A test of trust

Hotel owners and operators tell Louise Oakley why it is essential that their relationships are based upon mutual trust.

The relationship between a hotel owner and a hotel operator is one of the most complicated partnerships in the world of business. The relationship has many layers and management contracts can take years to define before the two parties actually sign.

The contracts themselves are complex too and Hotelier does not profess to be able to explain the ins and outs of them in one article (we’ll leave that to your lawyers).

What all these contracts are underpinned by, however, is the mutual trust that exists between the owner and the operator — and it is the establishment and maintenance of that trust that Hotelier will explore here.

According to the senior vice president of development for Corinthia Hotels, Paul Pisani, building this trust is vital to achieving success.

“The common denominator is that, notwithstanding the type of relationship (e.g. management; JV etc.), and where it is domiciled, all relationships are ultimately driven by the human element and mutual trust or confidence can help offset most differences,” says Pisani.

“I focus on structuring relationships which work long-term, building trust and understanding, and tailor-making them by giving individual owners the time, dedication and attention each requires on a day-to-day basis,” he adds.

Rotana chairman Nasser Al Nowais agrees that this “human element” is critical.

“If I look back at Rotana’s history, to its modest success, I would say it is based on genuine friendships, which have been built solidly over the years and have led to strong business partnerships.

We pledge to understand and meet the individual needs of all who we deal with, especially owners, who entrusted us with their investment,” he says.

Ownership trends
As Al Nowais and Pisani observe, each relationship with an owner is unique. But while each owner/operator relationship is different and dynamics are likely to evolve throughout the hotel partnership, there are some general trends in the Middle East hotel investment market worth noting.

As owning company Action Hotels general manager Alain Debare notes: “Hotels in the region have traditionally been more of a single-asset, family-type investment. Owners enjoy the hotels they have invested in and more recently are getting involved as part of a natural cycle that has shifted from development to managing assets”.

Atlas Hospitality’s managing director Siegfried Nierhaus says that compared to international markets, Middle Eastern owners “play a larger role in running their hotels”.

“It’s a lot about being proud of their hotel and the services that clients will experience in their hotel. The involvement of some owners could go very far and interfere sometimes in decisions that should be taken by the operators and it’s up to the GMs to communicate and coordinate best to satisfy all parties.

“The willingness of owners to learn from international operators is very high and it’s always better to have an owner who shows interest in their assets than having owners who don’t care,” says Nierhaus.

From the operator’s point of view, Pisani observes: “What I have seen in recent years is that many individual owners have become a lot more educated in the hotel business, even if this is not their core competency. Since the financial crisis in the last couple of years, demands are higher as a result of similar demands being made on them by funding institutions and such like”.

As a result, owners are becoming increasingly savvy and over recent years, new owning companies have been established that pride themselves on their operational know-how. These entities believe that owners should absolutely understand hotel operations.

“It is critical for us as hotel owners to have a multi-disciplinary team that understands all the facets of the business — finance, construction, real estate and hotel operations,” says Debare, who oversees five operational properties wholly owned by Action Hotels, established in 2008.

“Our in-depth knowledge of hotels ensures that we are able to deliver quality properties that comply to brand standards of our international operators. It is also important to understand that hotels are a local business and our understanding of the regional market allows us to have this first mover advantage and to truly align our interest with the operators,” he adds.

Sanjay Tanna, business development director at Abu Dhabi National Exhibition Centre, which owns three hotels, ensures he is up to speed on the assets’ operations.

“The general manager and their team are the guardians of the owner’s asset,” says Tanna. “To me it is equally critical to know and understand how the hotel’s back office operation interacts with operator’s regional offices and in turn how effective the operator’s distribution channels and the sales and marketing engines are — which ultimately are what the owner invests in and why it pays the fees to the operator!”

Anil Bhardwaj, director, A.A. Al Moosa Enterprises, says all owners should have an operational understanding — which could be via a third party asset manager — but that increased communication between both was important.

“Hotel owners in the Middle East who have several hotels as opposed to one, are better informed about their business through in-house and/or external consultants. However, greater interaction between them would improve their collective lot,” asserts Bhardwaj.

Michael Scully, a former hotel operator and now managing director at owning company Seven Tides, agrees that some owners may be able to get more out of their hotel.

“I think the majority of the hotel owners know the business very well, some treat them purely as investments and in some cases are very happy with their ROI. Many hotels in Dubai are now free of mortgages and some owners may not push for or realise the full potential,” warns Scully.

Aligning the relationship
Pisani mentioned the impact of the global financial crisis on ownership trends, but while this may cause owners to tighten their hold over their investment, they were quick to refute the notion that the “ball is now in the owner’s court” when it comes to the balance of power between owner/operator.

“I don’t believe the ball is in anyone’s court, especially once a hotel is complete and fully operational,” says Scully. “What we might find is that due to the downturn and disrupted development schedules, owners won’t be forced into accepting inappropriate management companies for their hotels.

“I think management companies should be made more accountable when contracts are negotiated; this should certainly further protect owners’ interests,” he suggests.

Atlas Hospitality’s Nierhaus agrees that owners have more choice, but says this should not mean they become too demanding.

“I do not think that owners or operators have an upper-hand in any cycle, even though I feel that in 2011, owners will have more choices and options. This is because operators currently outnumber demand and they are willing to negotiate to get additions in portfolio,” says Nierhaus.

“As an owner, winning a partnership with operators means sensible decisions, realistic expectations and definitely not the tendency to push your operator or pushing for demands that are unreasonable.”

Debare agrees: “As hotel owners and asset managers we are very involved in working alongside operators for the success of our hotels.  We work closely to provide guidance from an industry perspective and also a financial one. We seek to maximise returns and provide a focused, results-oriented overview that translates into value.

Ask the operator, however, and the view on who holds the power ball is different. For Wyndham Hotel Group president and CEO Eric Danziger, the owner has entrusted the operator with his investment and therefore, the owner is in charge.

“I have a contrary view to that statement, it should never be in cycles; the owner is always the boss. My customer in our business is the owner. Then there’s the consumer, which is the user of the hotel, but my success is directly tied to my relationship and ability to make an owner successful. I started as a bellman and I have worked in every position in a hotel, and I have always looked at it as the hotel company is an employee figuratively of an owner,” says Danziger.

“It’s not us and them; the power of ‘us’ is better together than as us and them. So I am deeply opposed to hotel companies thinking that they are ever in charge,” he claims.

The ideal relationship
So, what is it that brings the owner and operator “together” in this ideal relationship?

“We need greater transparency between owners and operators and less of them versus us,” says Bhardwaj, echoing Danziger’s point.

“Owners need to be better informed with specific comparison of various hotel operators’ capabilities. While this is happening in the comparison of their ability to drive revenue through independent consultants like STR, no comparison is available regarding ability to control costs,” he says.

For ADNEC’s Tanna, “ideally, the risks and rewards should be shared in an environment of mutual trust and communication”.

“Too often this doesn’t happen; owners are forced to take all the risks in investing and the operators reap the rewards if the asset is successful, while having no exposure if performance isn’t as expected.”

To counter this, Scully says owners need to have the confidence that the operator treats his property as an individual business — “not just as an extension of their company and their brand”.

“We particularly take note when traditional business hotel operators try their hand at resort operations where their source markets are generally only business focused.

It can take them many years and a complete change in culture before they are able to add any true value to the resort that they manage, ultimately costing owners huge sums of fees for very little value or incremental revenue,” Scully explains.

Operators that have expanded quickly and lack local knowledge also pose a risk for owners, says Scully, while Nierhaus says his biggest “gripe” about hotel operators is “the tendency to short-term tactics, particularly in a tough business cycle, based on a global company policy without taking into consideration the individual owner’s wish”.

The key to the ideal relationship, says Danziger, is the way in which such “gripes” are eliminated. This comes down to establishing a good relationship and understanding early on and ideally, having the operator on board during the development process to help advise on what they can generate a profit on.

Ultimately though, this goes back to Pisani’s original point about the importance of the “human element”.

Drawing on Wyndham’s recent signing in Doha for the first Wyndham Grand and Planet Hollywood hotels in the Middle East — which are both owned by Regency Group Holdings — Danziger says personal relationships “do matter”.

“I would rather have our great growth and expansion in this region, which is even more important in terms of relationships, with fewer people than every hotel being a new relationship.

Growing relationships and adding more with existing owners is a key strategy of ours and if you do all your deals right up to a handshake, I’m happy to do that.

“That is my style; the lawyers are part of life but deals [should be] done based on your relationships, and the trust, honour and integrity you have mutually for each other first,” Danziger concludes.

About the owners
A.A.Al Moosa Enterprises LLC
Founded in 1970, A.A.Al Moosa Enterprises LLC owns seven hotels in the GCC, including Hilton Dubai Creek and Crowne Plaza Muscat, and three hotel apartments under the Golden Sands brand. In 2011, the company opened Ramada Hotel Apartments in Sharjah in January and will open Hilton Jumeirah Beach Residence and Ramada Jumeirah Beach Residence, each 45-storey towers, in the second half of 2011.

Abu Dhabi National Exhibitions Company (ADNEC)
ADNEC was established in 2005 and owns three hotels — Aloft Abu Dhabi, Hyatt Capital Gate, Abu Dhabi, opening this year, and Aloft ExCeL in London, also due to open in 2011.
Its hotel stock is designed to effectively support ADNEC’s core business of operating world-class events venues across the world.

Action Hotels
Action Hotels was established in 2008 as a subsidiary of Kuwait-based Action Group Holdings. Under the leadership of H.E Sheikh Mubarak A.M. Al Sabah, the objective of Action Hotels is to become the leading hotel-owning company specialising in mid-market hotels in the Middle East.

Action Hotels currently owns five hotels in Melbourne, Australia; Salmiya, Kuwait; Sharq, Kuwait; Muscat, Oman and Amman, Jordan. It aims to have a total portfolio of 16 properties by 2014.

Atlas Hospitality
Atlas Hospitality was established in 2005 as a division of Dubai-based Atlas Group of Companies. Its focus is on niche hospitality-asset development and management in the Middle East, South East Asia and Indian Ocean, as well as undertaking specific consulting for select hospitality projects, restaurant operations and back-of-the-house design projects.

Atlas Hospitality’s own asset portfolio includes the Radisson Blu Hotel, Dubai Media City and the upcoming Regent Emirates Pearl, Abu Dhabi, on track for a 2012 opening, and two restaurant concepts, Certo and Pascal Tepper French Bakery, as well as a 40-hectare area in the Seychelles to develop.

Atlas Hospitality is focused on an expansion strategy — it envisages five hotels and 20 restaurants by 2013, and is opening three restaurants in the next six months alone.

Seven Tides — Hospitality
Seven Tides is a Dubai-based, privately-owned, internationally-oriented holding company established in 2004. It currently owns four hotels in Dubai, two of which are yet to open, and one in London.

The four properties in Dubai are all operated by Mövenpick Hotels and Resorts.

Over the next few years, the company aims to open its final two properties in Dubai and launch the Dukes Collection internationally. It is also looking at opportunities in hotel apartments in various locations.

What do you look for in an operator?
“Our priorities when it comes to choosing an operator are strength of brand and management depth.”
Anil Bhardwaj, director, A.A. Al Moosa Enterprises

“In addition to the terms of the offer received from the operator, the other important elements we take into account when selecting a hotel operator, are the synergies between the location of the asset and ‘best brand fit’.”
Sanjay Tanna, business development director, ADNEC

“We work closely with Accor Hospitality and InterContinental Hotels Group, two of the world’s leading hotel companies. When selecting an operator, we focus on the value that the brand and its distribution network will bring to our investment — from a variety of aspects ranging from loyalty programmes to account management, as these are the components that drive business to the hotel and ultimately create value for us.”
Alain Debare, general manager, Action Hotels

“We look for the right quality service-minded attitude, global expertise, interesting and innovative concepts and recognised professional capabilities while selecting partners. Our operators translate our vision on the ground and because of this reason, we take care to find the right partners.

Above all other factors, we look for a potential long-term partner, who comes with a willingness to understand this vision and translate it in reality. We look for experience, regional and market insight, sales, revenue and marketing power, and the unique selling points they offer.”
Siegfried Nierhaus, managing director, Atlas Hospitality

“We look for a management company with innovation, drive and dedication. A company that will treat our hotels as individual businesses, earning their fees on merit not on the reputation of the management brand.

Also, it is important to focus on bookings independent of their reservations systems, not simply relying on their system bookings. It is also imperative that hotel operators are three-dimensional in that they drive business into all sectors of the hotel and not just concentrate on their strength, which is normally rooms where they derive most of their management fees from.”
Michael Scully, managing director, Seven Tides Hospitality

The operator's opinion
“Owners in the Middle East are different to those in the west. In addition to the ROI plan, it is important for them to know who they are dealing with, and how much trust is there from the beginning. Our best ‘sales team’ is our owners. They are the ones who recommend us to each other. This is the best referral any company could have.”
Nasser Al Nowais, chairman, Rotana

“Perfection may be a tall order and perhaps there is no such thing [as a perfect owner] in the same way as there is no perfect operator. I believe that in all cases, one must appreciate that all relationships are different and individual and that one must focus on the strengths that each party brings to the relationship and to concurrently work together on areas which require more special attention.”
Paul Pisani, SVP hotel development, Corinthia Hotels

“I have been running hotels for 40 years, but that doesn’t mean there isn’t an owner who has an idea or suggestion that makes it better. There are some sorts of owners who have no interest in what goes on, they want to see the results at the end of the month or end of the year and that’s fine too.

Some owners want to come by every week and have a meeting and find out what is going on — both are fine with us. I have had many wonderful ideas that made me a better hotel person come from a person who wanted to be involved. I do think, by the way, that the actual running of hotels is best left to hotel operators, but the input which might be provided by others is always welcome.”
Eric Danziger, President and CEO,Wyndham Hotel Group

Building Owner / Operator relationships at AHIC
Many of the owners and operators quoted in this article are speakers at this year’s Arabian Hotel Investment Conference (AHIC), which will be held at Madinat Jumeirah in Dubai from April 30 to May 2.

The theme of the conference is ‘Changing Gears’ and hundreds of owners, investors and operators will come together to discuss topical industry issues, cement existing relationships and begin new ones.

Of particular interest are the new AHIC Investment Marketplace and the Owner & Investor Association, which includes a session called The Owner’s Forum on May 2, that will be hosted by Seven Tides’ Michael Scully with Alain Debare and Siegfried Nierhaus on the panel.

A.A.Al Moosa Enterprises’ Anil Bhardwaj, meanwhile, will be speaking in a session on May 1 called ‘Owner-Operator Forum on Agreements’ while Corinthia’s Paul Pisani will discuss ‘Acquisition and Brand Conversion — the new development strategy’, also on May 1.

AHIC includes dozens of other valuable sessions on topics from asset management to emerging markets to creating luxury hotels, as well as lots of networking opportunties.

For the full schedule, visit www.arabianconference.com

Did you know?
None of the hotel owners Hotelier spoke with were looking to sell off any of their assets. Instead the strategy was on consolidation or acquisition — and on finding the right partner in an operator and building this relationship over time.

Both Atlas Hospitality and Seven Tides also said they would consider possible partnerships and joint ventures in order to expand.

Only one company, Seven Tides, was expanding into owning and operating hotels following the establishment of a management division which looks after hotels such as Dukes in London, a brand the company is keen to roll out.