Sonesta's U.S. scale-up: New hotels will grow the brand by nearly 325%

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The Royal Sonesta New Orleans is part of one of Sonesta’s full-service brands. As part of its scale-up strategy and to help assimilate former IHG and Marriott properties, Sonesta has added a midscale, extended-stay brand and an upscale, select-service concept.
The Royal Sonesta New Orleans is part of one of Sonesta’s full-service brands. As part of its scale-up strategy and to help assimilate former IHG and Marriott properties, Sonesta has added a midscale, extended-stay brand and an upscale, select-service concept.

Sonesta may not yet be a household name, but with Sonesta International Hotels Corp. recently adding more than 200 former InterContinental Hotels Group (IHG) and Marriott International hotels to its fold, the flag has attained some newfound prominence.

"I'm sure that at the beginning of the year, nobody had Sonesta on their list as the hotel company that would show the strongest growth in 2020," said Sean Hennessey, clinical assistant professor at New York University's Jonathan M. Tisch Center for Hospitality. 

"But as it stands now, they certainly are going to win that title this year."

Massachusetts-based Sonesta announced in late August that it would be absorbing 103 IHG-branded properties from hotel real estate owner Service Properties Trust, after the real estate investment trust cut ties with IHG, alleging missed payments.

Service Properties Trust, which owns a 34% stake in Sonesta, said it will transition its entire IHG-branded stable -- comprising 22 full-service and 81 extended-stay hotels across the U.S., Canada and Puerto Rico -- to the Sonesta family of brands by Nov. 30.

In October, Service Properties Trust claimed a similar financial shortfall with Marriott and said it would transfer 98 Marriott-branded U.S. hotels -- including two full-service, 54 select-service and 42 extended-stay properties -- to the Sonesta portfolio by Jan. 1. 

By any measure, Sonesta's sudden growth spurt is unusual, according to Hennessey.

"Mass reflaggings are rare," he said. "We have seen large expansions happen in the past through corporate acquisition, but this is certainly a bit different. Contracts are hard to break, and agreements are often [broken] one-off rather than portfoliowide."

The addition of the former IHG and Marriott hotels will grow Sonesta's domestic footprint from 59 U.S. hotels at the end of 2019 to over 250 by the first quarter of 2021. Globally, the company's portfolio, which also includes a franchised licensing operation in South America and the Caribbean and two hotels and a Nile river cruise business in Egypt, will comprise 280 properties. 

"My take on what Sonesta looks like in 2021 is essentially a new venture," added Hennessey. "Of course, the company needs to manage its growth, and that's really hard to do when you're growing so quickly. It has to not only manage day-to-day operations but also promote the company aggressively and introduce the Sonesta brands to large corporate buyers. And the outlook for improved profitability is not great right now, so it may be that the [newly added] hotels struggle in the near term. That's a lot to overcome."

If Sonesta CEO Carlos Flores is fazed by the task at hand, he's not showing it.

"There are certainly going to be challenges associated with scaling up to this degree," Flores conceded. "But we've been planning for scale all along, so a lot of the foundations and the organizational plumbing and decisions we've made have been made through the lens of scalability."

As part of its scale-up strategy, Sonesta has launched two brands designed to help fold the IHG and Marriott properties into Sonesta's portfolio. 

Previously, Sonesta's stable included full-service brands Royal Sonesta and Sonesta and upscale, extended-stay flag Sonesta ES Suites. (The company also has a small number of properties under regional South American brand Sonesta Posadas del Inca.)

The additions are the midscale, extended-stay flag Sonesta Simply Suites and Sonesta Select, billed as an upscale, select-service concept.

"The IHG transaction has facilitated, or necessitated almost, the birth of Sonesta Simply Suites, and that brand will play host to a lot of the hotels coming to us from that operator," Flores said. "And with Sonesta Select, the majority of that portfolio will be populated with hotels coming from Service Properties Trust that are former Courtyards."

The transitions will also introduce Sonesta into several key markets, including Washington, where Sonesta would be taking over the former Kimpton Hotel Palomar Washington DC, and Hawaii, where the group would plant a flag at the former Marriott's Kaua'i Beach Club. 

In Chicago, Sonesta will be taking over two full-service hotels, which will join the group's Royal Sonesta Chicago Riverfront, currently under renovation.

"We're a company that's looking to materially improve our overall brand awareness, and nothing does that better than a larger distribution and network of hotels to offer our customers," said Flores, adding that a bigger footprint will also enhance Sonesta's loyalty program, Sonesta Travel Pass, which currently has more than a million members.

Meanwhile, Sonesta's fast growth comes as the company reports a relatively solid post-pandemic comeback. According to Flores, a large share of the company's portfolio is currently performing at over 60% occupancy, and Sonesta brands are also "significantly indexing above the competition" on the RevPAR front by as much as 20 or 30 percentage points.

"A significant percentage of our occupancy is extended-stay-based, meaning that these accommodations are, in many cases, a substitution for a primary residence, or have become a primary residence, or just generally are not discretionary," he added. "So, from a relative perspective, we haven't been as adversely impacted because of that base business."

As for the future, Flores remains ambitious. 

Longer term, the company, which currently manages 100% of its U.S. properties, is looking to set up a franchise and licensing program stateside. 

"We've secured our growth and are talking about hundreds of hotels," said Flores. "Now it's time to ask ourselves: When do we start talking about a thousand or going north of a thousand?" 

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