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Hotel management firms : A multi-facetted universe

There is no single model for firms specialising in hotel management on the behalf of investors. Depending on their history, their shareholders, their directors, each of these companies has a slightly different profile. A quick sketch of a few of the major operators or new arrivals offers a vague idea of this diversity.

In the United States:

“Management companies that specialize purely in hotel management must take up a challenge with owners: justify a premium with respect to a pure and simple franchise contract with dedicated personnel at the hotel,” explains David Mc Millan, former manager of third party management company. The fees for this middleman between the owner and franchiser generally amount to 3% of operating revenues. To this may be added an incentive in function of generated cash flow. But these terms of the contract tend to evolve under the impetus of owners that are increasingly knowledgeable about hotel operations. These owners wish to develop the interest of their middlemen in their business results. Consequently, fixed fees are on a downtrend – now closer to 1.5% of operating revenues – while the variable share in function of results achieved is on an uptrend.Interstate Hotels & Resorts, or the historic intermediary: created in 1961, Interstate Hotels & Resorts, with 65,000 rooms, is the emblematic example of these managing operators. This major actor manages 280 properties on behalf of sixty or so owners, from the smallest (a single property) to largest portfolio (72 hotels). Thus, Equity Inns, one of the most important Reits (1) on the other side of the Atlantic, entrusted the operation of 48 of its 110 properties to this specialist that is recognized for the services it offers in terms of marketing and human resources. In order to sustain its growth, Interstate doesn’t is quick to use external growth. In 2004, the Interstate group bought out the management firm Sunstone Hotel Properties, an emanation of the Reit Sunstone, or 54 new contracts. In another development track, Interstate hopes to diversify the origin of its revenues by turning towards real estate property. With a privileged target: the high capacity 200- to 500-room hotels under the Marriott, Hilton or Starwood brand in the 50 largest cities in the United States. The group thus bought its first hotel in 2004, the Hilton Concord in San Francisco. Now Interstate owns two new properties as well as shares in 25 other properties.Innkeepers Hospitality, or the Reits partner: since the modernization law of Reits, voted in the United States in 1999 and in effect since 2001, these real estate investment vehicles may rent the properties they have in their portfolio to Taxable Reit Subsidiaries or TRSs. These taxable subsidiaries entrust the management of their properties to a third-party hotel management company. Close ties exist between all these parties. Thus, the manager Innkeepers Hospitality has had a partnership since 1994 with Innkeepers USA Trust, one of the most important Reits in the United States with nearly 9,000 rooms specializing in the extended stay segment. The same person may be found at the head of these two entities: Jeffrey H. Fisher. He remarks that “being responsible towards an institutional investor listed on the stock exchange that specialises in hotel real estate investment allowed us to implement systems, policies and procedures in order to produce the best possible results for each of the properties we manage.”Lodgian, both owner and franchised operator: a major hotel owner with 13,000 rooms at 75 hotels, this hotel management and real estate property specialist has more than 5,000 employees. In order to optimize returns on invested capital, Lodgian entered an investment plan of more than 100 million euros in order to renovate and improve the quality of most of its properties. Four of these were affiliated with a franchise brand of a higher category in order to grow the number of rooms in the upscale category, and, consequently, increase the group’s revenues. Like some hotel groups, this firm found itself under Chapter 11 (Bankruptcy protection law) after September 11. In order to pull itself out, it rationalized its inventory. Since 2003, the group has sold 21 properties, including 9 since the beginning of 2005.Crestline Hotels & Resorts, or the subsidiary of a hotel group: Crestline Hotels & Resorts, specialised in the management and rental of hotel properties, is a subsidiary of Barcelo Crestline Corporation, which is a 100% subsidiary of Barcelo Corporacion Empresarial since 2002. Crestline manages 40 hotels and 9,700 rooms under Hilton and Marriott brands for the most part. These properties are mostly upscale and urban. Simultaneously, the company manages a dozen boutique hotels. Crestline doesn’t hesitate to invest in partnerships to acquire hotels and convention centres such as the Sugar Land Marriott Town Square and Conference Center or that are a part of a university such as the Georgia Tech Hotel and Conference Center.In Europe: Alliance Hospitality, or the manager of hotels on the behalf of investors: at present the primary shareholders of Alliance Hospitality are the American bank Goldman Sachs and Westmont Hospitality through Whitehall investment fund. “We will ensure management on the behalf of third parties,” explains Eric Castelnau, Vice president of Operations for the group. In this case En l’occurrence, its mission is to valorise the hotel assets of its shareholders/ les avoirs hôteliers de ses actionnaires. The holding is in charge of the day-to-day management of the properties (marketing, sales, legal issues, human resources, purchases, technical issues). It optimises the management of a portfolio of sixty or so properties in France, Belgium, Switzerland and Italy. Some of these hotels come from conversions of acquired groups such as Queens Moat House and Timhotel, and are mostly under the brands of the group InterContinental - Holiday Inn, Crowne Plaza, Express by Holiday Inn - but also under the brand Mercure or Ibis.In France Hotel & Partenaires Conseils, or manager of a portfolio under acquisition en cours de cession: recently created, Hotel & Partenaires Conseils received a portfolio of 28 Libertel properties - bought in a block by the investment fund LBO France - in a management contract.. These properties are gradually being disposed of individually or in small groups. “We guarantee the interim period while optimising the management of these properties on the behalf of their owners who valorise the walls without any specialization in the hotel industry,” explains Christian Recoing, manager-associate. In France, there are other companies which operate on behalf of institutionnal investors and investment trusts, such asLone Star France, a subsidiary of American Lone Star, which manages hotels under the Mister Bed brand and also hotels under various brands of Louvre Hotels .(1) A Real Estate Investment Trust or Reit is a specialized form of investment company in the United States that effectively allows its (usually public) investors to share the ownership of a group of real estate properties. When organized as a public company, ownership shares in Reits trade on public stock market exchanges like shares of common stock in other firms. A Reit generally is not required to pay corporate income tax if it distributes at least 95% of its taxable income to shareholders each year. After North America, Europe? The craze for third party managers specializing in hotel management could soon reach the shores of the Old World where their presence is still only modest. “I always thought this phenomenon would cross the Atlantic and make its way to Europe,” explains David Mc Millan, the current general manager of the International Hotel & Restaurant Association (IH&RA), who has a long history in third-party management. This opinion is shared by Eric Castelnau, Vice president of Operations at Alliance Hospitality, one of the rare players on a European scale with 60 hotels in France, Italy, Belgium and Switzerland: “there are still very few companies of this type in Europe, and yet there are many small and mid-size players for which it would be in their interest to join forces.” The rapid development of management companies benefits from favourable conditions. The growth margin is not negligible; hotel groups have acquired much experience for developing their brands through franchises. First of all because the majority of hotels are still independent in Europe and restructuring is inexorable. Only 30% are hotel chains versus more than two-thirds in the United States. The second point that plays in favour of these firms is the real estate disinvestment strategy adopted by hotel groups. It supports the development of management companies when the sale is not followed by a management contract. And new owners will be increasingly led to entrust their acquisitions to hotel management specialists. The challenge of “pure players” “Management companies that specialize purely in hotel management must take up a challenge with owners: justify a premium with respect to a pure and simple franchise contract with dedicated personnel at the hotel,” explains David Mc Millan, former manager of third party management company. The fees for this middleman between the owner and franchiser generally amount to 3% of operating revenues. To this may be added an incentive in function of generated cash flow. But these terms of the contract tend to evolve under the impetus of owners that are increasingly knowledgeable about hotel operations. These owners wish to develop the interest of their middlemen in their business results. Consequently, fixed fees are on a downtrend – now closer to 1.5% of operating revenues – while the variable share in function of results achieved is on an uptrend.

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