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Investment alignment – pursuing a more level playing field for hotel owners and brands23 February 2021

Following the first in our webinar series ‘Hotels: Investment Alignment’ with Lionel Benjamin (Co-Founder at AGO Hotels) and Robert Swade (Managing Director, Swade Hospitality), we thought it might be useful to flag a few points that emerged from the discussions which will be relevant both for the properties and relationships emerging from the pandemic, and for fresh negotiations underway, whether for a rebranding or a new branded project: (As Lionel said “we should all be sitting at a round table!)

"It was recognised that the brands were also suffering and would be looking to secure their income streams but needed to work with owners."

1. The traditional lease structure has proved less secure than perhaps many traditional landlords had assumed. Just as many are considering a closer engagement with the activities of their tenants and opening their portfolios to other operating assets, landlords are becoming more aware of hybrid solutions such as the hybrid lease/franchise model being developed by Ago Hotels which appeals to landlords who understand and become comfortable with the risk-and-reward approach it offers.

2. The disruption of the pandemic will produce more opportunities for the educated and sophisticated investors with more experience which may assist in adjusting the ‘risk stack‘ between owners, developers, debt, equity, brands and insurers, leading to a better fundamental balance between the parties. The more experienced owners will have more power and those who fully understand operations will (together with funders) drive change.

3. Brands that are prepared to stand behind delivery by their systems in terms of distribution, as well as showing flexibility and transparency, will be in a good position going forward (Robert gave examples of the approach that could be taken by the more flexible brands). Whilst brands have been accommodating throughout the pandemic many owners will need both flexibility in their brand and to fully understand brand costs going forward. Minimum guarantees may be an ask too far but clear and simple termination where distribution systems are not delivering would give many owners more comfort.

4. To the extent that the ‘collection brands’ offer a more flexible approach (and not all do in reality), it may help the distribution concerns of owners and allow more flexibility which owners may well want in the context of the proliferation of brands in some operator ‘stables’ and limited exclusivity on offer.

5. It was recognised that the brands were also suffering and would be looking to secure their income streams but needed to work with owners. Robert invited operators to offer solutions on delivery of fair market share, scrutinise their offering and be prepared to adapt to increase topline revenue. They may not be willing to promise one fee for all their services but they will need to serve owners better in terms of containing costs and innovation.

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"It is clear that there is still a lot to be done to find a balance between the various parties in the stack."

6. Going forward, both owners and their backers will need to look closely at existing contracts and drill into the figures, and brands will need to innovate and work with owners to move forward. No one underestimated what a brand had to offer but the feeling of the panel was that greater flexibility need not be a zero sum game.

7. It was noted that the ESG agenda is high in the minds of many lenders and investors and the agendas of many of the brands are very well advanced and very positive for owners in securing their appeal across both investors and guests.

With this in mind (and some of the fees being charged in closed hotels), it is clear that there is still a lot to be done to find a balance between the various parties in the stack (and to find the round table). It should not be the case that an owner or asset manager needs to be exceptionally experienced and alert to make a brand deliver for their property.

Most owners will have been struggling with budgets and balancing their financial requirements (and the threat of imminent pressure by their lenders) and should be insisting on the approach of their brand being demonstrably fair and equitable. This includes costs at all levels being effectively managed, questioning their brands in terms of distribution, costs and charging, reviewing effectiveness of OTA bookings and delivery by the systems they are paying for, as well as exploring the treatment of their property within a system where a brand operator has multiple properties.

The key messages as we emerge from the pandemic (assuming financial and full contract reviews have already been carried out in phase 1 of pandemic planning) include:

"Owners should work with the brand to ensure the brand is offering what is needed going forward."

  • There are models emerging that give challenged landlords some options to share in the upside as well as the risk;
  • A detailed review of charges and budgets is essential (and put in the context of the brand requirements and concessions) and there needs to be both detail and transparency with regards to pre-pandemic as well as current periods;
  • It is worth reviewing the processes in place with the operators and what they are doing to accommodate and promote alternative processes as you emerge (and understanding the approach of different brands);
  • Ensure that the expectations as to the timing of the reintroduction of cap ex requirements are managed;
  • Owners should work with the brand to ensure the brand is offering what is needed going forward and adjusting for the location and market (e.g. staycations);
  • Insurance should be revisited in the light of the Supreme Court decision¹ in January;
  • What are their plans (particularly if still charging, operators should proactively showcase strategy to address repurposing or changes in customer base, helping to future proof the owners’ investments)?; and
  • Review both current management arrangements against what needs to happen in practice to obtain necessary waivers to protect the owner (particularly in the light of any revisions to financing).

[1] FCA v Arch Insurance (UK) Ltd and others [2021] UKSC 1

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