the banks and the lending community at large are getting more and more comfortable with soft brands. “You will continue to see this shift that is already taking place both for new-builds, new properties [that start] out as an independent right from the beginning, and obviously hotels that may start with a flag for a few years and then deflag when they think the time is right,” Weghmann said.

Ultimately, Weghmann said, there is enough business for everybody. “Our industry—fortunately—is growing, and there are more and more hotels everywhere, and pipelines in the luxury space are looking healthy.”