NATIONAL REPORT—As the management field continues to grow, companies are diversifying and transitioning themselves back to their roots in order to stand out from their competitors. Some are building out portfolios by buying up portfolio transactions, and others are pursuing a new practice in third-party management.
“HVMG historically has been an owner and operator of hotels,” said Robert Cole, president and CEO, Hospitality Ventures Management Group (HVMG), an Atlanta-based private hotel investment, ownership and management company. “After the financial crisis, we had a number of capital groups reach out to us to help fix or improve their assets, given our long and successful track record turning around underperforming hotels.”
After partnering with these groups, HVMG watched its portfolio’s third-party management assignments grow. Instead of being an owner and operator, the hotel company became known for its third-party management practice. Eventually, HVMG decided it’d be best to return to its roots, so it began transitioning its property portfolio.
“Over the past three years, we have moved back to our model of an equal balance between ownership and third-party,” he said. “Though we have been very active in acquiring hotels recently, I think we are an exception for hotel managers and not the norm.”
Recently, to display the seriousness behind its goal of a more balanced portfolio, HVMG hired Andy Wardner as its director of acquisitions and financial analysis. In his new role, he’s helping the hotel company evaluate and underwrite new hotel acquisitions and third-party management opportunities. Also, earlier in the year, in April, HVMG completed a joint-venture acquisition of a 12-hotel portfolio totaling 1,465 rooms. As part of the deal, HVMG is the sole operator of all of the properties in the entire acquired portfolio.
“We have strategically targeted to do more portfolio acquisitions,” Cole said.
Compared to acquiring a single property, buying up entire portfolios provides management companies with the “ability to scale up faster, and they are more efficient in terms of time and cost,” he said. This is one of the reasons why acquiring portfolios has been part of HVMG’s strategy all along; it’s why HVMG is balancing out its portfolio.
“Over the past few years, HVMG has added to our leadership team to support this strategic direction, so we are prepared and have the resources that it takes to pursue and take over a number of hotels at one time,” Cole said. “We are opportunistic and entrepreneurial buyers, and open to looking at both portfolios and one-off hotels.”
HVMG is also involved with numerous capital partners sharing the same investment goals. In fact, the hotel company prefers joint-venture partnerships for two top reasons.
“One, it allows us to diversify our internal capital over more assets,” he said. “Two, we have a number of long-term capital partner relationships that we want to maintain and assist in their own growth goals.”
Additionally, HVMG sees value in having capital partners structured into the deal, especially when it comes to skill sets and experiences. “Collectively, we see nothing but upside in bringing talented people with significant underwriting and deal execution experience together leading to a well-thought-out deal thesis,” Cole said. For these portfolio deals to work for HVMG, brand affiliation and location need to be at the core.
“Having the ability to scale in a certain market or region gives HVMG a competitive advantage that allows us to maximize results faster and leverage the leadership talent and market knowledge we already have in place,” he said. “We see synergies with specific brands, hotel types and markets depending on the individual assets, hotels we currently have in our portfolio or where we have collective history.”
On the future of management companies acquiring entire portfolios, Cole said the following: “I think it has been a strategy for larger groups and will continue to be. There has been an uptick in the number of portfolios listed over the past couple of months, so this lends to more portfolio transactions.”
Another management company, one based in New York City, is moving in the opposite direction.
Known for owning its own brands and properties, Denihan Hospitality has been taking a different direction since this year’s NYU International Hospitality Industry Investment Conference, which was held in New York City last month. The company currently owns six properties. It owned seven at year-end 2017; Denihan sold The James Chicago to Junius Real Estate Partners for $83 million this year. Instead of realigning its focus more on ownership like HVMG, Denhian is looking to grow in a few different ways, one of which is through new third-party management contracts.
“When we looked at ourselves strategically, what we do best is the management aspect of it; I think the brands are strong brands, but frankly, there are multiple other strong, larger brands out there, so, really, when we look at ourselves critically, what we do well and we’ve built over 50 years is this management capability,” said John Chan, SVP of development at Denihan, which has four brands of its own.
Denihan doesn’t see its move toward third-party management contracts as a “large leap,” he said. Even though the third-party management piece is new, the hospitality company has been managing properties for decades. Additionally, Denihan’s leadership team, which includes its co-CEOs, Brooke Denihan Barrett and Patrick Denihan, has years upon years of experience in hospitality management, which makes the company’s decision to focus on third-party management “essentially a no-brainer.”
Many would say the third-party management space is crowded—and Chan would agree—however, for him, it’s “all about creating the differentiator,” and Denihan believes, in addition to its years of managing properties, its background in managing New York City properties is what separates it from other third-party managers out there.
Given that Denihan has capital locked up in its own portfolio, it’s not looking to put a lot of additional money into acquiring third-party management contracts, a tactic some management companies use to try to win one-off contracts and entire contract portfolios. When it comes to having a differentiator, Chan sees this approach as the “easier one.”
“Our strategy, from a capital perspective, is we think the owner achieves a lot more value and stronger management long term than throwing some key money at an asset,” he said.
It seems as though it’s more important now than ever to differentiate in the management space. To prepare for the days ahead, some management companies are looking back in their pasts to shape their futures. HB