Sonesta adapts on the fly as portfolio doubles in size
 
Sonesta adapts on the fly as portfolio doubles in size
08 SEPTEMBER 2020 8:18 AM

Sonesta President and CEO Carlos Flores said the conversion of 103 hotels from IHG to the Sonesta flag will elevate his company to the next level after years of behind-the-scenes work.

NEWTON, Massachusetts—Early in 2020, executives at Sonesta were rethinking their strategy. The company had enjoyed solid growth since it was acquired and became part of the RMR Group in early 2012, but had fallen short of more recent, lofty growth goals.

Sonesta President and CEO Carlos Flores said the shift in strategy included a likely exit from the extended-stay segment.

All of those plans went out the window with the onset of the COVID-19 pandemic and its associated economic recession. Service Properties Trust’s plans to rebrand 103 properties currently under InterContinental Hotels Group flags would more than double Sonesta’s portfolio, significantly strengthen the company’s distribution platform and cement its place as a true player in the extended-stay space. Service Properties is externally managed by the RMR Group and has an ownership stake in Sonesta.

Flores said this is a moment Sonesta has spent years preparing for.

“We’ve been internally focused on building our platform. I’m feeling good about what we have established in terms of our core systems, plans, and vendor relationships. We’ve been preparing for a like event. (103 hotels) might be a little bit more than we expected at once, but the team has been working night and day to come up to scale.”

A long history for Sonesta
Flores said it’s been a long time getting to this point.

Sonesta, founded in 1937*, was “a really well-known brand before the titans of today’s industry” were established but had just three properties at the time of the 2012 RMR acquisition, said Flores, who started at the company a day after that deal. The brand saw an immediate spike, growing to 24 properties within six months, he said.

The company has a portfolio of full-service and extended-stay hotels spanning eight countries, with several flags—Royal Sonesta, Sonesta Hotel & Resorts, Sonesta ES Suites, Sonesta Posada del Inca and Sonesta Cruise Collection—under the broad Sonesta banner.

Executives have high aspirations for growing the company and have set targets to reach that goal.

“Since I stepped in (as CEO in 2015) and even earlier than that, our objective has been to create a platform for growth, and to prepare the organization for more than 300 hotels within the first 36 months of my tenure,” he said. “We didn’t completely hit that mark, but it was more of a financial control than an aspirational goal.”

The company has grown in large part through acquisitions by its related real estate investment trust, Service Properties Trust, which now owns a stake in the brand as well. However, deals were challenged as the lodging cycle grew longer, Flores said.

The slowing growth motivated the company in early 2020 to revisit its overall growth strategy and prepare for some large-scale changes, which included plans for Service Properties to sell off its portfolio of Sonesta ES hotels. Flores said those strategic changes have been shelved, and Service Properties executives have publicly stated sales of Sonesta ES properties are no longer in the works.

“Going into 2020, we started to discuss a revised strategy to amplify and focus as a brand, but just about the time that strategy was crystalized … and finalized, COVID-19 hit,” he said. “Any strategy was put on hold, including what we’d just planned.”

Pictured above is the Sonesta ES Suites Atlanta Perimeter. (Photo: Sonesta)

While the pandemic has been painful across the hotel industry, an unexpected silver lining for Sonesta was the opportunity to convert Service Properties’ 103-property portfolio of IHG properties. The opportunity came about when IHG opted to stop paying required minimum rents, citing a desire to remain “in sound financial condition by reducing costs and protecting cash flow, ensuring our management agreements are in line with this approach.”

Minimum rent protections are traditionally stronger in Service Properties’ management agreements than in those of most ownership groups, which has been a point of contention between the REIT and several brands, including IHG and Wyndham Hotels & Resorts recently.

That, combined with the fact that Service Properties often looks first to move properties to Sonesta flags when possible, meant Flores and his team weren’t caught off guard by the news they were getting a historically large influx into their brands.

Service Properties’ “structural relationship with operators are unique and rare, and the downside protections they have had in place, I’m sure many lodging investors covet,” he said. “Specifically, downturns have challenged those relationships, and part of our birthing in 2012 was one of those bumps on the road.”

The REIT, then known as Hospitality Properties Trust, converted 16 IHG hotels to Sonesta in 2012.

In 2019, Service Properties also converted some Wyndham properties to Sonesta, and in 2018, a lawsuit with Morgans Hotel Group resulted in the conversion of The Clift in San Francisco into The Clift Royal Sonesta.

“We’re looking for opportunities not just with the IHG hotels but to be the recipient of other hotels,” Flores said. “We’ve played part in those exercises in the past.”

Ultimately, the conversion of the IHG properties, which is targeted for the end of November, will bring 88 extended-stay and 22 full-service hotels to Sonesta, growing the overall portfolio to more than 160 properties in the U.S. and nearly 200 globally.

Flores said that growth, the largest in the company’s history, vaults Sonesta into a new tier among hotel brands. He hopes to parlay that into new growth avenues, including establishing a franchising model and expanding deals and development of the brands’ balance sheet. The company also maintains strong relationships with ownership groups outside the U.S.

“Acts two and three and beyond for Sonesta really include getting up a potential licensing and franchising platform,” he said. “Our increased distribution makes that not just a longer-term strategy, but something we can bring in and consider.”

Expectations for extended stay
Flores said the has changed for virtually every segment and every company within the hotel industry, but the ongoing recession has underlined what was the initial appeal of extended-stay properties.

“Before COVID, for the last six or seven years, everyone was in love with extended stay, which brought tons of cash into assets,” he said. “The market was saturated, and it was changing the profile of how (the model) was executed in the market. It was a long way away from the original Jack DeBoer model that birthed the whole segment.”

He said prior to the crisis Sonesta officials had started “to question where we’d be able to move the needle” with extended-stay hotels, but the ability to get back to the operational efficiencies of the “true extended stay” make the model more appealing now than ever.

Flores said when the virus hit and “sucked a lot of demand out of the market,” it exposed how many assets, ostensibly positioned as extended stay, were benefiting from being part of large distribution platforms and operating more akin to transient hotels. However, more traditional extended-stay properties like Sonestas did relatively well as they maintained their base business of traveling workers and people who treat those properties as their “primary or secondary home.”

“It’s hard to get too excited about performance now, but from a relative perspective, we did quite well, and it’s shined a light on the protections of the model itself,” he said.

Working as a smaller brand
The planned conversions will make Sonesta considerably larger than it has been historically, but Flores noted the company is still smaller than the biggest players in the hotel industry.

“Before (the conversions) we were perhaps a minnow, but now we’re in that welter class where there are not a lot of players in the space,” he said. “That gives us the ambition and trajectory to punch well up if not among the titans of the industry.”

While Sonesta has long-term goals to be among the most prominent hotel brands, Flores said its current size and structure is a strength, especially in an era when “cookie-cutter” hotels are a dying breed.

“We have tremendous agility and don’t have a huge network of owners we have to placate when making changes,” Flores said. “We have a tremendous opportunity to mold who we are in alignment with consumer taste.”

Service Properties executives often point to operational outperformance as a reason for converting properties to Sonesta, and Flores said he remains confident in the company’s strength.

“We’ve accomplished a lot in a short amount of time,” he said. “We’ve got a million-plus loyalty members and some of the best guest satisfaction scores in the industry. I’ll take the Pepsi challenge against most any hotel brand. I feel confident and think we have a real opportunity in the market.”

*Correction 8 September 2020: This story has been updated to correct the year in which the company was founded. 

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