Hawaii Hotel War: M Waikiki LLC, Marriott International, Battle for Control of Elite Waikiki Property

BY MALIA ZIMMERMAN – Most of the visitor destinations in Hawaii’s busiest caller hub, Waikiki, are hoping for sunny days, gentle surf, and a tourism boom in the islands.

But on the west end of Waikiki, there is a hotel war brewing full of surprise and intrigue that is being played out publicly in the media. And the hotel owners, managers, and employees are uncertain how the saga will end.

Early Sunday morning, M Waikiki LLC, which is comprised of 75 investors, booted Marriott International management executives from the property, changed the locks and renamed the 353-room luxury hotel from The Waikiki Edition to The MODERN Honolulu – all before sun up.

Later that morning, guests and hotel staff were informed by the new management firm, Modern Management Services, an affiliate of Aqua Hotels & Resorts, that its management is taking charge of the elite harbor front property.

Employees were scared by the surprise tactics and were fearful of losing the jobs in this down economy – but the new management company claims to have offered employees other than management the chance to retain their positions at their current rate of pay, original start date and accrued vacation. Benjamin Rafter, president and CEO of Aqua Hotels and Resorts, confirmed 220 employees agreed to make the switch.

But Marriott executives, who had a 30 year contract, didn’t leave quietly. Just hours later, on Monday, Marriott International, Inc. took its grievance to a New York Court, where a civil lawsuit filed by M Waikiki LLC against Marriott and boutique hotelier Ian Schrager is playing out.

The complaint asserts, “What defendants represented would be a fully supported new lifestyle hotel brand in the Marriott family of brands has turned out to be a nonexistent hotel chain.”

The lawsuit filed in May alleges that hotel owners have lost tens of millions of dollars since the hotel opened in October 2010 because of mismanagement by Marriott, and as a result, the hotel has “suffered from poor occupancy, a brand with virtually no identity, and Marriott’s unwillingness to control expenses.”

The lawsuit also gives insight into the company’s plans to secure nine hotels worldwide within the year, and up to 100 more soon thereafter, in partnership with Marriott, but owners said just one other hotel, a 77-room property in Istanbul, Turkey, has opened. According to the owner, a 2011 forecast prepared by Marriott projects staggering operating losses for the year of almost $6.4 million.

“Although Marriott has attempted to deflect responsibility for the hotel’s poor performance, the hotel’s competition has consistently outperformed the property. A recent report from Smith Travel Research indicates the hotel has a RevPAR (revenue per available room) Index of 47 percent year-to-date. Even in July 2011, as the local hospitality market flourished, the hotel had occupancy rates that were almost 20 percent below its competitive set and a RevPAR index of only 54 percent,” M Waikiki LLC said in a statement.

But the judge wasn’t sympathetic to the hotel owners’ plight. He granted Marriott a restraining order and ordered the hotel back under Mariott’s management as of 2:30 p.m. on August 31.

Arne Sorenson, Marriott International’s president and chief operating officer, called the process “trying, frustrating and confusing for our guests and employees” and promised to quickly take charge again.

But that wasn’t the end of the management tug-o-war.

M Waikiki LLC had a back up plan.

Wednesday afternoon, M Waikiki LLC filed for Chapter 11 Bankruptcy Protection, allowing it to affirm its termination of the Marriott contract, retain its control of the hotel, keep its new management company in place and reorganize its finances.

“In our view, filing for bankruptcy protection is the only prudent option for protecting our investment in this asset,” said Damian McKinney, principal of M Waikiki LLC. “We look forward to reorganizing as a new corporate entity, continuing the employment of a new management company, and making this a leading lifestyle hotel for guests and employees.”

Benjamin Rafter, president and CEO of Aqua Hotels and Resorts, said: “It is unfortunate the actions of the previous management company to mislead and confuse employees has complicated the situation. We will continue to operate The MODERN Honolulu at direction of ownership.”

But Marriott isn’t giving up and it plans to defend its reputation and its deal in court.

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