New Independent Hotel Group Fights Back on Industry’s Bigger-Is-Better Mentality

One of the largest U.S. lodging trusts Tuesday launched a soft brand aimed at thwarting the growing industry notion that the world’s biggest hotel companies stand to benefit from the coronavirus pandemic.

Pebblebrook Hotel Trust along with six U.S. hotel operators — Benchmark Global Hospitality, Davidson Hotels & Resorts, Noble House Hotels & Resorts, Provenance Hotels, Springboard Hospitality, and Viceroy Hotels & Resorts — hope to improve the competitive edge for upscale independent hotels. Their new brand, the Curator Hotel & Resort Collection, aims to give better distribution to independent hotels without the high costs and brand standards associated with the likes of a Marriott or Hilton.

The new brand, which has been in development for two years, arrives ahead of an expected wave of hotel loan defaults and flood of interest from opportunistic investors pursuing pandemic-induced bargains. But it is less certain if big brands or smaller chains and independents will benefit the most from coronavirus economic distress.

“Unfortunately, there are going to be a large number of transactions. We’re not an industry where you can wipe out as much as 70, 80, or 90 percent of revenues and still make your interest payments,” said Pebblebrook Hotel Trust CEO Jon Bortz last week in an interview ahead of the brand launch. “We’d hate to see the [independent hotel] business model disappear and see all these entrepreneurs who create their own hotels and have their own brands disappear and have it where ‘bigger is better’ is the only way forward.”

The seven founding members began with a combined 120 hotels under the Curator umbrella, but there are roughly 500 hotels across the U.S. that would fit in the brand’s target market, Bortz said. Global growth is also possible.

Curator’s leaders plan to market the brand as offering the services and distribution features of a bigger brand but with more flexibility and lower costs. Agreements are on a 12-month basis rather than the kind of multi-year deals associated with global brands.

While Bortz — who has a mix of independent and major brands on Pebblebrook’s portfolio — did not provide a specific rate structure, he said Curator’s franchise fees are only a “very small” percentage of revenue compared to big brand arrangements.

“We didn’t set out to launch this in the middle of a pandemic,” he added. “But in the middle of a pandemic, anything you can do to help someone survive and save money is extremely beneficial.”

Stifling Standards

Beyond lower franchise fees, the Curator team plans to appeal to money-conscious independent hoteliers with more flexible brand standards than a typical hotel company. Brand standards have been the ire of hotel owners even before the pandemic, but the crisis and ensuing plummet in demand renewed focus on how they can be a major drain on cash reserves.

The major brands all relaxed standards and renovation timelines earlier this year as a way to give owners a financial break, but investors continue to rally against the costly component of brand affiliation even in a normal demand environment.

Hotel brands claim property improvement plans are about gaining market share. Starwood Capital spent $250 million on property improvement plans on a portfolio, and the company didn’t gain any market share following the investment, Starwood’s CEO Barry Sternlicht claimed last month.

Curator still demands an upscale level of service and amenities at its member hotels, but the company isn’t going to be as regimented on buildouts, food and beverage offerings, or entertainment. Customer feedback will play a bigger role in brand standards rather than a development team.

“We want to maintain a quality level rated by customers — not by us, not AAA, and not a big brand,” Bortz said. “Let the customer decide what four diamonds means.”

The Conversion Shakeout

The Curator launch comes as the chief executives of each of the major hotel companies, from Marriott to Wyndham, all repeatedly tout during investor calls they anticipate independent and smaller hotel owners to enter franchise agreements as a result of the pandemic.

There is certainly a valid distribution argument on the side of the big brands. While Curator may strive for a 500-hotel portfolio within the U.S., Marriott has more than 5,500 domestic hotels and nearly 8,000 globally. IHG operates nearly 6,000 hotels around the world.

But bigger-is-better predictions haven’t entirely panned out during the crisis. Hotel CEOs during third quarter earnings calls continued to predict a wave of new deals with owners of existing hotels, but they also noted there hasn’t been the pick-up of these so-called conversion negotiations as they initially expected.

Some of the most notable hotel transactions during the year have actually involved a hotel owner dropping affiliation agreements with a bigger brand in favor of a smaller one, like Service Properties Trust’s plan to turn roughly 200 Marriott and IHG hotels into properties associated with Sonesta International Hotels Corp.

Traditional bank lenders historically favored deals with brand affiliation over an independent, lesser-known concept. But Bortz, who led LaSalle Hotel Properties for more than a decade prior to its merger with Pebblebrook, thinks an entity like Curator can change attitudes at financial firms — even in the current downturn environment — due to the lower costs of an independent hotel.

“Every time we’ve had a conversation over the years of financing an independent property vs. a branded property, [financiers] always prefer a branded property,” he said. “Well, that’s the sales pitch they’ve heard over the years. Go back to LaSalle and Pebblebrook during 2001 and 2002 and [the Great Recession], you will see we’ve performed better than the folks in the branded world, and we performed better because it’s a better financial structure.”