PHOENIX — Hotel industry conditions are playing out well for Stonebridge Companies' further expansion into the third-party management space.
Founded by hotel developer Navin Dimond in 1991, Stonebridge has been growing its third-party management portfolio over the years, giving it a major infusion with the company's acquisition of Real Hospitality Group in May, growing its portfolio to 160 hotels with 24,000 rooms.
Rob Smith, formerly of Aimbridge Hospitality, took over the reins as president and CEO of Stonebridge in July.
Though called an acquisition, the Real Hospitality deal was much more of a merger, Smith said during an interview at the recent Lodging Conference. The goal wasn’t so much the properties but the talent at Real Hospitality, which helped build out Stonebridge’s team. They’ve maintained both Stonebridge’s Denver office as well as Real Hospitality’s East Coast office.
Stonebridge is growing in the third-party hotel space, he said. In his first few months on the job, he’s been meeting with owners and visiting hotels. His takeaways so far are that Stonebridge does well at driving the top line, and overall the combined companies take 109% of market share. It has its own in-house digital firm and a fully built out sales force. Year to date, the hotels are up 7.8% on same-store rooms revenue while the U.S. industry average is about 2.75%.
Evolving the company
Smith is in the process of building out an operations team and focusing on full-fledged third-party management. The company recently received approval to operate luxury hotels, and has several ready to go, including converting the 237-key W Atlanta to a JW Marriott following a renovation.
“A lot of people think of us as a as a premium select company, but about almost half of our product is in full service and independent,” he said.
Stonebridge has 46 independent hotels, a niche it will continue to pursue, he said. Given the cost of branding, there’s going to be a future market as owners look for managers with expertise in this area.
Having spent 20 years of his career in the Caribbean, Smith said Stonebridge is looking at opportunities in the region. The company is hiring a senior vice president of operations and development for the Caribbean to be based out of Miami.
One advantage that Stonebridge has is after the Real Hospitality deal is that the operations teams oversee a lighter load, of about eight to 10 hotels each, he said. The company’s board asked him if he planned to increase that, and he said no.
“I’m going to exploit that,” he said. “I think owners want that today. They want high-touch. They want engagement, and we’re going to keep that and use it as a competitive advantage.”
Stonebridge’s focus is hotel owners and their investments, he said. The goal is to make sure owners make their margins before Stonebridge makes its own. Having started as an ownership company means that mindset is internalized.
“Everybody in the building thinks like that, and so it's a DNA that I want to keep,” he said.
Growth expectations
What’s helping Stonebridge grow at this pace is a fund the company originally designed to acquire hotels. Now that there’s a greater focus on third-party management, he doesn’t want to compete with other owners for properties. Stonebridge will use that fund to build out its operating company by co-investing through key money, sliver equity or, in some cases, full general or limited partnerships.
“Not every owner wants that, but I think it shows the confidence in both pro formas and our operating execution, that we're willing to put our money side by side with the owners’,” he said.
Smith said Stonebridge will use its fund, taking advantage of interest rates as they fall and transactions increase by being part of an owner’s capital stack.
The bigger driver for growth at the end of this year and next will be owners looking to change operators, he said. Coming out of the pandemic, many owners haven’t been happy, especially with management companies telling them the market and costs have changed.
“I was told that most of the companies out there right now, their contracts lapsed during COVID, and at least 30% of their contracts are month to month,” he said. “I think we’re going to see a lot of [requests for proposals] next year.”
Most hotel owners have five-year holds, but they’re now in years seven and eight because they couldn’t transact, he said. Transactions open up opportunities to gain new contracts, but it means operators can lose contracts as well.
“When they sell, you have to have a unique story to relink,” he said.
Stonebridge’s retention strategy is twofold, Smith said. First, it has to show its margins and market share are top of the market. The second is to have a story, because if an owner achieved their internal rate of return and wants to sell, the buyer will want the next cycle of returns. Whether it’s something like a branding change or renovation cycle, the operator has to show the next cycle is going produce the returns needed for that deal.
Whenever Stonebridge has a hotel that’s going on the market, it has an internal meeting to figure out what the next cycle looks like, how it’s performing and what needs to be done to make the next cycle of returns, he said.
At the same time, with the fund, Stonebridge is asking owners to give it an opportunity when they share their exit strategy, he said. That way, Stonebridge can take a swing at the exit before it formally goes to the market.
The other part of this is when owners want to sell, that’s part of Stonebridge’s job, too, he said.
“We get more positive growth from an owner that exist in the way that they strategize to exit, even if we lose the hotel, because word of mouth gets out, they want to do another deal with us because we did what we said we’re going to do,” he said. “We took it through the cycle. We got them the exit they wanted — whether they stayed or not, it’s a successful transaction.”
As more owner-operators decide they prefer to just be owners, they aren’t any less engaged, Smith said. They manage the manager. There will be a lot of owner-operators turn over management to third parties and staying engaged while benefiting from a less expensive infrastructure.
Brands will move further in this direction as well, he said. They’ll keep their trophy properties, but they see its more profitable for them to leave management to third-party operators. They also manage the manager.
“I think that a lot of people think that when the brands step out, it's a disengaged position,” he said. “It's not, they're just like an owner-operator. They feel that they can get out, be more profitable and more effective at managing the manager than managing themselves.”
These factors combined will lead to “a ton of growth” in the third-party management space, Smith said.