A hotel is three companies in a trench coat

Distinguishing owner, manager, and brand

Claire fell skiing two years ago; the skis did not pop off, and acted like a lever to drive her femur into the top of her tibia. She had a surgery to install a plate and several screws, and when I was finally allowed into the recovery room at UCSF Mount Zion, I found her hopped up on pain meds and deliriously explaining to the nurses this concept: a hotel is not one company. The next day she didn’t remember talking about it, but it seems like a good test of anyone’s core ideas. What comes to you as you come to?

The distinction between Ringo Hospitality and the Apple Tree Inn is also central to the exercise of writing this newsletter. My short answer is that Ringo is “behind the scenes”. But the longer answer is that this is a universal feature of modern hotels, and not for the sake of any cute meta content.

I don’t yet understand why this sort of franchising and financialization boomed in the late 20th century (and would love any leads), but what Claire explained to those nurses is that a hotel today generally involves up to three companies:

• An owner (like Blackstone or Brookfield): the financiers modeling the hotel as a business in Excel.

• A manager (like Aimbridge or Crescent): some company you’ve never heard of hiring the onsite staff and running point-of-sale systems.

• A brand (like Marriott or Hilton): the one you think of, handling marketing, standards, bookings, and loyalty points.

This separation is most common in the giant chains. When you stay in a Marriott, Hilton, Westin, Sheraton, etc., it’s generally not owned or run by the company with that brand name. In the case of one hotel Claire worked on in Sunnyvale, CA:

• The owner was Starwood Capital Group (her employer).

• The manager was Aimbridge Hospitality.

• The brand was Sheraton (owned by Marriott).

(Google’s campus in Sunnyvale is to that hotel as Tanglewood is to us: the major local attraction.)

When Claire tells people she worked for Starwood, they say “Oh, I know Starwood!” — but they’re wrong. They’re almost certainly thinking of Starwood Hotels and Resorts, which was the management/brand side sold off to Marriott in 2016. Its brands included Westin, Sheraton, W, and St. Regis, and it was well-known for its Starwood Preferred Guest points program, which gave the umbrella company brand recognition, and became the cornerstone of the new Marriott Bonvoy program.

Claire didn’t work for that one. (It didn’t exist anymore when she started in 2019.) She worked for the older Starwood, the owner side, SCG, which created SHR in the ’90s in some kind of tax maneuver before it grew and sold to Marriott. SCG owns no brands and employs no front-desk personnel. It’s a real estate private equity firm: it buys, redevelops, and sells the land and buildings themselves. And not just hotel buildings, but apartments and offices too.

The founder of both Starwoods, Barry Sternlicht, seems to be running the same playbook again (i.e. building a management/brand company with a portfolio of brands) with SH Hotels & Resorts — where “H” stands for “Hotels”. When SCG redevelops a hotel, it has SH manage and run them under their new brands: 1 Hotels and Treehouse. New brands often have the same owner for a lot of their properties, like Rosewood (manager/brand) and Sonia Cheng’s family office Chow Tai Fook Enterprises (owner).

In the case of the Sunnyvale hotel Claire worked on: just before Covid, that hotel fell below Sheraton’s brand quality standards, so Sheraton booted it out. It had to close and remove all identifying signage (though I guess legally they didn’t have to totally efface the shadow left on the façade’s stucco). SCG began redeveloping it: designing a new concept, renovating existing buildings, building new ones, changing the whole identity, and generally putting a lot of money in. After a few false starts, they’re close to re-opening it as a much nicer Treehouse.

Note that, before redevelopment, the brand and management were separate companies, and now they’ll be the same. That integration is common in nicer hotels, like most Four Seasonses.

The owner is generally:

• a private equity firm (like Starwood, Blackstone, Brookfield, or smaller ones like KSL, KHP in San Francisco, or EOS in New York);

• a family office (like MSD, i.e. Michael Dell; or Cascade, i.e. Bill Gates) or “high net worth individual” (like Ty Warner of Beanie Babies fame);

• REITs (like Host, Park, or Apple Hospitality — no relation);

• or mom and pops.

I guess REITs are kind of like ETFs, in that they’re a way to bundle up big assets and split out small shares that can trade “over the counter”. They may have rules having to pay out some percentage of cashflow, so they tend to be better for stabilized properties, like a convention hotel in Phoenix, rather than for new developments, like that Treehouse in Sunnyvale.

The owner has the equity — i.e., it makes money by the appreciation of its assets, by selling things (after many years) for more than they bought them for, and by receiving management fees from investors who want a share of that equity. The manager and brand have contracts. The manager gets around 3% of revenue; the brand gets around 7% (or up to 12% with add-on fees); the owner gets the rest.

If the hotel’s profit margin is less than the combined brand and management fees, the owner would lose money, but the brand and management could still make money if they’re well-run. And if the hotel is crushing it, most of it goes to the owner.

So the three entities worry about different risks:

• The owner worries about interest rates and macro factors.

• The manager worries about their profit margin.

• The brand worries about staying cool.

And, of course, they all worry about each other; in particular, the manager and brand worry that their contracts could get canceled. The managers feel the most expendable, whereas brands have made their contracts increasingly ironclad, with long terms and huge termination fees. Marriott might have a 25-year contract; Four Seasons and Rosewood might have 50-year ones.

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Before Starwood split itself into owner and brands, Marriott led the way: in 1992, the Marriott Corporation spun out its brands as Marriott International and renamed itself Host Marriott Corporation. (So today’s Marriott is the spin-off, not the original Marriott.) Host was saddled with debt; an analyst, Bruce Thorp, said at the time, “Host Marriott will represent most of the bad things that Marriott Corporation now has in its portfolio. There is a very uneven split.” He seems to have been right: today, Host is worth a little more than twice what it was, and the spun-off Marriott is worth almost thirty times what it was. I don’t know if that’s unfair to the debtors somehow.

(My math is definitely off, since Host isn’t what it was; e.g. it spun out HMSHost in 1996. Another recursive acronym: HMS stands for Host Marriott Services. You might recognize it from rest stops; I never realized it had anything to do with Marriott. Like the “MS” in “MSNBC”, it’s a vestige of a bygone factoring of American industry.)

Like Marriott has the Host REIT, Hilton has the Park REIT, and Kimpton has the private equity firm KHP. Everyone does it! And now we have Ringo Hospitality, which is the manager holding the brand, and another company called Eclipse Properties (named for the 2017 one), which owns the land and building; Ringo is technically a tenant of Eclipse. I don’t really know the tax implications there, but it also gives you more granular control over which equity you dilute: that in this particular hotel, or in the scalable managerial apparatus.

As a kid I think I associated all this sort of financial engineering with vaguely nefarious “shell companies”, throwaway plot points masking erudite villains in globetrotting James Bond movies, something Margot Robbie would explain from a bathtub, tricks to take advantage of loopholes. I still feel some of that. But “loophole” implies a gap that could be closed, that any reasonable observer would see should be closed. At some point, the hole feels more like the hole in a donut, an essential and unavoidable feature, topologically invariant. As Matt Levine said, there is no spirit of the law; there is only the law as written.

In college I took a class with Prof. Zorina Khan on the history of the firm, and I don’t remember much more than the name Ronald Coase. But maybe that’s enough for now. You get some good results if you just search for Coase and Marriott. Like this 2010 paper, “Trademarks and the Boundaries of the Firm”, by Dan Burk and Brett McDonnell. It’s hard to summarize, but they talk like this:

Coase postulated that in some instances, entrepreneurial fiat direction would be less costly than market negotiations due to the transaction costs of the market. In such cases, competitive pressures will tend to compel the formation of firms as market participants organize themselves to minimize inefficiencies or face displacement by competitors that have organized themselves into firms… When transaction costs, including the threat of hold-up, are comparatively high, firms may attempt to avoid a market transaction by integrating production functions within the firm. When market transactions are comparatively low, firms will tend to “disintegrate,” outsourcing production functions.…

Oliver Hart… points out that firms need to own some sort of tangible or intangible property other than workers’ human capital in order to provide a “glue” that holds the firm together. Without such glue, there is nothing to keep workers with the firm. Workers work for a firm in order to get access to some sort of asset that makes their activity more valuable than it would be on its own. Some of these assets are hard physical assets-machines, buildings, and so on. Others are soft intangible assets, such as patents and client lists. Hart lists a firm’s name or reputation among the latter.…

Changes in firm management are often undetectable to consumers, especially if the firm continues to operate under the same name or using the same mark. If consumers are unable to detect changes in management, then one might expect the development of adverse selection—a classic “market for lemons” in which the only trademarks available are those associated with poorly managed firms—and, knowing this, only poorly managed firms would offer their trademarks for sale on the market. Alternatively, one might expect a market for trademarks to be subject to a form of “moral hazard,” in which poor managers acquire good marks in order to purvey substandard goods or services to unsuspecting consumers. But the literature analyzing the potential for such effects suggests that robust markets for reputation can emerge, and that trademarks can in fact serve as a point of stability for firm reputation whether observable or unobservable transitions in management occur.

They go on to cite some difficulties with transferring trademarks — e.g., the goodwill in people’s minds cannot be freely bought or sold, and “consumers may naturally resist purchasing a familiar commodity at a new location or hearing an otherwise familiar advertising slogan in the mouth of a new spokesman”. But they also cite some benefits of abstracting a founder’s name from the trademark derived from it:

For example, if Bill Marriott founds a hotel chain branded with his name, subsequent decisions by the officers and directors of the firm may reflect on Marriott the founder even if he no longer in fact has decisional authority, due to having been out voted or even having been bought out. For example, if Marriott is a member of a religious denomination that forbids the consumption of coffee and alcohol, as well as discourages the viewing of pornography, his reputation and standing in his religious community could be affected if the hotel chain bearing his name begins to offer coffee, alcohol, and adult pay-per-view movies to its guests.

Their example is real: Bill is Mormon, and did fight those battles.

But all of those features of trademarks have been true forever. So why did franchising boom after World War II, and this financialization of the hotel business in the ’90s?

Claire began this endeavor sitting in front of a computer monitor in our San Francisco apartment, signed the purchase and sale agreement in front of a computer monitor in our Boston apartment, and now sits in front of a computer monitor at the front desk of the hotel — and all the while, she has had largely unchanged access to a network of business school friends, former coworkers, and the well-indexed writings of many of the smartest people to ever do this. So I guess, like everything, it’s largely because of the Internet. It’s not like the assets and knowledge and people of Ringo are in one building and those of Eclipse are in another and you gotta run back and forth to coordinate. Inter-firm communication is incredibly cheap, inter-firm trust is very high, and the Internet has also made the implications of the tax code extremely legible and cheap to act on. So if expensive communication, low trust, and inscrutable law is what makes a hotel be all one company, I guess I think I’m glad it’s this way instead.

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Changelog

The “Summer Annex” is now open to guests. Alison spruced up its spartan lobby with, among other pieces, a large print of Jasper Johns’s 1961 painting “Map”. It’s a big poster, and a big help, but still feels kind of swallowed up in there. Still, the first few guests there have been happy with it.

Danny added more stuff behind the bar and we hosted a very small soft soft open of the Ostrich Room with some college friends and the handful of other guests around on Saturday.

Danny also made us hats. Pictured, left to right: Christian, Claire, and Danny. Christian is Claire’s new right-hand man, with a desk opposite hers in the front desk office; we’ll have to introduce him properly next time.

A new calf was born at High Lawn: High Lawn Starlord Peanut, daughter (?) of Primus Craze Starlord (sire, by embryo transfer?) and High Lawn Jeronimo Camino (dam).

The breakfast buffet has been moved to the now-cleaned-out space beside the round room, to allow for better flow and more seating. And it’s been moved onto a larger table relocated from the Ostrich Room, freeing up the previous long table to go back to being seating.

You can now swim in the pool, and several people have. Not me yet! And there’s lawn furniture out there.

Lidey moved her cookbook to the top of the stack.

Recently asked questions

Is there more yogurt?

Yes, but Claire says she should have given them more than she gave them.

When’s the restaurant opening?

We still need to find a cook! Maybe a few weeks?

How much do you charge for a wedding?

Give us a couple weeks and we’ll get back to you.

Can I leave my golf clubs with you somewhere? I don’t want to carry them up to the third floor and the back of my truck doesn’t lock.

Sure! We’ll lock them up in the office.

Do you have plans to make the property more wheelchair accessible?

Good question. It currently isn’t at all. We’re grandfathered-in as “preexisting nonconforming use”, but if we ever touched certain things in renovations it could trigger a huge cascade of new requirements. Some of those could be catastrophically expensive. But like, the summer annex outdoor stairs… well, we’ll see.

Can we light a fire in the fire pit?

Sure. (These people later said the various working fireplaces were what made them pick us.)

Can I have an espresso martini?

Oh… um, no, sorry, didn’t think of that, we don’t have espresso. Lidey says maybe we could make do with cold brew but we didn’t try.

Can I Venmo you?

We have no point-of-sale set up in the bar yet so we charge it to the room.

Can I have an extra soap?

Yes, here it is.