Inside Marriott's Sonderlust & Trimont Grabs the Crown

Inside Marriott's Sonderlust

The first thing I did when I saw the Marriott-Sonder announcement Monday was chuckle. The second thing I did was text @somehotelguy, a hotel exec (vetted, legit) who did a HoF analysis of Sonder’s investor presentation back in ‘21, and asked him to write a piece for The Promote. As you’ll see, he answered the call to arms w/ gusto. It’s a great peek under the hood of the hotel biz, a black hole for most of us. Enjoy, and remember: Not all who Sonder are lost! - HS

By Some Hotel Guy

Sonder did a thing. Or, rather, they announced a couple things – one loudly, one quietly. And folks, I’ve got some thoughts.

*As I said in the thread that made me famous, “I have nothing to do with Sonder, I’m not particularly smart, and I’m in no way a securities analyst. This isn’t investment advice.”  All that holds true today too. But: I am in the hotel space, I know how this business works, and for whatever reason Hiten seems to like me, so here goes…

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Sonder/Marriott (Cont.)

What was announced: A “Strategic Licensing Agreement” giving Sonder access to the Marriott distro systems / channels / teams. Sonder highlighted the benefits to both its customers (Bonvoy points!) and its properties (wider distribution, more sales focus, lower CACs). 

Buried in the Sonder announcement (and ignored in Marriott’s) was this little gem: “Finally, Sonder secured approximately $146M in additional liquidity through a combination of equity, debt, key money, and the extension of the paid-in-kind interest period on our term loan. We expect that this capital infusion will fund the business through the integration and to sustainable free cash flow generation.”  

We’ll focus primarily on the agreement here.  

What it means: Sonder just became a franchisee of the Marriott systems. Each individual Sonder location will be available to book directly on Marriott.com and affiliated sites, will be sold by Marriott’s global sales team, and can avail of Marriott’s negotiated rates and positioning with third parties (e.g., the OTAs and GDSs). However, Marriott does not own the Sonder brand – Sonder still does, in a deal similar to last summer’s Marriott/MGM one.

Why would Marriott do this?  Fees and growth!  You’ll often hear Marriott execs, including CEO Tony Capuano, quote the legendary Mr. Marriott’s maxim of: “More.” Marriott’s franchising / licensing business has exceptional operating leverage, so the best thing Marriott can do for its investors is add more units (and more fees) in that business line. 🎈 

And there’s the “more” for hotel owners: more pricing power, more loyalty program members, and more juice w/ travel planners. At least that’s the theory – market saturation is most definitely a thing, which is why Marriott has to ensure that customer base growth is never outpaced by unit growth. God forbid hotel developers challenge the gospel of “Nobody ever got an angry call from an LP because they chose Marriott.”

Why would Sonder do this? Survival 🛟  Sonder is still largely a lease arbitrage play, and for them to remain solvent, they need to juice property performance FAST. You do that by upping revenues or cutting costs, and Sonder thinks it can do both: Score top-line growth via a girthier sales funnel and cut expenses by virtue of lower CACs.

What’s the deal? 

Here’s the skinny from Sonder’s 8-K. 

• Term: 20Y, with two 5Y extensions.  Sonder has a termination right if it changes control or if a performance test is missed. 

• Fees:  Royalty Fee of [REDACTED 😢]; Sales & Marketing Fee of 1% of Gross Rooms Revenue; Program Services Fee of 0.57% of Gross Rooms Revenues + a dollar amount/room, and a fixed dollar amount; and, Other Mandatory Services [In an excluded Exhibit – 😢]

• Key Money: $15M of Key Money ($1,667/ 🔑) paid in 2 tranches. Tranche 1 is subject to (i) some PIK extensions; (ii) Marriott getting Board Observer rights; and, (iii) cash raised from a pref sale, lenders, and a lawsuit. Tranche 2 is subject to (i) raising more cash from that same lawsuit; (ii) a lease adjustment; and, (iii) reducing corporate overhead by $10M per year.  That’s quite a cocktail – not sure I’d feel too good if I’m one of the Sonder employees splashing this announcement all over LinkedIn…

• Sonder will be an approved 3^rd party manager of Apartments by Marriott, which could be foreshadowing an entry into a business line I’ve heard described as a knife fight in a phone booth) 🗡️☎️ 

My take 

Sonder desperately needed something like this and should have done it YEARS ago. With 9K units x 200 properties, it’s awfully hard to build anything resembling the sales funnel you need. Latching onto a Marriott (or a Hyatt, IHG etc.) lets you tap into the decades and gajillions they’ve spent building up that infrastructure. You also gain instant street cred in the business travel space. IF they can get into Marriott’s OTA negotiated rates, that could slash costs further by (i) moving bookings to lower commission channels like Marriott.com and (ii) lowering commissions on the OTA business from (I’m guessing) 18-20% to 11-13%. Conceptually, this should be a property level game-changer, subject to one big ‘If’ – Marriott’s infamous Module 14 Fire & Life Safety Standards, which would entail expensive renovations/retrofits, with the odds being that Sonder would have to eat those costs. 🧯 

I have my doubts, though. Marriott’s well-established brands are as close to ‘set-it-and-forget-it’ as you can get in the hotel space from a reservations system contribution perspective, but here you’ve got a (i) a brand w/ little broad-based name recognition (ii) a group trying to manage as lean as possible – with the average property just 45 keys and needing to cut $10M of corporate overhead. To me, that means Sonder may not have the hands needed, let alone the expertise, to pull the reservation system levers or work the global sales org correctly to get the reservations flowing through those well-built pipes. And it is existential that Sonder gets this right FAST, as otherwise they’ve got a [REDACTED 😢]% - I’d expect to be between 7-10% - of Gross Rooms Revenues flowing out the door to Marriott at a time when they’re bleeding money.

For Marriott, this reads like a flier on an upstart with essentially zero investment.  The $15M of Key Money – $1,667 per key on existing or $1,429 per key if you include pipeline – can probably be scrounged from the couch cushions in Bethesda. For a typical smartly executed Upper Upscale hotel, I’d expect them to be in the $15K/ key range. Plus, they don’t have to pay it unless Sonder gets their financial ducks in a row, so this may end up being pure growth. If I’m Tony Capuano, a true-blue deal guy, I do this deal 10 times out of 10. 

Will Sonder be able re-toggle the PIK or sell $42.5M of Pref?  Seems like a fairly tall order just to avail of the $7.5M key money. Then there’s the J Collection lawsuit: I don’t know anything beyond what is easily google-able, but one thing that is easily google-able is that Joe Jaeger, the owner, died in a car accident in June. I’d imagine any settlement there ends up being held up in whatever trusts / estates / courts down in New Orleans handle those things, and that never happens quickly.

If the rest of the liquidity items in that $146M nugget are this hard to come by, Sonder may not have bought itself nearly as much runway as they want you to think.

That gets me to the crux of it.  I think Marriott – very, very cheaply – bought themselves an option on Sonder getting their shit together. And while I think this helps Sonder, I’m not sure it’s the panacea implied by a 130%+ stock jump. The business model of lease arbitrage in hotels is still fundamentally bad (see: LuxUrban) and until they can figure out how to pivot to either brand and/or management or actually owning the real estate, I think they’re a helluva lot more likely to be a zero than the $1.9B+ from when they IPO’d. 

But that’s just like, my opinion, man.

Service with a Smile

Wells Fargo is getting out of most of the CRE loan servicing game, selling a $475B book of business to Trimont. The acquisition of Wells’ non-agency 3rd-party commercial mortgage servicing business catapults Trimont to the top (from 10th last year, per MBA) of the CRE servicing charts, w/ $715B of loans under management.

Värde Partners, the investment manager that owns Trimont, is bankrolling the transaction. Värde’s head of RE Jim Dunbar threw out yet another Wall of Maturities 😍 estimate, telling Bloomberg that $2T of debt would come due in the next 3Y, making servicing a very promising growth biz. The bulk of the loans coming over from Wells are CMBS, including CRE CLOs. Wells, which has been Ozempic-ing its business lines, will continue to service its 3rd party-agency and government-sponsored loans.

Quickies

• The Promote podcast: Tell us how you want it to be 👂️ 

• Slammer time: Chicago developer gets 32 mos. in alderman bribery scandal 🎬️ 

• “Construction worker gossip retrieval” is my new fave phrase

• Fortress on top: CRE CLO distress rates by issuer

• More RFR SMH: Misses 🎈payment for Lower Manhattan tower (Further reading: Trophy hunter Aby becomes the hunted)

• Starwood looks to sell office towers in meh Austin market

• Analysis: How Fed rate cuts can impact CMBS maturity fail rates 

• Tishman Speyer spent $300M+ on Rock Center glow-up

• More Shaya Prager foreclosure troubles in Chicagoland (catch up on his fuzzy math here)

• SY dynasty Nakash subpoenaed in Nightingale scandal (Bisnow nicely fleshes out a scoop from The Promote) (And here’s a primer on 🐐 contender Elie Schwartz)

Unquotable Quotes