Portfolio growth and talent attraction and retention were what drove First Hospitality to find a company to acquire.
Through its talks with potential deal partners, First Hospitality’s leadership found the culture, experience and portfolio they wanted in their neighbor, Hostmark Hospitality Group.
First Hospitality has been focused on expanding in markets where it operates as well as higher growth-oriented markets while also building on its bench strength of talent, First Hospitality President and CEO David Duncan said. The team spoke with roughly 20 hotel management companies in its search.
Hostmark in particular had the portfolio that would help First Hospitality accomplish its goals, he said. Hostmark has a presence in markets that First Hospitality wanted to add, namely California, Texas and Florida.
It’s the similarities of First Hospitality and Hostmark that made the deal work, Duncan said. Along with having similar workplace cultures, they’re both family-founded companies based in the Chicago area, and they’ve been friendly competitors for decades.
“We know them quite well,” he said. “We know them generationally is what I would say.”
First Hospitality has been focused on entering the Sun Belt states and expanding its portfolio into more full-service, lifestyle hotels across the country.
“This is a nice step in the beginning of the next step,” he said.
The deal will help leverage the company’s standing as an employer of choice, Duncan said. The attraction and retention of talent is the biggest challenge in the industry, and achieving an appropriate scale is one way to attract more of the industry’s best talent.
“That’s on our mind every day,” he said.
The talent challenge wasn't just pandemic related, he said. It's been building for a decade or two. When making decisions about segments to pursue and how much bigger to grow, one of the first considerations is how it will affect the company’s ability to attract and retain top talent, he said.
“That’s going to be really a key differentiator in hotel operating companies — who attracts the best talent [and] allows that talent to thrive in their positions supported by a culture that cares for those individuals,” he said. “That’s really one of our most primary objectives as we think about any strategic consideration.”
Company Integration
The deal is expected to close in the fourth quarter. Once that happens, the integration process should be relatively straightforward, Duncan said. First Hospitality has invested heavily in its infrastructure, technology and back-office systems over the past few years. Hostmark’s properties will be integrated into First Hospitality’s operating platform.
The majority of Hostmark’s employees above the property level will join First Hospitality, including Hostmark President and CEO Jerry Cataldo, who will take on an owner-relations role, Duncan said. He’ll work with managing relationships and adding to the collective portfolio.
“From their owners’ perspective, their clients’ perspective, they’re going to know their operating team,” he said. “That’s not going to change. It’s going to look much the same. Technically, it’ll be on our platform, but there’s a lot of similarities here.”
Owners will see they’re working with the same team operating with a similar culture with deeper resources powering the work being done going forward, he said.
Further Growth
Guest preference has been focused on soft-branded and independent lifestyle and boutique hotels, Duncan said. There’s been a significant proliferation of soft-brand collections because guests like it, and it allows hoteliers to create individual experiences in particular markets. To do that, however, it requires having the capabilities to understand what it’s like to run a hotel like that with a significant amount of food-and-beverage offerings.
As the company looks to grow its platform, the sweet spot for First Hospitality will be the premium select-service hotels and the “compact” full-service hotels, both branded and independent.
“We've added a significant amount of those over the past few years, and I expect we will continue to do that,” he said.
Duncan said the goal is to grow the company enough to have sufficient scale and efficiencies to deliver for owners, but he would be guarded against the company becoming materially bigger. It’s important to him to balance being a management company that understands the real estate business better than most while also having close relationships with owners and understanding their objectives at the property level. That includes understanding that net operating income is more important than other measures in the hotel business.
“If we were forced into a transaction where we felt like we were changing our culture, which I think is the most important part, or we had such scale that we couldn’t pay attention to our owner groups at all up and down the organization levels, I think that would be a challenge for us,” he said.
The Hostmark deal takes First Hospitality’s portfolio up to 70 hotels. Roughly 100 hotels would be a nice-sized portfolio, he said, and the company has no designs to get to 300.