As the current hotel industry cycle grinds on, investors and operators require their risk strategies to be met with brand flexibility in areas such as terms, termination, PIPs and key money.
LONDON—For contracts to work at this point of a hotel industry cycle, all partners have to be flexible, and that is especially true if there is to be a new brand flag placed above the door.
More flexibility is required from brands due to the increased desire to have more relaxed termination clauses in place, something sources said will be seen more and more in the industry.
Speaking at a panel titled “Swimming out of your lane” at the recent Hotel Operations Conference, sources said making risks work now requires all partners to meet halfway. But speakers reiterated that no side ever wishes to waste time and capital and is in business to grow, add value and better serve guests.
Simon Allison, chairman and CEO of owners’ body HOFTEL and moderator of the session, said good contract negotiators remain focused on structuring the right exits and equally enjoying the upside.
Panelists agreed and said third-party finance in such a scenario might be an unwelcome intrusion.
“An equity positon in a deal fundamentally changes the partnership relationship,” said Gabriel Petersen, managing director of Event Hotels. Petersen joined the firm in January after more than a decade at U.S. private equity company Blackstone.
“Some funds do not want your additional equity, just your expertise, and we say we are not interested if we cannot invest and be aligned,” said Dominic Seely, director of acquisitions at Westmont Hospitality Group, which owns and operates approximately 500 hotels, principally via franchises.
More and more deals are seeing operators add a minority equity contribution, although Tobi Weissinger, partner at Hamilton Hotel Partners, said he would be happy if that was in the low single digits.
Petersen said companies such as his are aware they are owners in some contracts and managers in others. Event Hotels owns and operates approximately 60 properties across numerous brands in Germany, Italy and The Netherlands.
Allison said he is increasingly seeing the inclusion of performance clauses in franchise agreements, which is another lever to help balance risk across all parties.
“There is increasing flexibility from franchisors on terms and termination. There is more alignment,” Weissinger said.
“Often the owner can leave whenever he wants, and unencumbered,” Petersen added.
Weissinger said London-based Hamilton has learned over a wide curve of the industry, being firstly an asset manager, then a white label and now a co-investor.
“We found ourselves inadvertently asset-managing assets for an owner who did not want to be aligned with a brand over the long term, so we naturally morphed,” Weissinger said.
The lessened maturity curve of any market in Europe, and across Europe as a whole, vis-à-vis the U.S., produces opportunities for those looking to move up the risk curve.
White labels in Europe do not behave quite in the same way as do their peers in the U.S., panelists said.
“In the U.S., the fee-based white labels are so aligned with brands, brands often recommend specific ones to owners,” Westmont’s Seely said.
Petersen said franchising is more popular in the U.S.
“In Europe, where market saturation is lower than in the U.S., hotel firms see it as more profitable for brands to franchise and are consciously creating the extra layer despite more costs,” Petersen said. “Wyndham, for example, is doing that and trading at 38-times multiple. Hilton, with 70% franchises, is just a couple of percent below that. Capital is markets-driven.”
“It is all about getting the best of what each partner provides. In 98% of cases, there are no increase in fees or costs, just a little more complexity.”
Each hotel company weighs the benefits of either option, Seely said.
“It is on a case-by-case basis and how much a brand wants to be in any location,” Seely said.
Old guard or new sparks
Panelists said for brands to get scale in any market, they have to be flexible, especially considering the amount of choices owners have as the number of brands continues to grow.
“The ones we see as being successful are those who have flexibility in room standards. Also owners can say, you want your 39th brand here, then we’ll take five on a five-year term, and if it does not work out, we’ll walk,” Seely said.
“Brands are also being more flexible with key money and (property-improvement plans),” Petersen added.
Seely said at internal annual meetings, Westmont executives often “powwow as to whether we should funnel money into creating our own brand. It’s a venture-capital model, but as far as brands are concerned, brand agnosticism is our way.
Petersen said new one-brand firms act in this venture-capitalist way, too, and maybe brands do as well.
“Starting a brand from scratch is a different proposition to further rolling out the established ones,” he said.