Marriott kicked out by owner of five star hotel in Waikiki

Early Sunday morning Marriott lost control of a Honolulu hotel that was part of Edition, a trendy new hotel brand the company is trying to jump-start. In a dramatic move, the owners of the Waikiki Edition in Hawaii said Sunday that in the early morning hours they installed new management and changed the signs and locks on the hotel to reflect a new name, the Modern Honolulu. The changes were made in spite of a contract that allows Marriott to run the hotel as an Edition for 30 years.

The move is the latest escalation in a legal battle that began this spring between M Waikiki LLC, the owner of the stylish but unsuccessful hotel, and Marriott. M Waikiki claimed in a lawsuit filed in May in New York Supreme Court that Marriott had failed to make the flashy new Edition hotel brand a success, resulting in the Waikiki location underperforming relative to its market. Marriott has filed a motion to dismiss that case.

Regarding Sunday morning’s action, Marriott Chief Operating Officer Arne Sorenson said in an emailed statement: "This is a deeply unfortunate, regrettable and illegal event. The owner and its partners raided the hotel literally under cover of night, forcibly taking over the property and threatening our employees with dismissal unless they immediately agreed to a change of management. We will aggressively and vigorously pursue all remedies against the owner and its partners in this illegal act, which was completely and blatantly in violation of Marriott’s contractual agreements."

William Brewer, an attorney for the Waikiki Edition owners, said that his clients have the legal right to terminate the contract because Marriott is mismanaging the property and causing them to lose money.

Marriott announced Edition in 2007 with great fanfare but has struggled to build the brand amid a sharp downturn in the hotel industry. Edition is a partnership with Ian Schrager, who is widely considered the inventor of trendy boutique hotels. At the time, Marriott predicted it would open 100 Edition hotels in 10 years. The new brand was designed to compete with Starwood Hotels & Resorts Worldwide Inc.’s W Hotels brand and hotel brands like it.

However, the hotel in Waikiki is one of just two Edition hotels that have opened. The other is in Istanbul. Now, Marriott is investing its own money to develop additional Edition hotels, an unusual move for a company that nearly always relies on third-party owners. The company is investing US$400 million in Edition locations in London and Miami Beach, Fla., which will open over the next year or two, Mr. Sorenson said in his statement.

M Waikiki, the Waikiki Edition owner, bought the hotel in 2006 for $112 million and spent more than $200 million to renovate it. M Waikiki is controlled by eRealty Fund LLC, a San Diego real-estate fund. The Waikiki owners allege the brand isn’t growing quickly enough, making the hotel a virtual ghost town, unable to keep up with competitors. Some observers say that, in addition, one challenge the hotel faces is that, unlike many successful luxury hotels in Waikiki, it isn’t directly on the beach.

The owners say the hotel has lost $8.4 million since it opened in October 2010, with occupancy just around 30% in the fourth quarter of 2010, far below the 62% occupancy Marriott predicted in August 2009. The loss projection for the remainder of 2011 were recently increased to $1.9 million from $1.2 million, owner representative Damian McKinney alleged in a letter sent Sunday to Mr. Sorenson of Marriott.

"Marriott has demonstrated that it is unable to attract an adequate volume of customers and at the [rates] necessary to make the Hotel profitable," Mr. McKinney wrote. "Manager’s failure to perform compelled Owner’s actions."

Mr. McKinney at 2 a.m. on Sunday hand-delivered a similar letter to the night manager on duty. Representatives of the hotel’s new management company, Aqua Hotels & Resorts, then came in to operate the hotel and Edition signs were quickly covered or changed to reflect the hotel’s new name, the Modern Honolulu, Mr. Brewer said.

Mr. Brewer said there is precedent for owners wresting control of hotels out of the hands of managers they claim are mismanaging the hotel and losing owner money. However, dismissing a hotel management company or brand can be difficult and costly.

One of the nastiest and most high-profile of owner-manager standoffs occurred at the former Four Seasons Aviara resort in Carlsbad, Calif., in 2009. Owner Broadreach Capital Partners—also a client of Mr. Brewer, the lawyer for the Waikiki Edition owners—sought to oust Four Seasons Hotels Inc. as the resort’s manager in a dispute over costs. But Four Seasons staffers physically blocked employees of Broadreach’s new management company from entering the resort. An arbitrator decided in 2010 that Broadreach had to pay Four Seasons an undisclosed fee to end its management contract of the resort. Broadreach subsequently converted the resort to a Park Hyatt.

Last month, another white-glove dust-up erupted when the owners of the Ritz-Carlton in Manalapan, Fla., near Palm Beach, sued Marriott, alleging that Marriott mismanaged the 310-room hotel and allowed its costs to mushroom out of control. Marriott said it "strongly disagrees" with the owners’ allegations and vowed to keep the property under its Ritz-Carlton brand.

from Wall Street Journal