Boston’s Pyramid Hotel Group opened its European HQ in 2015 to seek value for its investors across a brand-agnostic spectrum. It is now starting to see the fruit of its labors.
DUBLIN—Boston-based Pyramid Hotel Group is concentrating on adding scale in Ireland and the United Kingdom before seeing where else in Europe it can grow.
Privately held, Pyramid was formed in 1999 by CEO Richard Kelleher and CIO Warren Fields, and joined a year later by partner and COO James Dina. The company’s portfolio now includes more than 100 hotels and 13,000 employees worldwide.
Pyramid opened its European headquarters in Dublin in 2015, under the leadership of Casey Spilman, VP of new business, Europe.
Spilman suggested that moving out of Pyramid’s home market has not been too difficult.
“Given the amount of diligence we conducted prior to our formal arrival in 2015, the learning curve was not as steep as one might think,” he said. “We did a large amount of work in understanding legal (and) labor dynamics, competitive landscape, market-by-market performance (and trajectories), customer profiles, airline lift and travel patterns.”
The company, he added, faced many of the same challenges everyone currently does in Europe—Brexit, U.S. politics, terrorism, labor concerns and retention of talent in a competitive market.
“I speak sincerely when I tell you that we are now, and have been for some time, 100% comfortable operating in Ireland and the U.K.,” he said.
Chris Pfohl, Pyramid’s SVP of hotel acquisitions and new business, said the initial decision to set up a European base came from other practical reasons.
“We saw we could add value, and we found that was the case, although the real reason was that our capital investors started looking at deals there, and we had no relationship with U.K. management companies,” he said.
Driving value to owners remains key and helps flatten out differences in operations and industry cycles when comparing Europe to the Americas, Spilman said.
“There are strengths and weaknesses to each, and the ‘cross-pollination’ we continue to see with Europeans working and training in America—and Americans like ourselves testing our abilities here—can only be a good thing for all as we’re able to share best practices and open our minds to potentially new and different approaches to the industry,” he said. “It’s our view that America has benefited from earlier and more prolonged exposure to the brands (that) have been able to build and share some very sophisticated tools for use in areas like reporting, revenue management, sales, social media monitoring, et cetera. These are present in Europe, but, in our view, not yet to the same degree.”
There are upsides and downsides to a more-fragmented brand and management space in Europe, Spilman said.
“Smaller brands and management firms can sometimes be more entrepreneurial and flexible in their approach to doing business and agreeing terms,” he said. “The fragmented landscape also provides opportunity in consolidation, which we’ve seen over the last few years, and likely with more to come. On the negative side, smaller management firms or brands often lack the systems and infrastructure to optimize their businesses the way others with more resources might. This can sometimes leave them struggling to compete.”
Another edge that Europe has over the U.S. is that “Europe benefits from a seemingly inborn service culture that has a sincerity to it that can sometimes go missing in the U.S.,” he said. “Europe also benefits from its inherent diversity of workforce.”
Spilman said certain U.S. firms have led the way for peers to enter Europe.
“Interstate (Hotels & Resorts): Hats off to them. They were a little earlier to the table,” he said. “We actually like our own balanced position in Europe, being a somewhat larger firm with all the systems and infrastructure that comes with that, while having a relatively small European Union portfolio allowing our owners (there) to benefit from superior focus and flexibility.”
Spilman said the Pyramid philosophy has always been to create value through its diversified, educated and contented employees.
Having a wide range of investors and brands also helps that health, he said.
“We work with a very diverse stable of capital groups, so providing value to them can take different forms,” Spilman said. “Some are seeking the distressed, deep repositioning, (such as) the one we executed at our Temple Bar Hotel in Dublin. Others are looking for stable cash flow from a performing asset. And still others are seeking something in between.”
A diverse portfolio is an extension of that, he said.
“In terms of our portfolio, it has taken many different sizes and shapes over the years,” he said. “The allocation of branded/independent or 2/3/4/5-star isn’t as much of a focus so long as the opportunity meets our owners’ objectives and allows us to garner a management fee commensurate with the efforts required to do the work.
“With regard to management fee dynamics, we’ve found that properties of a 3-star caliber or higher are most productive for us, as their average-daily-rate profiles and food-and-beverage offerings typically offer a revenue stream large enough to earn a fee that’s accretive to us when measured against corporate overhead, acquisition and due diligence costs and ongoing operational costs. As such, we tend to steer clear of the budget segment simply given ‘time in versus Euro out.’”
Eyes on Europe
Despite the differences, Pyramid’s plan for Europe, for the most part, will stick to what’s worked for the company in the U.S., Spilman said.
Currently its European portfolio consists of the 132-key Temple Bar Hotel, Dublin; 117-key Pendulum Hotel & Manchester Conference Centre; and 378-room DoubleTree by Hilton Hotel London Docklands Riverside.
That portfolio will grow, according to Spilman. “There is a sincere commitment from our senior leadership to doing business in Ireland and the U.K. and the establishment of this office is a clear demonstration of that,” he said.
Growth will come from its own capital, too.
“We are and have always been a hotel management company,” Spilman said. “We invest selectively alongside our majority capital partners with what we call ‘sliver equity,’ giving owners peace of mind that we have skin in the game.”
He added that Pyramid remains brand-agnostic.
“From distressed management to repositioning plays and from stable operation to disposition, each phase presents unique opportunities which we have and will continue to find value in on behalf of our partners,” he said.
Spilman said Pyramid typically has pursued acquisitions and other opportunities underpinned by a management contract, but it has selectively engaged in lease structures in the U.S. and may entertain similar ones in Europe.
“Currently our geographic focus is in Ireland and the U.K. … which we felt would allow for relative ease of entry,” he said.
“In terms of pipeline, we have several deals in the works and continue to engage in both on- and off-market sale processes with the aim of growing our European portfolio,” Spilman said. “Similarly, we’re in discussions with various existing hotel owners who are seeking to improve and/or replace their in-place management and looking for a proven alternative like ourselves. In these instances, no transaction takes place, but a management contract is entered, and the operations are transitioned to us from the incumbent.”
He added that Pyramid is more likely to seek partners with which it has existing relationships, and those which already have hotels in their portfolio.
Pfohl said the company works with European capital providers looking to invest in the U.S. and vice-versa. Pyramid also is looking for local operators in other European countries, Chinese and Asian investors wishing to invest in Europe, as well as opportunities to acquire portfolios and management companies, he said.
“Our big surprise in Europe was meeting new sources of capital, German and Swiss investment funds, which have done several transactions with us in San Francisco, New York, Seattle—capital sources we did not know before we went in Europe,” Pfohl said.
Pyramid has approximately $1 billion invested by European companies outside of Europe, Spilman added.
Debt in Europe generally is cheaper than it is in the U.S., and alternative lenders everywhere are being more aggressive, he explained, adding that the dynamic of lending is fluid.
“Overall, we have different strategies for different geographies in different phases of the cycle,” Spilman said. “The U.S. is in the same place as Dublin, with pricing dynamics for things being sold fully recovered and stretching towards previous peaks.”
In some markets, it was cheaper to build, he said; in others, it made more sense to acquire.
“The goal always is to expand our capital stable to pursue more opportunities,” he said.
Pfohl added that the company remains bullish.
“In some markets, pricing is getting pretty difficult, but if you look at the possible operating synergies, well, they can justify that pricing,” he said. “We’re also looking at middle-tier markets, small but good-sized markets. The performance of hotels in regional markets has gotten better, too, due to the desire of U.K. citizens to stay there on vacation.”