Sage Hospitality is going it alone as it bets on independent lifestyle hotels while its peers are selling to bigger players or planning to go public. This strategy is either very wise or very foolish.
US hoteliers have long turned to third-party management companies like Sage Hospitality Group to manage their properties. Sage stands out as having grown from 17 independent, soft branded, luxury or lifestyle properties in predominantly suburban areas to 47 lifestyle hotels in major urban areas (out of a total of 60 hotels) since 2017.
Sage has made a big, deliberate shift in its overall portfolio. To understand its bet on lifestyle and what that bet says about the wider sector, we need to cover some story.
Sage does many things, but is best known for third-party hotel management. Most hotel managers are essentially mom-and-pop players—each overseeing roughly a few dozen hotels, on average.
But the pressure to consolidate hotel management players is.
- Aimbridge, the largest hotel company in the US, manages more than 1,500 properties on behalf of about 400 owners. Advent International, a private equity firm, took a majority ownership stake in outside hotel operator Aimbridge Hospitality in 2019, merging it with rival Interstate Hotels & Resorts and plans to try to take Aimbridge public once markets settle.
- Highgateanother giant hotel management company, is privately owned by the founders Mahmood and Mehdi Khimji. In 2014, the company gave a minority stake to a private investment company Trilantic Capital Partners. Recently, it has entered into agreements with which it has expanded in cooperation Cerberus Capital Management. He bought Highgate in December Viceroy. He plans to turn Highgate into a brand recognized by consumers. This consumer branding is relatively unheard of among management companies.
- In 2021 investment supporters Gencom and TZP Group forged merger of Benchmark Global Hospitality and Pyramid Hotel Group into a new company, Comparison pyramidwhich embraces its inner conglomerate.
For hotel management consolidation, bigger is better.
- Businesses expand to save on transaction costs in part by negotiating volume discounts on purchases and negotiating better interest rates on loans. Hotel management companies spread their development, legal, technology and management skills – cross-team ideas.
- For example, Aimbridge said its giant size allows it to provide hotels with better IT, accounting and revenue management tools than smaller competitors.
- By offering a wider range of jobs, larger hotel management companies can theoretically help deepen the skills of a long-term worker. This investment in the workforce could help companies attract the best talent more easily. This, in turn, could give them an advantage in the labor-intensive area of hotels and hotel restaurants.
- But in reality, the real motivation for dealers who do mergers and IPOs is their dream of financial riches. They often personally benefit by cutting deals today to expand companies, regardless of the long-term impact on companies.
Sage Hospitality Group is making a different bet—namely, having special expertise in the “lifestyle” space is an effective competitive advantage.
- “We’re in it for the long haul as one of the truly private hospitality companies,” said CEO Walter Isenberg. “We have a strong desire to remain independent.”
- Isenberg founded the company in 1984. But in 2013, its portfolio began to expand across different types of properties.
- The company decided to change its mix to become a specialist in an area it believed would grow: lifestyle hotels.
- Over the course of nearly a decade, Sage let its management contracts expire with select service properties to replace them with lifetime clients.
- Today, the company has about 60 hotels in its portfolio.
- “We’re about 95 percent of the way to our ideal mix,” Isenberg said. “We’re more of a pure urban and resort in terms of location and lifestyle.”
- Sage believes that its focus on these highly responsive and complex products helps it hire and develop the best talent. Its sales, operations, development, human resources and technical teams are now focused on developing capabilities serving urban and resort hotels rather than suburban select services with diverse needs.
Isenberg, who founded the Denver-based company in 1984, gave it four options for mutual blocking.
- Hotel management.
- Restaurant concepts for your hotels.
- Real estate investments that increasingly focus on mixed-use projects.
- Own “studio” for creating lifestyle designs and products for hotels, restaurants and residences.
Sage is rebranding to strengthen its position in lifestyle hotels.
- “We want to be the most–the beloved lifestyle hospitality company out there,” Isenberg said.
- Sage tapped consulting firm G+G to create a new “brand architecture” that will inform the new website debuting this summer.
Sage aims to innovate in the lifestyle hotel space.
- Sage operates 18 lifestyle properties that are purely independent and unaffiliated with any of the major brands. It will launch an affinity program for these independent hotels later this year.
- “Today’s loyalty programs are all based on performance around general points,” Isenberg said. “We see a niche to create an experience-focused affinity program.”
- In 2020, she joined Pebblebrook, a real estate investment trust, Springboard and Davidson to become a founding member of Curator, which helps independent hotels select technologies and optimize their direct marketing strategies.
- “At Curator, we’re effectively creating a co-op, bringing independent groups together to get more buying power for technology and marketing,” Isenberg said. “We’ll never get the same price as Marriott, but the effort is worth it.”
On the one hand, Sage was smart to see in 2013 that lifestyle hotels would grow in popularity in urban and resort areas. Big brands are now rushing into the segment.
On the other hand, Sage is betting rather heavily on independent lifestyle hotels at a time when big brands seem to be on the move globally. Will he be overcome?
- “We’re still big franchises of groups like Marriott, Hilton and Hyatt,” Isenberg said. “But even there we relied on their offer in the segment of luxury and lifestyle brands.”
- “Our view is that the hotel business has been commodified, yet the disposable income consumer segment is looking for collectibles instead of commodities, so to speak,” Isenberg said. “More consumers are gravitating towards unforgettable experiences. Although, yes, the lifestyle is more complicated, if we do it well, we get a premium in income.”
- “Our system revenue in 2022 was half of 1 percent of our 2019 level,” Isenberg said. “In 2023, we’ll be far beyond that, knock on wood, thanks in part to growing demand for unique experience-based assets.”
- Over time, Sage will face competitors like OTH who are eyeing a similar playbook.
Sage also invests in real estate, which it sees as generating capital that it can use to support its innovation efforts.
- “We have a lot of private equity partners, but they tend to buy hotels with a plan to sell in two to four years,” Isenberg said. “In these situations, we become a co-investor with the promise that in a few years we will sell, build and share in the value created – something we wouldn’t do if we signed a management contract.”
- For management contracts, Sage prefers to work with partners who plan to hold properties for the long term, such as ten years or more.
- “We have to make sure that we’re taking great care of our associates and that we’re very focused on our customers, that they want to come back,” Isenberg said. “If we do these two things extremely well, we will get good returns from real estate. Not the other way around. If we think about profitability without focusing on people first, things will go wrong.”