Evolution in the Role of a Hotel Management Company
We, at Pinnacle Advisory Group, are often asked by our clients to provide recommendations for a hotel management company. Frequently these are clients that are new to the industry or are in some way operating outside of their normal comfort zone (i.e. a new geography, chain scale, etc.). These requests have increased in the last couple of years as the industry experiences an uptick in the number of new projects in the development pipeline and as transaction volume increases. We want to always be in a position to provide our clients with the appropriate recommendations for their project so we reached out to a number of independent hotel management companies to gain a better understanding of how their landscape is changing.
A number of years ago, the role of a hotel management company was pretty clearly defined. Management companies functioned as third]party operators providing day]do]day management services as well as support in accounting, HR, marketing, etc. Today, that is not necessarily the case. In the current environment, there is a lot more flexibility in the role that a management company can fill for a hotel owner, ranging from a straight third]party operator to some form of equity partner. Taking some equity interest in a portion of their managed portfolio is a trend amongst the companies that we interviewed. Most of the companies that we spoke with have a mixture of deal structures in their portfolio: some properties are under a traditional third]party management agreement, while for other properties, the management company has taken an equity interest, in addition to management. Typically, the equity interest ranges from sliver up to 25% to 30%. Some management companies have also started their own investment funds and are taking the lead in the acquisition role.
This shift in the management companyfs role has, in part, come out of necessity. The need or desire for these companies to grow has required creating or identifying new opportunities. The increase in hotel transaction volume over the last few years has created opportunities for management companies, with many deals trading unencumbered by management. Savvy management companies are evaluating the deals and bringing them to their existing owners or one of a handful of equity sources with whom they partner. A growing number of equity sources prefer that management companies bring some equity to the deal, feeling that this helps to better align the goals and objectives of both parties. Of course, it depends upon the equity source (REITs, insurance companies, private equity, and high net worth individuals), as not all of them prefer this structure, feeling that it can blue the line between the ownership and management functions.
All of the companies we spoke with expend a substantial amount of effort in pursuing new opportunities. For every one deal that is successful, there often are ten or more that arenft; the competition is intense for the good opportunities. To minimize resources spent on deal sourcing, savvy management companies have taken the time to develop a well defined positioning statement that highlights their area(s) of expertise and strengths which allow them to deliver tangible results to their owners. Then, they target properties that allow them to showcase their strengths and deliver upon their promised results using some well]defined metrics to effectively and expeditiously evaluate the merits of a deal.
As in any business, knowing what you are good at is critical. The same is true for hotel management companies. Some have particular expertise in operating resorts, others focus on limited or select service properties, and others still have particular skill in operating hotels for colleges and universities. The successful management companies clearly understand their own strengths and are wise to openly articulate their objectives. This allows industry partners to better filter and funnel potential deals. Savvy management companies recognize that their industry partners are an incredibly valuable resource in terms of creating and managing deal flow so ensuring that they fully understand the direction of the firm can improve the quality of referrals and help minimize or eliminate referrals that donft quite fit the bill.
Overall, as with the rest of the hotel industry, the landscape for management companies is evolving. The role filled by a management company can vary from owner to owner and the services they offer can vary from deal to deal. Management companies can serve as a third]party operator or an equity partner; they can provide due diligence and underwriting support or they can provide expertise in marketing, food and beverage or HR services. The key to identifying the appropriate management company for any particular deal is to understand the key aspects of the deal and try to identify a management company whose skills and expertise match. Ensuring that the owner and management companyfs objectives align will help further the overall success of the deal.
We would like to offer our thanks specifically to the following management companies that were very generous with their time and information during the course of our research for this article:
Crestline Hotels & Resorts…..http://www.crestlinehotels.com
Hostmark Hospitality Group…..http://www.hostmark.com
LinChris Hotel Corporation…..http://www.linchris.com
Marshall Hotels & Resorts……http://www.marshallhotels.com
New Castle Hotels & Resorts….http://www.newcastlehotels.com
Newport Hospitality Group……http://nhghotels.com
Pyramid Hotel Group…………http://pyramidhotelgroup.com
About the Author
Natalie Francoeur joined Pinnacle Advisory Group in May 2005 and is currently a Senior Vice President within the firm’s Boston office. In addition to working on the asset management team, Natalie has extensive experience with hotel impact studies, feasibility and appraisal work. Prior to joining Pinnacle, Natalie held positions within hospitality operations and marketing and also within the wine industry. Natalie holds a Bachelors Degree from Cornell University’s School of Hotel Administration and a Masters Degree from the F.W. Olin Graduate School of Business at Babson College.