Starwood Hotels & Resorts' announcement this month that it would sell the W San Francisco for $90 million to Hong Kong's Keck Seng Investments Ltd. is part of an aggressive move by the company toward an "asset-light" portfolio in which it sells off properties but retains long-term agreements to franchise and/or manage them. Starwood's shift in business strategy corresponds to similar changes made by its major competitors.
In 2004, Starwood owned 56 percent of its hotels and managed and franchised 21 percent; the remainder was part of joint ventures and other arrangements, according to a May presentation at the Robert Baird Growth Stock Conference in Chicago. By 2008, the company owned 33 percent of its hotels and managed and franchised 53 percent. In the future, company officials expect to own fewer than 20 percent.
Before its 2007 acquisition by the Blackstone Group, Hilton Hotels Corp. in its 2006 annual report said it had been "steadily moving to a more fee-based business model by adding new units, increasing revenue per available room at our hotels and selling previously owned assets while retaining management or franchise agreements." InterContinental Hotels Group owns just a fraction of rooms in its portfolio, as does Marriott International. Marriott's latest quarterly report said its "lodging business model involves managing and franchising hotels, rather than owning them. At March 27, 2009, 48 percent of the hotel rooms in our system were operated under management agreements, 50 percent were operated under franchise agreements and 2 percent were owned or leased by us."
Impact On Buyers
Starwood's strategy secures additional cash flow, but some said it has potential trickle-down effects on travel managers. In theory, for corporate travel managers the transition should have no impact since the properties are to be managed by Starwood, but some said that is not always the case. When negotiating for owned properties with the global sales team, there is a stronger guarantee that the negotiated rates and amenities will be honored, according to Maruca Malloy, global travel manager for Agility Defense and Government Services.
"It definitely has an effect," Malloy said. "[Negotiations] are supposed to be done with the [hotel company sales] team. However, when you get down to the property, when it is franchised, it is ultimately the manager of the property that has the final word. In my opinion [property managers] report back to their owner, but they are supposed to be reporting back to [the hotel company]. We have had a lot of issues with that, where they are supposed to honor this rate and then they don't because it is too low or they never really agreed to it."
"The ownership structure of the underlining assets should not matter as long as your management team stays in place, which, in this case, it does," Jan Freitag, Smith Travel Research director. "In a very long-term agreement in a franchise contract, you should get the same amount of service that you have experienced before at that property. It's just that the owner has changed, which should be completely seamless from a client perspective. You always negotiate with the management company--the director of sales is hired by the management company."
But the rigidity of franchise contracts can have an impact, as well. "When you are dealing with a franchise property, it is a little more restricted," according to Rick Seymour, freight and corporate travel buyer for Integrys Energy Group. "They are given certain rules and procedures to follow and they really can't step out of the box and be as flexible. As for the owned, they can be more flexible; they have a little more leeway to deal with."
Benefits Of Selloffs
Given that year-to-date lodging revenues have declined by 20 percent and cash flow declines are in double digits, hotels companies "seek to sell some of the less strategic and otherwise less desirable assets," according to Bjorn Hanson, clinical associate professor at New York University's Tisch Center for Hospitality, Tourism and Sports Management.
"We are pulling all possible levers to further strengthen our balance sheet through additional debt reductions," according to the Starwood presentation. "While near-term visibility is limited, we are more optimistic than ever about the long term."
"Is this a good time for any company to sell?" Smith Travel's Freitag asked rhetorically. "No, times are tough because the buyers are looking for steep discounts and the owners are looking for valuations over time. These companies will pursue the right strategy of owning the right assets that works for them and getting rid of the ones that are not strategic."
Before the credit crunch, Starwood initiated plans to increase its pipeline dramatically. It opened a record 87 new hotels last year. In 2009, Starwood anticipates that up to 100 hotels will be opened, with 65 percent of the rooms outside the United States and 68 percent in upper upscale and luxury categories.