POSTED ON: 03.18.2014
By Pyramid Advisors

Today’s resort owners, especially those that have acquired new assets, must make many difficult operational decisions. One of the most complex questions is whether to affiliate (or remain affiliated) with a known brand or to take an independent path. Which road leads to the more profitable future? Pyramid Advisors Group’s Harley Mayersohn shares some insights on navigating the options garnered from his firm’s deep expertise as a hotel and resort management company and his own more than 30 years in the industry.

“What flag does the asset have and is it the right one? Or, should it operate as an independent?”

PAG has a unique perspective on the topic. As manager and asset manager for major brands and independents, we have keen insight into both sides of the decision. We know every brand and the family of brands within those companies. We know what programs work and what segments the brands are strongest in delivering.

Resorts are inherently complex assets in that they are a collection of businesses, not a collection of amenities. We see golf as a business unit, membership as a business unit, restaurants that not only must succeed on their own but also help position the resort, and so on. When we open a discussion on brand, which brand, or an independent  scenario we have to consider that we are working on this complex aggregate of business units that together create a compelling experience.

We go into every new management situation with an “eyes wide open” approach. Our role is to help ownership assess the benefits and production of the brand, costs including PIP and ongoing fees, what those costs are likely to return the compatibility and appropriateness of the brand with the resort’s identity, and compare and contrast that positioning and quality with the resort’s independent identity. We also need to look at the owner or buyer’s exit strategy and run a variety of scenarios based on that strategy.

The most important questions for us to answer are:

  1. Does the resort have its own identity or brand equity?
  2. What is its unique selling proposition?
  3. Would the resort benefit from additional sources of business associated with a brand and can we forecast a lift in RevPAR and the metric we focus more on, RevPG (revenue per guest).
  4. Are any brands absent from the market and if so which are appropriate for this asset?
  5. What are the likely PIP costs and how do they impact the buyers exist strategy?
  6. Is this additional RevPAR cost justified?
  7. Does the brand enhance the value for the next buyer upon exit by elevating NOI beyond what can be done as an independent, or does it create burden upon exit for the seller?

We work with ownership to determine:

  • Cost/benefit
  • Cost in capital to achieve brand standards, a timely topic as such costs are rising (this topic is profound as brands continue to add on expenses associated with items like yield management systems, upgraded loyalty programs and others)
  • Extent of commitment and impact on exit
  • Track record of brand or independent
  • Control owner will retain

Fee considerations are an important part of the cost/benefit analysis. Hidden fees are contentious. Marketing fees can also be termed contentious as the resort owner is uncertain if the fees paid to the brand are going toward marketing their property or supporting institutional brand marketing where direct benefit to the specific resort may be difficult to assess.

Our assessment places emphasis on these factors, in this order:

  • Ability of the brand to deliver Revpar and RevPG (revenue per guest)
  • The cost to generate those Revpar figures
  • Database compatibility- this is particularly important as it is easy to hear that a brand has x million names in their loyalty program database but we have to understand to what degree those people are likely to want a specific resort product. For example, what percent are golfers?
  • Value enhancement to the real estate upon exit
  • Extent of the brand encumbrance, term and termination rights

The advantages of brand affiliation include the potential for more brand exposure, more sources of business and ultimately, greater Revpar, lender and investor requirements. If the individual resort lacks a meaningful brand of its own, a brand can greatly assist a resort in proper positioning. For example, a brand is going to bring new customers from their loyalty club. And while the rate associated with those members is somewhat lower than the typical ADR, as long as they are not displacing higher rated buyers the lift in occupancy is accretive. That said the analysis has to be what the costs are in fees to generate that business and is the ROI there.

On the other side of the equation, going independent offers flexibility in product and service. It may mean possible lower costs, but will likely require adding more sales and marketing resources. It also may result in more potential buyers on exit due to lack of encumbrance. Further, the cap rate for an unencumbered asset may be better for an independent. And an independent is not burdened with brand standards that may or may not be of benefit to any given property.

The absence of any meaningful brand can pose a challenge for a resort to operate independently. The size may also be a factor. The larger the hotel or resort, the more benefit there may be to having a brand affiliation as the resort focus may need to be group and a particular brand may have a compatible database that can support that direction. A large convention focused resort then may see more benefit with a brand than say a smaller, iconic-style resort that has a more leisure orientation.

Our analysis may also lead us to recommend a switch from one brand to another. This is based on assessment of what brand offers the best reputation, market saturation, product quality and positioning, customer profile, loyalty program and fee structure.  We also factor in our own experiences with different brands as well as our collective experience with independents.

Once all of the facts are gathered and assessed, we find that we sometimes need to recommend flag changes due to under representation in market of a particular brand and/or over representation from the current brand. There are certainly situations as well where there is a clear ownership benefit to moving to an independent stature.  In most cases we tend to recommend a soft brand for any independent (e.g. Preferred Hotel Group, Leading Hotels of the World or Great Hotels of the World). These are really more marketing affiliations that offer an independent access to group sales people, client databases and “being known by the company you keep.”

The subject of brand affiliation or independent solution  is critical because once the decision is made it is very difficult to reverse course later. This is particularly true if we are recommending a brand affiliation in that undoing that agreement is costly and highly disruptive. We are fortunate in that our collective experiences with the major brands, soft brands and operating or asset managing both branded and independent properties affords us a unique view of this complicated landscape. Our analysis is thorough, diagnostic in nature and completely owner-centric which we believe leads to smart decisions and recommendations.

Our view is that “one size fits nobody.”