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Can Third-Party Managers be Answer to Middle East’s Performance Sag?

Can Third-Party Managers be Answer to Middle East’s Performance Sag?

The third-party hotel management agreement or HMA is decades old, yet still not fully embraced by the global hotel industry.

NB: This is an article from HotStats

But as industry fundamentals in regions like the Middle East sputter, impeding revenue and profitability, change could be afoot. Hotel owners with an eagle eye on the bottom line are now more inclined to seek out specialized experts to be the caretakers of their assets in order to keep profitability afloat.

In the United States, the third-party management model thrives. According to the Management Companies 2019 Survey, released by Hotel Business, there are more than 140 such companies operating one or more hotels in the country. 

The surfeit of these companies, which manage a property on behalf of that property’s owner in exchange for fees (typically a base fee and incentive fee; the former typically running from 2.5% to 4% of gross revenues, while the incentive fee, normally a percentage of gross operating profit, is added to align owner and operator goals), is proof of the decentralization of the modern hotel industry. And it dates back 70 years to 1949, when Hilton Hotels opened the Caribe Hilton Hotel in San Juan, Puerto Rico, and marked a new operating method for hotels—the operating lease. 

At that time, Conrad Hilton, the founder of the Hilton chain, proposed to the Puerto Rican government that he would design and operate the hotel, which the government would then finance through bonds. The deal’s cornerstone was that the government would lease the property to Hilton, which would pay rent based off of operating profits. 

Although it was not a straight third-party hotel management setup, it was a precursor to it, showing that a single property didn’t have to be owned and operated by the same entity. There was room for sophistication and specialization. 

In “Lessons of a Lifetime: The Development of Hilton International,” which appeared in the June 1996 issue of Cornell Hotel and Restaurant Administration Quarterly, Curt Strand, the former CEO of Hilton International, wrote, “Hilton had to come up with a plan that did not put Hilton’s equity at risk.”

HMA Prominence

The 1960s saw a palpable rise in third-party hotel management companies. Consider Interstate Hotels & Resorts. It’s one of the biggest hotel management companies today, (as of 2019, it manages more than 480 properties worldwide) and one with roots that stretch back to its founding in 1960. By 1965, it was managing four Howard Johnsons, and in the early 1970s it began a legacy partnership with Marriott.

The HMA is an established export of the U.S. and—having taken some time—has washed up on the shores of Europe before making other further stops—a continental drift, if you will. 

To be sure, as the hotel industry has matured and evolved and the quotidian task of operating a hotel has grown more complex, owners—especially those of an institutional ilk that may own many assets across many asset classes—have become more apt to appoint a third party to manage on their behalf, thus freeing them from the burden. 

Already established in the U.S., as Hotel Analyst points out, “the concept of third-party management has become more popular in Europe due to the expansion of the franchise model there. And as the gap between ownership and operational management becomes wider, asset management too is becoming more accepted in Europe.”

The trend appears to be inching its way ever-farther east. A recent Skift article pointed to the HMA’s imminence in the Middle East, which has long eschewed much of anything more than a pure brand-managed or owner-operated model.

As the Skift article rightfully points out, it takes some measure of persuasion to convince hotel owners to put their trust in a third party—thereby ceding real day-to-day control of operations—and also take on an additional cost beyond the franchise fee.

If there ever was a time for the Middle East to roll the dice on a knowledgeable third-party manager, it’s now. According to HotStats data, for the first half of 2019, average room rate is down 5.1% year-over-year, which, combined with a slight rise in occupancy, has led to a 1.5% drop in RevPAR and a 1.3% dip in TRevPAR. The cost side is similarly being impacted with a 2.5% rise in F&B expense on a per-available-room basis, resulting in a pernicious 4.3% drop in GOPPAR.

This is coming off a drab full-year 2018, which saw GOPPAR drop 9.2% YOY, dragged down by a 4.6% drop in total costs on a per-available-room basis. 

The June 2019 GOPPAR 12-month moving average of $69.01 PAR is 6.6% lower than it was at the same time a year prior. 

As operational data grow negative, coupled with a noticeable rise in supply, taking on a third-party manager with expert local knowledge can be a profit salve, a mechanism that generates higher flow-through numbers. 

The pool of qualified third-party managers in places like the Middle East is still shallow, but the gap in the market is slowly being filled by these third parties, or white-label management companies, as they are often called. 

With the region constantly adding new product along more segments and key performance indicators in a torpid state, savvy third-party operators, armed with data intelligence, could be an antidote to the profit plummet.

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