Ian Schrager is to launch a new hotel company under the name Schrager Hotels, moving back into ownership and operation and putting the financial issues which had dogged Morgans Hotel Company behind him.
The new venture will launch two brands, one luxury lifestyle brand and another that is, in a departure for Schrager, described as "reasonably priced". Schrager will continue to work with Marriott International on its Edition brand.
Schrager left Morgans in 2005, to work with artist and filmmaker Julian Schnabel on the Gramercy Park Hotel. The launch of Schrager Hotels came as Schrager announced he had sold his half of Gramercy Park to partner Aby Rosen for an undisclosed amount, making Rosen the sole owner.
"It was a very good financial transaction for me," Schrager said. "I received an offer that was just too good to refuse. However, it is a bittersweet moment as well. I put 110% into that hotel as I do with all of my projects, but it was time to move on and seek new challenges. As always, I am committed to the idea that the future will always be better than the past."
The brand at the lower price point is expected to focus on hotels with 1,000 rooms or more. Further details of the two brands were not revealed, however the first hotel in the group will open in Chicago in September 2011 with the renovation of The Ambassador East, famous as a favourite of David Bowie, Led Zeppelin and the Sex Pistols.
Schrager is thought to close be to finalising two transactions in New York, with bids also submitted on hotels in London, as well as having identified properties in Los Angeles and Miami.
The company plans to develop 10 to 15 locations at a cost of $250m in the next five years, Schrager told Bloomberg, adding: "Every major city of America, they have these large hotels that have been built 30 or 40 or 50 years ago that have been languishing. We think that's perfect for us to go in there and sort of ‘Schrager-ise'."
Schrager Hotels will own the hotels, with the group looking to Schrager's previous lenders and partners, predominantly Morgan Stanley. Once he has reached his five-year target, Schrager said that he would either take the group public or sell the sites. One of the reasons behind such large hotels for the lower-priced brand is thought to be because he wants much of the estate to be new-build, and the 1,000-plus rooms would allow him to recoup costs faster. There has been no word yet as to whether Schrager will add a residential component to the hotels to aid cash flow, as he did at Gramercy Park.
With Schrager Hotels, the father of boutique hotels is looking further afield than his experience with Morgans took him, which was to London and the US, having failed to realise its more wide-ranging ambitions. He has identified multiple 24-hour international gateway cities for the new venture, such as: New York, Los Angeles and Southern California, Miami and Southern Florida, London, Paris, Barcelona, Istanbul, Mexico City, Rio De Janiero, and other cities in Europe, Asia, China, India and South America.
Marriott has similar aspirations for its Edition brand, which most recently acquired the Berners Hotel in London. The company, who Schrager works with as creative director, is rolling out a global chain of 100 hotels, in locations similar to those targeted by Schrager Hotels. With the global heft of Marriott behind it, the group is already up to seven hotels, either open or in the pipeline.
Schrager said that the new company would not compete with Edition and would develop properties at price points higher and lower than the Marriott brand.
Schrager's departure from Morgans came months before the company floated in 2006, leaving in the year it made a net loss of $30m. Morgans has been weighed down by large debts relating back to its expansion attempts and has, during the past year, reduced its liabilities on the Hudson in New York and the Mondrian in Los Angeles, although still owes $304.7m against the two properties.
This year has also seen group announce a debt facility of £100m secured against the group's two London hotels – the St Martins Lane and the Sanderson, refinanced by Aareal Bank.
While Schrager Hotels protests that it will not compete with Marriott's Edition, it looks likely to come up against Virgin Hotels, which aims to acquire up to $500m in properties over the next three years, with North America's major urban markets the initial target. Schrager appears to have the jump on Virgin so far, however, with Richard Branson's group without a site. In the search for properties, the two are unlikely to clash, with Schrager looking at new-build while Virgin looks to partner with existing owners. While there could be some conflict over hotels Schrager feels he can ‘Schrager-ise' it is more likely that the established hotel innovator and the new entrant could split customers over choice.
HA Perspective: Schrager's previous efforts with hotels were a hit from a property development standpoint but less so operationally.
His early hotels in particular tended to focus on unfashionable areas of a city and rely on his mix of glitz and glamour to make staying in such parts attractive. The influx of comparatively high-spending funky types that stayed at the hotels in turn helped lift the immediate neighbourhood, boosting property prices and thus Schrager's returns on the investment.
This strategy can only work when it is implemented in cities that are well known to Schrager where he can spot the right neighbourhoods. It is much tougher when he is relying on others to make the call about locations. A global strategy it is not.
And this is where the hook-up with Marriott made sense. Marriott would deliver the service and global reach. Schrager would sprinkle his stardust to add the wow-factor. The hotel developments can make sense without the necessity to spot the next up and coming locality.
It now looks like Schrager is at risk of over reaching himself and under mining his relationship with Marriott.