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Ownerto Owner OWNERTO OWNER Flying High: A Conversation with Tyler and Rebecca Morse, Owners of MCR Hotels FAMILY BUSINESS ISSUE TABLE OF CONTENTS 01 A Letter from Jeff Meskin 02 The Business Environment FEATURE Flying High: A Conversation with Tyler and Rebecca Morse, Owners of MCR Hotels 08 Contributors How to Begin Approaching Formal Governance Jeff Meskin Thomas Martin, CFA as a First- or Second-Generation Family Business Grant Smith Christine Hourihan Jacob Turner Maddy Pellow 16 Travis Dunn Nick Maglio Editors: Jacob Turner and Kaitlin Barbour Designed by BBH Creative Services | LETTER Dear clients and friends, I hope you had the opportunity to spend time with family and friends over the holiday season as the year came to a close. We look forward to continuing to serve you as 2020 gets underway. Jeff Meskin / Partner It bears repeating that Private Banking’s mission is to help our clients achieve their vision of success for their family, wealth and business. To do so, we offer clients the full suite of BBH’s comprehensive solutions for families and private companies, ranging from our multi-family office services—including investments, values-based wealth planning, trust services and family office solutions—to offering corporate finance advice and equity and debt capital to private and family-owned businesses. No matter the objective, Private Banking creates customized solutions and offers the highest levels of service to help clients comprehensively achieve their goals, while leveraging the full power of the BBH network of business owners, advisors and investors. Within BBH’s Center for Family Business, we work with companies across industries and at all phases of own- ership from founder-owned and managed to cousin consortiums with outside professional management. We find that the lifecycle of the business often dictates the work we do with clients, whether that be management or ownership succession planning, employment policies, governance and communications, distributions or any combination of these topics. This edition of Owner to Owner features an interview with a husband and wife duo who own and operate over 100 hotels across the United States. Tyler Morse is the founder and CEO of MCR Hotels, which primarily owns branded hotels in 27 states in the U.S., and his wife, Rebecca, is his creative partner. In addition to branded hotels, together they have also developed unique hotel properties, including The High Line Hotel, originally built as student housing for the General Theological Seminary, in Manhattan’s Chelsea neighborhood, as well as the newly opened TWA Hotel, which is housed in the old TWA terminal built by Howard Hughes at JFK Airport. In the feature interview, Tyler and Rebecca discuss leaving no detail behind in their development of the TWA Hotel, which transports its guests to the year 1962, down to the Saarinen midcentury-modern furniture, rotary phones and Tab sodas. They also cover growing and scaling the business, applying design and creativity to hotel spaces, taking advantage of multiple revenue streams in hotels and what it’s like working with a spouse, among other topics. In addition, this issue covers a topic on which we regularly advise clients within our Center for Family Business: creating a family business governance structure for the first and second generations, written by Travis Dunn and Nick Maglio. As always, my colleagues, Thomas Martin, Grant Smith and Christine Hourihan, address the business environment on three fronts: the economy, credit markets and mergers and acquisitions and private equity markets. We hope you enjoy this edition of Owner to Owner. If there are any family business, corporate advisory, banking, wealth-related or other topics you would like to discuss from this issue or otherwise, please do not hesitate to reach out to me or one of my Private Banking colleagues. We wish you all a happy new year. Sincerely, OWNER TO OWNER 1 | THE BUSINESS ENVIRONMENT Thomas Martin, CFA / Investment Research Group Grant Smith / Corporate Advisory & Banking Christine Hourihan / BBH Capital Partners The Business Environment In each quarter’s issue of Owner to Owner, we review aspects of the business environment on three fronts: the overall economy, the credit markets and the private equity (PE) and mergers and acquisitions (M&A) markets. The following article addresses both positive and negative economic data as of late, the continued accommodative lending environment and the fiercely competitive private equity market. 2 The Economy While the economy appears on solid footing overall, the manufacturing sector is under more stress. The ISM Manufacturing PMI rebounded The U.S. economy continues to hold up quite well despite ongoing slightly from a decade low of 47.8 in September to 48.3 in October. macroeconomic headwinds. On balance, economic data leading up However, the ISM is a diffusion index and levels below 50 are con- to fourth quarter 2019 has been positive, equity prices rose to all- sistent with contraction in the manufacturing sector. The weakness time highs and fixed income markets appear more “normal” with an in the manufacturing sector is consistent with weak global growth upward sloping yield curve. and lingering trade uncertainty. At the end of October, the Federal Open Market Committee (FOMC) As discussed in the third quarter of 2019, we believe that the Con- lowered the federal funds rate for the third time since July, seemingly ference Board’s index of 10 Leading Indicators (LEI) provides the completing the Fed’s 75 bps “mid-cycle adjustment,” bringing over- most balanced, forward-looking gauge of economic activity. While night interest rates to a range of 1.50-1.75%. With this adjustment, many economic indicators display more noise than signal, the LEI’s the yield curve returned to its normal upward-sloping shape, and fears 10 components (shown in the nearby table) have proven to be a of a yield-curve induced economic slowdown were quelled. valuable forecasting tool over multiple economic cycles. In the past U.S. Treasury Yield Curves three recessions that began in 1990, 2001 and 2007, the LEI began declining between 12 and 22 months prior to the start of the reces- 3.0% sion. As of September 2019, the LEI has been relatively flat, up 0.4% year over year. There is no guarantee the LEI will prove to be as good 2.5% 2.42% 08 Nov 2019 2.08% a forward-looking indicator this time around, but given its history 2.0% 1.93% and the broad base of data it includes, we still believe this index is 1.75% 1.73% 1.95% worth consulting. d el 1.5% Yi 1.58% 1.56% 1.47% 27 Aug 2019 1.38% Conference Board - Leading Economic Indicators (LEI) 1.0% 120.00 0.5% 100.00 0.0% 80.00 0 1 5 10 15 20 25 30 Years to Maturity 60.00 Source: Bloomberg, BBH Analysis 40.00 Economic data has been relatively positive. The economy added 20.00 128,000 jobs in October, which is impressive considering upward revisions to prior months, as well as the striking of 46,000 GM workers - 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 that reduced monthly job gains. As of October, the trailing six-month Economic Recession LEI Index average of payroll gains stands at a healthy 156,000, and the unem- ployment rate, at 3.6%, is just 0.1% above its recent low. The last Source: The Conference Board, Bureau of Economic. time the unemployment rate dropped this low was in the late 1960s. The Conference Board Leading Economic Index® (LEI) Beyond just payroll gains, wages have been climbing at a healthy clip 1. Average weekly hours, manufacturing as well, helping to drive growth in personal incomes. Heading into the fourth quarter, the year-over-year increase in average hourly earnings 2. Average weekly initial claims for unemployment insurance has been at or above 3.0% for 15 months. 3. Manufacturers’ new orders, consumer goods and materials 4. ISM® Index of New Orders In addition to employment figures, GDP growth was more positive 5. Manufacturers’ new orders, nondefense capital goods than expected with the economy growing at a 1.9% annual clip in the excluding aircraft orders third quarter vs. an expectation of 1.6%. In line with the positive data 6. Building permits, new private housing units on employment and wages, GDP growth in the prior two quarters 7. Stock prices, 500 common stocks has been almost entirely driven by personal consumption. Personal 8. Leading Credit Index™ consumption, which we believe is a more durable form of growth than 9. Interest rate spread, 10-year Treasury bonds less federal funds investment, net exports or government expenditures, contributed 10. Average consumer expectations for business conditions 3.0% to GDP in the second quarter and 1.9% in the third quarter. OWNER TO OWNER 3 The Credit Market U.S. Treasury Yields The Federal Reserve’s October decision to decrease its fed funds target 3.3% range by 25 bps for a third time in 2019, represents an unexpected shift in interest rate expectations from the beginning of the year. As shown 2.8% in the nearby chart, the Fed’s last meeting of 2018 had FOMC voters’ 2.3% expectations for interest rates ending 2019 at an average rate of 2.875% (representing only two rate hikes). However, as the year progressed, 1.8% expectations for interest rates took a more dovish tone as rate cuts were viewed as a more appropriate course of action by FOMC members, given 1.3% 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y30Y economic data uncertainty. 10/31/2019 9/27/2019 6/28/2019 3/29/2019 12/31/2018 9/28/2018 Fed officials have largely cited three reasons for trimming rates in 2019: Source: Bloomberg.
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