Hotel Business - April 7, 2012

Executive Roundtable Series

Managing Expectations: From Construction to Conversion

By Bruce Serlen

ORLANDO, FL With the lodging industry recovery continuing to gain momentum this year, owners are again relying on management companies to be their day-to-day lieutenants on the ground—working to raise occupancy and ADR, deliver guest services, deal with the brands, oversee CapEx improvement programs, and even monitor social media sites to see how their hotels are being described by consumers.

Against this background, HOTEL BUSINESS last month held the first of its 2012 Signature Roundtable Series on the subject of manage-ment companies. Entitled "Management Expectations: From Construction to Conver-sion," the session brought together 10 senior management company executives to analyze the stresses their companies find themselves under.

The session was hosted by Hilton Worldwide's DoubleTree by Hilton brand and held at the DoubleTree by Hilton Orlando at Sea World Hotel. Additional sponsor support included Gallagher Real Estate and Hospitality Services, ProfitSword, Pure Solutions, Ferguson, Valley Forge Fabrics, Inc. and Keurig. To provide a brand perspective to issues raised at the Roundtable, two Hilton executives joined the session.

Roundtable moderator and HOTEL BUSINESS executive news editor Stefani C. O'Connor called on PKF Hospitality Research president Mark Woodwrorth to present a brief industry overview that would put the management company question in a broader context.

"More U.S. hotel rooms were sold in 2011 than ever before. Plus industry profits in 2012 should match the 10%-11% gain we saw in 2011," reported Woodworth, adding that, "It's a wonderful time to be investing capital in lodging assets."

Participants were then asked to be candid about the interaction they have with owners. "The objective is to understand what's important to them. Each owner is different. Some want to read positive reviews of the hotel and have no interest in going to the bank with a check. Others are all about the NOI and don't care the least about guest service or brand standards," Ben Seidel, president & CEO of the Real Hospitality Group, told the Roundtable.

"Owners have different needs," confirmed Edward Rohling, chief business development officer for Pillar Hotels & Resorts. "Some owners today are what we call 'surprise owners,'" he said, meaning "they had acquired the mezz debt and found themselves the owner of a business they had no clue about."

Carlos Rodriguez, principal & EVP of Driftwood Hospitality Management, LLC, views most owners as leaning towards the NOI. "At the end of the day, frankly, it's all about the money. Owners want to know if we can help them drive RevPAR. As for them needing more help nowadays, it can be about managing the PIPs (property improvement plans) or providing help as they seek to refinance their properties. These seem to be the two issues that are on many owners' minds at the moment," Rodriguez said.

Once management companies feel they have a handle on what stake owners have in the asset, the ball is in their court: Can they deliver? "You have to make sure you can deliver on that expectation, so you don't promise a dream and then not deliver the dream," cautioned Michael Tall, president & COO of Charlestowne Hotels.

"As every management company knows, reputation in this industry is so important. Word travels fast, if you don't deliver on the results you promised," Tall added.

As revenue management tools have become more sophisticated, expertise in this area has become a kind of competitive advantage for a management company. "We're doing a better job. Owners certainly appreciate it as do the brands," said Lewis Wiens, president of True North Hotel Group. "Many owners are financially adept and are already knowledgeable about how the industry works. They know the numbers."

With the brands increasingly leaning on properties to implement brand standards now that the downturn is more or less a memory, owners can squawk at being asked to fund the CapEx programs. It can then fall on the management company to get owners on board. John Pharr, president of Strand Development Co., LLC, and his team have had to serve as middleman as a result. "Owners may not understand the requirements set by the brand. Consequently, you may actually have to bring some brand people in to meet the owners. Once the owners are participating in the brand sessions, they'll begin to develop an appreciation for what's going on," Pharr said.

Joseph Moffa, president, Riley Hotel Group, and his team conduct quarterly meetings with ownership groups. "We teach them how to read Smith Travel Research market reports and what they mean," he said. "Once the owners get it, our job becomes much easier."

Rob Palleschi, global head of DoubleTree by Hilton, offered the brand perspective. "Clearly, we want experienced management companies operating our hotels, and as part of that experience, we look for stability. Stability and continuity are key for us," he explained.

Many transactions today seem to entail owners acquiring an asset with the intention of "fixing it and flipping it," Palleschi observed. In such scenarios, the brand typically then has to deal with a new management company brought in to do the fixing. "It's not clear how we help with that process, no less how it gets resolved," he noted. There are stipulations built into some management agreements that give the brand veto power over the selection of a management company. But that can be tricky. "As a brand, you don't want to create a difficult relationship with the owner," pointed out Mark Kucera, president & COO of Presidian Hotels & Resorts.

It's great for the brand to say it wants stability, but in the final analysis, it's the owner the brand is trying to please as well. The owner is the brand's customer just as much as the management company's customer," Kucera said.

The discussion shifted to the lists brands maintain of approved management companies. "Although the process may be faster or slower depending on the brand, the brands hardly ever disapprove of a management company chosen by an owner. They're afraid of risking their relationship with that owner," noted James Carroll, president & CEO of Crestline Hotels & Resorts.

Most of the major franchise companies maintain lists of approved management companies, according to Tim Walker, president of Island Hospitality Management. So, "Being an approved manager is something we vie for," Walker said.

It's critical for management companies seeking new clients, particularly among institutional investors that may be new to hotel ownership. "They want to hire an operator they believe is experienced and that they can trust," Walker explained.

Overall, Roundtable Participants were skittish about taking on too many assignments from receivers and special servicers to manage properties that are in varying states of financial distress. The general consensus was that they needed to proceed with caution. And that these agreements were typically short-term with no exit strategy. "You become a cash flow manager of spread sheets," said one participant, adding, "It's a tough business from low fees."

Pillar Hotels' Rohling also admitted to a brighter side. "We've got a lot of history doing six-to-eight month assignments. But it's not really what we're interested in. That said, though, there are an awful lot of lenders that are expecting to take back assets in the next few years and it's good to be close to them," he said.

In the operation of a hotel, the day when the existing management company exits and a replacement named by the receiver or special servicer takes over can be especially critical. It's a transition rife with challenges.

"There's more that can go wrong on that day than any other, everything from losing key staff members to losing customers," Rohling noted. In Addition, the changeover is likely to create confusion in the market as to the hotel's future and give competitors an opportunity to grab business. So it's a day that can put the organizational and leadership skills of the incoming operator to the test.

On the international front, meanwhile, experienced management companies face a range of possibilities to grow their businesses in the next five-to-ten years. As the major U.S.-based brands expand internationally at an accelerated pace, opportunities for operators open up accordingly.

"We're struggling because we can't find as many good third-party management companies outside North America as we'd like. Many of those that are there aren't necessarily as sophisticated as we need," Bill Fortier, SVP of development for the Americas at Hilton Worldwide, told participants as the Round-table drew to a close.

"Consequently, we're managing the hotels ourselves in many cases."

For established management companies, it's a great opportunity because there's so much less competition than they face in the U.S., Fortier continued. "As a result, a number of the biggest Management companies have started to look at opening offices in Asia, Eastern Europe, South America, and other emerging markets," he concluded.

©HOTEL BUSINESS®/ICD Publications, Inc.
Reprinted by permission of HOTEL BUSINESS®

Serlen, Bruce. "Managing Expectations: From Construction to Conversion." Hotel Business 21.6 (4/7/2012): 18-21. Print.