LOS ANGELES — The desire of management companies within the hospitality sector to consolidate isn’t slowing down, according to members of the Lodging Industry Investment Council. The key to success with that, however, is managing greater scale with intimacy.
“The urge to merge is there,” said Jim Butler, founding partner of Los Angeles-based law firm Jeffer Mangels Butler & Mitchell, and founder and chairman of the firm's Global Hospitality Group. “The issues will be the opportunities for people to provide intimate service, because big companies have gotten very sophisticated. The size and mass, particularly when they’re merged, makes it extremely difficult to work through for a while. But it will work through.”
Recent consolidations include third-party management company Aimbridge Hospitality’s acquisition of hotel operator Prism Hotels & Resorts, Mexico-based hotel operator Grupo Prisma and the management contracts of hotel owner and developer NewcrestImage. Benchmark Hospitality merged with Pyramid Hotel Group, then Benchmark Pyramid acquired the operating division of Provenance Hotels.
Michael Cahill, CEO and founder of national hotel and casino advisory firm Hospitality Real Estate Counselors, said consolidation of management companies is appealing from a standpoint of critical mass as well as recruitment, training and retention.
“The concern is this … Some of the greatest management companies, when they were about 20-25 properties, where you actually had CEO access, they knew these assets and top-of-line people,” he said. “I think that’s going to go away, and I think it’s a shame for those great companies. When I talk to [those] who run these companies, a lot of it is a money situation. Because all of a sudden, you hit 30-40 hotels, [the CEOs] are a lot busier and have a lot more people working for them.”
The maturing companies that have acquired others will get better at providing intimate service, Butler said, but there have been and still are opportunities for new players to acquire.
“I think we have something we can look to in our industry as a model,” he added.
The key to success when merging two companies or forming strategic alliances is ensuring there’s “scale with intimacy,” said Douglas Dreher, president and CEO of The Hotel Group.
Hotel Equities and The Hotel Group formed a strategic alliance in 2019, which allowed the two companies to integrate and combine platforms. Among the benefits of that scale is they now have a new purchasing program, Dreher said.
“We couldn’t have done that with our 20 hotels. We have a really exciting enhanced business intelligence forecasting, which is great because we own about 40% of the hotels. We get real-time [profit-and-loss] forecasts. But then we also have the intimacy with our ownership groups and investors,” he said.
Hotel Equities has also formed strategic alliances with Witness Investment, Coakley Williams, Sethi Management and Greenwood Hospitality. Hotel Equities also has a sixth partnership in the works.
Despite Hotel Equities expanding, Dreher said, “We have CEO access.”
“In some cases that has been lost. I literally just got an email from one of our owners about a key box situation creating an ingress/egress issue and we were real-time on it. It was like in seconds we got it fixed. So that’s what we’ll continue to deliver.”
Mitra Van, managing director for Prism Hotels & Resorts, which was acquired by Aimbridge Hospitality in 2021, said the reason the company sold is because it was part of Prism President and CEO Steve Van’s succession plan.
“It had nothing to do with the capital,” she said. “But [coming] from a small, intimate company to Aimbridge, our question was, ‘How are we going to support our ownership?’”
She said support largely comes from the fact that Aimbridge has specialized operating verticals, including for full-service, lifestyle and select-service hotels.
“Each vertical has their own people, so the president for each vertical acts as the CEO, the finance person would act as the chief financial officer. The key to success is they have so much more resources to get better. Even though there’s small verticals, they take advantage of the buying power and everything else a huge company offers. It still is not going to be Prism, but the people make that intimate. It’s hard, it’s not an easy journey, it just takes time to build that culture,” she said.
Julienne Smith, chief development officer for the Americas at IHG Hotels & Resorts, said there are still a lot of independent brands or smaller collections of brands that bigger companies will continue to acquire.
“We announced [in November 2022] a strategic partnership with Iberostar, which is an all-inclusive company. We didn’t buy the brand; the Fluxá family still owns the [intellectual property], they own the real estate, but we have an exclusive long-term partnership with them that we earn and burn on our loyalty platform, which solves our issue where we don’t have a ton of resorts. We’re not really in the all-inclusive [segment] except for a couple of IHG-branded hotels. That gets us there, and they get our scale and they get to leverage our platforms,” she said. “It’s a really interesting partnership; maybe we see more of those?”
In 2019, Choice Hotels International similarly entered into a strategic agreement with AMResorts, an Apple Leisure Group-related brand in the all-inclusive segment. Then in 2021, Hyatt Hotels Corp. entered into a definitive agreement to purchase Apple Leisure Group from affiliates of KKR and KSL Capital for $2.7 billion.
“We’ve contracted against that,” Smith said in regards to IHG’s exclusive partnership with Iberostar.
She added that Iberostar “is so well-capitalized, that unlike some other dispositions that might occur, they’re not in a liquidity pressure situation.”
“They don’t need to do that. What they want is to leverage our sales engine and our reservation system, really. And they were talking to other brands, we just ended up coming up with the right deal.”
Thomas Prins, principal of hotel real estate private equity firm TQP Capital Partners, said mergers and acquisitions make sense from an investment standpoint because a lot of investors like the idea of scale.
“What they want ultimately is alignment with their investment, their hotel and the operator. The idea there is they want that scale to get better and better,” he said. “It’s about creating a better vehicle for the investors that are behind the management company; that’s where the thrust comes from.”
Prins was the co-founder of independent boutique hotel and resort operator Gemstone Hotels & Resorts, which in 2016 merged with Benchmark Hospitality International.
