Hotel owners and operators must work together, despite sometimes different goals and timelines.
LONDON—A successful relationship between hotel owners and operators increasingly requires a two-way street, in which both understand each other’s strategies in regards to property and guest dynamics, markets, investment timelines, real estate values and exits.
Human nature, though, can make alignment hard to obtain when the two sides have such differing sets of goals, according to panelists at the Independent Hotel Show.
For instance, independent hotel owners focused on increasing an asset’s overall value might look to add branding, which could complicate things for operators, panelists said during a session titled “Power couples: Owners and operators.”
Despite that, the three panelists—some of whom were owners, investors and operators—said that well-aligned partnerships are critical to fostering innovation, creativity and value.
“Being creative and open makes the distance between owner and operator smaller and the journey far better,” said Debrah Dhugga, managing director of Dukes Collection.
That’s easier said than done, panelists said.
“Our business model is seeking capital value, repositioning distress and recognizing opportunities where others have not, but there is no magic wand,” said Charles Scudamore, principal and founder of Hetherley Capital Partners. “Everyone has slightly different motivations. As a funder, you are committed to the deal, not involved in the deal.”
Scudamore added that, for him, one challenge is having to sign long management contracts, which he suggested is reticent of a bygone era.
“Such 25- to 30-year deals are onerous,” Scudamore said. “As an owner, you have to be in charge of the process. The operator is there for you, but there can always be a disconnect.”
He added that, with management contracts, he always insists on a termination-on-sale clause.
“Otherwise we are pushing that encumbrance onto the buyer. We are reconciled but not aligned,” he said.
Panel moderator Melvin Gold, owner of Melvin Gold Consulting, said it used to be the case that a hotel with a long management contract was seen as encumbered, but that’s no longer necessarily true.
Dhugga said it’s definitely not the case in some areas of London, particularly the districts of Mayfair and St. James.
Dhugga said investment is key to understanding how owners and operators want to position a property. For example, there might be “an underinvested hotel where the owner expects a return that is simply not feasible.”
Branding can help bring in revenue, but it also adds cost, and the success of a brand can be site-specific, said James Sharp, VP at private equity firm ESO Capital Partners. He said he has seen in some cases the number of potential buyers drops by 80% to 90% when an asset has a long-term management agreement in place.*
“It also depends on the quality of the brand,” Scudamore said, “and there are brands within the huge chains that you would not want to go anywhere near. Also, none of this is considered in isolation. Ultimately, it is about the investment.”
Soft branding is another option.
“That is about getting the widest audience as possible, but that adds cost, and does it add value and ease at the exit? Independent hotels are harder to sell, full stop, but much more fun,” said Scudamore, who, along with Sharp, said he would not consider leases because their return expectation falls short.
There are evidently different motivations at play, panelists said, but ultimately both sides want the asset to succeed.
“My belief is that if we work together, at the end of the day the property will succeed,” Dhugga said. “A lot of people see barriers between the two sides, and I see that, too, but we work hard not to form them. Relationship is key.”
Overall effectiveness and profit is helped by operators not taking a backseat to owners, panelists said, although that can differ property by property.
“We like operators to come to us with ideas,” Dhugga said. “It is not healthy if it’s just the owner shaping the future. More avenues lead to more revenue, and operators are on-site 24/7.”
Scudamore said that as organizations grow larger, keeping that contact between owners and operators can become more challenging, but it’s no less important.
“We are very hands-on, which I would not suggest is the norm,” he said. “We are in touch on a weekly basis. We underline we cannot afford to fail, and we make no apologies for us sitting fully on the shoulders of operators and to the extent that we build teams capable of running that hotel.”
Sharp said his company also keeps the lines of communication open.
“We have almost daily discussions and meet on a monthly basis,” he said, adding that much of the conversation focuses on CapEx, but also key changes of personnel.
Dhugga said those conversations take place “twice a week, twice daily sometimes.”
“This is the norm nowadays,” she said. “GMs have to have a close relationship with owners, there is not a choice anymore. They have to be accountants, to know everything that is going on with human resources. The old GM role is outdated, the GM now acts like a MD.”
Scudamore said the GM plays a key role as a bridge between owner and operator.
“And in this slightly different agenda between owner and operator, the GM straddles the middle, with the trick being for the GM not to be looking in two different directions,” Scudamore said. “Ambiguity essentially is to the detriment of the hotel.”
Lastly, Sharp said communication is critical.
“As an owner, surprises are the hardest thing to handle,” Sharp said. “You do not want to walk into that monthly meeting hearing something for the first time.”
*Correction, 19 October 2017: This story has been updated to improve context from the panel discussion.