• Brands come under attack

With the hotel sector showing signs of a slow and gradual recovery, the mood at the International Hotel Investment Forum was one of optimism.

However, with trading still off-peak and limited debt keeping the transaction market similarly down from its 2007 highs, there was a feeling that brands could be doing more to ease the position of owners and lenders.

Andy Cosslett, InterContinental Hotels Group CEO, admitted that the sector had a way to go before hotel brands were as efficient as brands operating in other markets. He said: "In any industry the great brands are also the most efficient. But in this industry they don’t make the best use of their scale. We should be able to bring all that scale to bear. It’s a bit of a Holy Grail, but the next 15 to 20 years will see us make the best use of that."

Cosslett came under attack from his fellow panelists, both owners, with Anders Nissen, CEO of Pandox, replying: "I like that vision a lot. I don’t see it." Ian Livingstone, international managing director of London & Regional, added: "If you’re that certain of your abilities you would have much more frequent performance tests. Twenty five years is a long time to go without the possibility of divorce."

As identified by Livingstone, the leading issue raised by owners was the feeling that contracts favoured the brands. Speaking on the distress panel, Desmond Taljaard, COO Starwood Capital, said: "The operators have been the slowest of the snails to react. There are some serious question marks. The operators have burned their bridges in some cases and we’ve got longer memories than they give us credit for – I don’t believe you’ll get NDAs [non-disturbance agreements] for the next 10 years to come."

Paul Collins, director, CBRE Hotels, agreed with him, adding: "Interests haven’t aligned, the higher you go up, the brands are inflexible." Earlier at the conference, Majid Mangalji, founder and president, Westmont Hospitality, drew attention to the potential negative effect on property, commenting: "It tends to have a small negative impact on valuation if it has a long-term management contract."

Also speaking at the event, Nick Skea-Strachan, senior associate, hotels, Berwin Leighton Paisner, called for contracts to be less simplistic, allowing for owners to identify the revenues achieved by the brand and those generated by themselves. He said: "The idea of being a much more incremental relationship is good. When it’s just doubling up fees I don’t know if it’s worth it to take a brand."

It was felt that the market was, partially as a result of the downturn, becoming more sophisticated in its decision-making process about when and how to take on brands. Ted Teng, president and CEO, The Leading Hotels of the World, drew attention to their use by short-term investors such as private equity groups, adding: "If your exit horizon is three to five years, you don’t have time to build a brand, but if your investment period is three to five generations, why would you want to pay rent for 100 years?"

For the brands, there was also felt to be a need for increased sophistication in how they were to be deployed. It is rumoured that Denis Hennequin, chairman and CEO of Accor, is planning to sell the group’s under-performing Motel 6 brand in the US and he commented: "It’s a very strong brand, but it’s true that the model is broken. It needs to be less exposed to cycles and it would work perfectly if it was 90% franchised."

The brands were largely defensive, drawing attention to cost savings which they could deliver in terms of collective buying power and lower costs when selling rooms, for example through negotiating more favourable terms with OTAs than independent hotels could achieve.

David Pepper, senior vice president, global development, Choice Hotels International, said: "What they target is that we can save you cost. Just by shifting channels, for example, we already have technology in place, technology which is expensive for an independent."

Several brand representatives defended themselves by commenting that they had increased their so-called ‘skin in the game’, as part of efforts to maintain their pipelines. They have also looked to conversions to increase their estates. Frits van Paasschen, president and CEO, Starwood Hotels & Resorts, said: "Construction financing, whatever the banks may say, is not available. Twenty per cent of contracts we signed last year were conversions and we believe that all nine of our brands are capable of being conversions. In North America there are very few shovel-ready hotels out there."

Despite offering money to, for example, back guarantees, the flags were reluctant to return to full ownership. Hennequin, who has accelerated the group’s asset divestment strategy, said: "Our biggest assets are our brands. To be in real estate and to be focused on brands are two different businesses, but there is not only value to being an operator, but also ownership."

Mark Hoplamazian, president and CEO, Hyatt Hotels Corporation, commented: "We have a long history of ownership of hotels and ownership is how we intend to grow. We’re going to put our capital to work to continue to expand our presence. When the guys like Hilton and Starwood were our size, they owned a lot of hotels, so we’re not forging a new path here.

"We’ve separated an asset management group, which operates as an owner and that has led to some good incremental investments."

 

Hubert Joly, CEO, Carlson, said that his group had done the same: "It’s a different business and a different set of skills required."

Marriott International’s acquisition of the Berners hotel in London was used as an example of hotels investing their own money for strategic reasons, however, Marty Kandrac, managing director, The Blackstone Group, said: "If they’re strategic – and that word can mean anything – [operators] are marketing and brand companies by this stage, not real estate companies."

Anthony Gutman, managing director, head of European leisure, Goldman Sachs, agreed: "People will always be opportunistic, nothing’s changed. There is an increasing view that if you’re going to be a global hotel company it’s about brand equity, it’s unlikely you’re going to see a significant return to ownership."

In a later panel Jonathan Hubbard, managing director, Jones Lang LaSalle Hotels, also spoke of the unlikeliness that there would be a retreat from the bricks and brains split, commenting: "I don’t think the stock markets and analysts will let them hold assets, they don’t like the return on capital."

 

HA Perspective: With most of the former owner/operators having undergone some degree of split between assets and management over the past decade, it is inconceivable that there will be a widespread reunion. This has been underlined by the decision by several boards – IHG, Starwood and Accor amongst them – to bring in leaders with brand, rather than hotel, experience.

However, the cost of installing a brand can be high to owners and the operators have found in the downturn that this can make them a harder sell to owners than to the consumer, leading to a need for them to be more flexible in their approach.

But probably more important is transparency, particularly for management contracts. The terms of many such arrangements are currently extremely attractive with operators prepared to offer extraordinarily good terms.

Base fees have shrunk remarkably with some owners claiming to have seen deals where there is no base fee at all. And at the same time, the incentive fees coming out of gross operating profit or equivalent have similarly shrunk, mostly below 10%.

Yet operators are continuing to make good cash, mostly by opaque charges. This is not a recipe for harmonious relations between owners and operators. The answer is for operators to be more transparent and for owners to accept that they need to pay a decent level of fee.

Right now, owners seem to be focusing on squeezing everything they can out of brands. This is just as short-sighted as brands slapping on hidden charges.

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