Multi-branded lodging companies, from Marriott International and Hilton to Hyatt Hotels Corp. and InterContinental Hotels Group, are leaning hard into asset-light strategies that favor franchising, an approach that generates fees with a lower cost base. The void, then, of operating assets has fallen more and more to third-party management companies (TPMCs), which hire, fire, oversee properties and answer to owners who care about one thing: profitability.
There’s a reason why, in the U.S., hundreds of TPMCs, small and large, vie for properties to add to their own portfolios, amid a sea change of consolidation within the ranks. As a result, TPMCs increasingly have the resources and leverage that brands formerly had and brands are recognizing the enhanced capabilities of their potential management partners.
Though the connection between brands and TMPCs has always been competitive on some level, said Kaushik Vardharajan, associate professor of the practice and director of the real estate and innovation & entrepreneurship programs at the Boston University School of Hospitality Administration, “It’s not the brand against the TPMC—each has a clear role to play and it is a symbiotic relationship.”
There is no right or wrong answer to choosing a brand or TPMC, said Greg Mount, founder of Victory Hotel Partners (parent company of Hay Creek Hotels and Restaurants), adding that the decision will be impacted by many factors, ranging from an owner’s personal preference for access to the specific market and segment.
TPMC v. BRAND
While nimbleness continues to be a central argument for an owner to contract a TPMC, the larger they become the more leverage they have as being better custodians for owners. Keith Oltchick, chief development officer for Remington Hospitality, said his company brings multiple disciplines that might have been the province of a brand in the past, such as a competitive business intelligence tool that has actually won the company some deals.
There is debate about capabilities, said Mount, with brand managers and third- party operators each possessing their own kinds of talent. Typically, a third-party manager’s brand knowledge will be much more diversified, since they likely manage a variety of flags, and they know the strengths and weaknesses of the other brands in the marketplace.
Chris Green, president of Remington Hospitality, said that operations are a tough business and the ultimate goal of a brand is to grow as long as standards are upheld, while operating hotels is not a historic path to rapid growth.
Of course, the industry is changing with growing emphasis on issues like sustainability and technology. While brands might have more resources when it comes to some of these responsibilities, TPMCs, said David Hart, CEO of RBH Hospitality Management, a U.K.-based management company, can be more agile here, too. “Certainly, our teams are focused on ESG because that’s what our clients are focused on,” he said.
Maybe the biggest reason owners choose a TPMC is flexibility, according to Richard Jones, COO for Atlanta-based HVMG. Although the company’s managed properties have to maintain brand standards, that flexibility, he argued, “brings a lot of value.”
As an example, at the beginning of the pandemic, HVMG was positioned to move quickly based on the individual needs of each hotel.
Still, said Jones, over the last couple of years, his company’s relationships with brand partners have become tighter. “We are not here to compete with the brand,” he said. “We want to be seen by brands as one of their best operators. If we have a problem to solve, we have that relationship capital, so the owner gets the best of both worlds.”
Eric Danziger, who has grown multiple brands in his long career with Wyndham, Starwood and others, recently became CEO of Resolute Road Hospitality, a TPMC. He said the key difference between brand and third-party management is the balance between managing for the owner and managing for the brand. “An owner mentality in the third-party management space must include the ability to challenge some costs associated with or prescribed by the brand,” he said.
Many owners choose to partner with TPMCs when they want to diversify their holdings across multiple brands, said Justin Jabara, president of Meyer Jabara Hotels. Most third-party managers, he said, have long-standing relationships with the various hotel companies and they understand the operational nuances between the different flags.
Offering a brand point of view is Julienne Smith, chief development officer, Americas for IHG Hotels & Resorts. She said owners must ask themselves many questions about their management partner, including: Will they help with the feasibility of the project to determine the best brand fit and programming of the hotel? Is leadership or field support based near the owner or hotel project? Do they have a good reputation for building and retaining on-property and corporate talent? Do they have in-house revenue management and field marketing capabilities? Are they at a scale that fits with the owner’s scale and expectations for engagement? Do they have contacts in the broader industry that can recommend needed consultants, suppliers and/or capital sources? Do their cultures complement each other? Would they invest in the project if desired?
And Paul Daly, SVP of global franchise operations and owner relations for Hyatt, said an owner will recognize the importance of aligning with a management company that is experienced in what the hotel will offer its guests. As an example, he explained, an owner opening a lifestyle hotel will need a management company that has a breadth of experience in food and beverage operations whereas an owner opening a select-service property with limited F&B may not have the same requirement.
CATEGORY MATTERS
A funneling has taken place whereby brands—for the most part—will retain management of a significant percentage of luxury properties, as well as big convention hotels and other prime assets, while all other segments will be franchised and either owner or third-party managed. Even cracks exist in this scenario.
Patrick Short, president of Peachtree Hospitality Management, said that brands do seem to be allowing more owners to franchise or use third-party management today than they have in the past, with certain approval processes in place.
For instance, he pointed out, Kimpton never used to franchise its hotels (or did so on an extremely limited basis), but now several groups have proven themselves to be stewards of the brand and have been approved to manage on a third-party basis, allowing owners more flexibility and choice.
In many cases, said Steve Contos, EVP of Davidson Resorts, branded organizations have restrictions on who they allow to manage their luxury brands, therefore necessitating brand management. He said that developing hotels of this size often requires a significant equity contribution from the operator and brands are willing to commit greater investment for the right to put their name on those large assets.
There is an “underserved need” for a third-party manager to operate luxury hotels, said Contos, but they must first gain the confidence of brands that they have the ability to execute on the brand promise.
The level of competition in the local market can also influence the decision, said Nick Bilotta, senior vice president, strategic operations and customer development for GF Hotels & Resorts. In highly competitive markets, he said, brand affiliation might provide a competitive advantage by attracting guests familiar with and loyal to the brand, but a third-party management group with market presence can cross sell and fill hotels quickly with the aid of the other properties in their portfolio.
FEES & CONTRACTS: IT’S COMPLICATED
Fees and contracts play a key role in choosing a brand or a TPMC to manage an asset. The fee issue is a complicated one: Though there has been a traditional argument that a brand is cheaper because there is a single fee, all observers agree it is more complex than that. “There really is huge variation regarding fees,” said Nick Kellock, COO for Concord Hospitality, which owns and manages hotels. “It is hard to give a definitive answer; generally, the overall cost of either option is not wildly different.”
There seems to be a clearer picture when it comes to the flexibility of contracts. The management contract terms of hotel brands tend to be longer term in nature (15-25 years), said Vardharajan, while TPMCs are open to shorter term contracts of five to 15 years, which many investors prefer, since it allows them to sell their hotels unencumbered by the management contract, which could produce a higher sales price.
BLURRING BUSINESSES
As both brands and TPMCs grow and consolidate, there is some blurring of their respective roles. Several management companies are owned by or are divisions of real estate investment trusts or other ownership entities. And, in many cases, management companies will have equity in their properties.
One trend among larger portfolio owners, said Jabara, is for them to acquire a minority stake within the third-party management company. This allows for all the benefits of the management platform but also offers more control over how their portfolio is managed because they have a bigger seat at the table.
Resolute Road’s parent company, Braintree Group, will continue to buy hotels, said Kevin O’Neil, VP of business development at Resolute, but his hope is that the company will acquire sliver equity positions and focus more on third-party management. As a result of Resolute Road’s heritage, he said, “We think like an owner. Hitting our goals is not the end of our story. All our employees think of the hotel as their business.”
and managed by Concord Hospitality.
HVMG has some ownership in half of its portfolio although it has not typically been a sole owner. “We lead with our owners’ mentality,” said Jones, even though almost all of leadership has worked with major brands bringing in that experience as well.
Mount said that the market is now seeing emerging partnerships, such as third-party managers, like Hay Creek, leasing properties from owners and sharing in the risk.
Brands, of course, will always work closely with TPMCs. Daly said that for an owner who chooses a third-party management company, Hyatt offers a variety of opt-in services that are proven to drive sales and revenue to their hotels.
BEYOND THE U.S.
TPMCs have historically been an American phenomenon; that may be changing. At an event held by a management company earlier this summer, Chris Nassetta, CEO of Hilton, said franchising is growing globally in part because management companies are as well. He told an audience of TPMCs:
“Your taking the show on the road is affording an opportunity for us to work with great partners like you.”
The U.S. has a deep pool of qualified third-party operators, said Anthony Capuano, CEO of Marriott International, at the same event, but he added that the pond is much shallower in international markets.
Filipe Bonina, marketing director for Discovery Hotel Management (DHM) in Portugal, said the company owns and manages most of its properties, but will franchise larger hotels where it’s important to get to market and build occupancy quickly. Discovery’s parent company, Explorer Investments, decides on the management of an asset on a case-by-case basis. It will open its first hotel next year that is not managed by DHM.
Remington, said Oltchick, made a strategic decision last year not to grow in Europe and Asia but to look to the Caribbean, Latin American and Mexico, where a limited number of TPMCs operate and the opportunities are significant. An office was added in Miami and multiple contracts have been signed in the region.
Ultimately, concluded Bilotta, the choice between a TPMC and brand management depends on the owner’s priorities and how involved they want to be. Careful consideration, due diligence and professional advice are essential, he said, “to make the best decision for the property’s and owner’s long-term success.”
Story contributed by Harvey Chipkin.