HB ON THE SCENE: Flexibility is Critical in the Ideal Operator

NEW YORK—The 2015 Executive Roundtable “Identifying the Ideal Operator: Brand or Third-Party Management” was held here at the Conrad Hotel yesterday.

Presented by Hotel Business, hosted by Hilton Worldwide and sponsored by The New York Times Digital Hotel Program, Simmons Bedding Company, Telos and Merchant Link, the roundtable was moderated by Dennis Nessler, editor at large, Hotel Business.

Paul Sacco, chief development officer, TPG Hospitality, opened the discussion by noting, “An owner really needs to find the right philosophical match. Sometimes personalities matching can be the best ingredient for success.” He added that many times brand management makes sense in major convention hotels or urban areas “where the brand might manage multiple assets and can find some efficiencies in those areas.” Regarding third-party management, he said, “Typically, the third-party operation by its nature offers more flexible terms and can also offer the same services that the brands offer as well, so if it’s a function of wanting flexibility, which is often very important, the third-party operators are usually a bit more akin to that.”

Joe Berger, president, Americas, Hilton Worldwide, highlighted the point on flexibility. “It’s important for the larger hotel manage brand companies to really say we’ve got to be a bit more flexible here. We like having real term or minimum term on sale because we put a lot of effort into hotels, we like a lot of continuity, and our management teams like real career progression but, clearly, term’s important,” he said. “We need to be flexible, whether its term on sale or do we look at it again in five years. Frankly, I think we believe enough in what we do and how we do it that we should stand on our own two feet.”

Kenneth Fearn, managing partner, Integrated Capital LLC, pointed out, “You have to break the term down into two components though: one is the term of the franchise piece that carries with the asset vs. the ongoing management.” He noted that, oftentimes, he’d love to carry a particular flag for 20 years, but doesn’t want the real estate encumbered by management when he’s looking to make a sale.

“It all depends on the business model of the ownership group,” said Benjamin Brunt, principal and EVP, acquisitions & development, Noble Investment Group. “For our model, we look to exit in a three- to five-year period so having that flexibility is critical.” He noted that the company also focuses on select-service, extended-stay and compact full-service hotels, so it’s a more transient demand based model. “From our experience, having that flexibility with those assets seem to have a higher transaction volume,” he said, adding that many brand management companies have become more flexible. “We’ve been able to do a handful of deals with brands where when we do exit we have the ability to convert to a franchise upon sale. That assists in our model.”

Jim O’Shaughnessy, managing director, hotel group, Cornerstone Real Estate Advisers LLC, circled back to Sacco’s point about markets, noting that sometimes brand management can be “surprisingly efficient.” He said, “Larger conference center hotels, city center with a lot of meeting space where we’ve had large brand managers including Hilton operating that asset, I think if you were to unbundle that profit and loss statement and add the franchise fee load that would be the alternative in a third-party management scenario, I’m not quite sure that it works.”

For more coverage, look for the feature in the Oct. 7 issue of Hotel Business.