Daniel Beider examines management company portfolio growth for Hotel & Motel Management
12/01/07 21:13 Filed in: Article
FOR IMMEDIATE RELEASE:
Daniel Beider examines Management Company Portfolio Growth for HotelMotel.com
February 12th, 2007:
Portfolio growth: expanding reach for management companies
It is no secret that new investors have entered the hotel industry at record numbers over the past few years. They often take shape as high-net-worth individuals seeking to take advantage of the 1031 exchange process and foreign investors looking to make an entrance into the U.S. real-estate market. What is notable is the significant effect this has had on management companies.
Unlike most other property types, a hotel is a unique operating business that happens to be housed in real-estate and therefore is fairly management intensive. This management-intensive environment is unfamiliar to investors who traditionally deal in retail, industrial or even office submarkets. Because they typically have little to no management experience, these new investors need to retain or obtain third-party management. In today’s accelerated deal market this can mean rapid and significant portfolio growth for management companies.
It can be doubly profitable for management companies who own assets and sell them to these new investors. They are able to free up equity, are often retained as management and have the option to pick up additional management contracts.
“Not only does it allow us to stay involved in a successfully managed asset of which we are intimately familiar, but we have been able to get creative and provide a greater opportunity for the buyer to have its return thresholds met,” said Mike Nanosky, president of Janus Hotels & Resorts. “In a recent case where we sold an asset, we were not only able to achieve the intent of retaining management, but were quickly able to add two additional management contracts with the same buyer.”
Communication is Key
There are some pitfalls of this process that management companies need to be wary of, including the exit strategies of buyers. Most buyers who retain management look for the ability to sell the property without a management encumbrance. If cap rates remain low or possibly push lower, these investors might be enticed or influenced to sell their assets to achieve quick gains. There is no guarantee that management will be retained long term. It is important that the buyer and the management company are on the same page when it comes to both short- and long-term goals for the property.
“It is not beneficial if the owner is most interested in the short-term cash flow or gain while the management company wants to manage for the long-term quality of the asset and the bottom line,” said Barry Perkel, director of real estate at Raymond Management. “Additionally you have to have really good, consistent communication of what the material issues are going on at the property. Really it’s a matter of communicating consistently and being honest and open.”
That being said, it is no wonder why management companies have been able to work so well with these new investors. Because they are new to hotel real-estate market, these new investors are used to and are willing to accept lower short-term returns in exchange for long-term growth than would hotel development entities or a management company investing in an asset. Because of their lower thresholds and a reduced sensitivity to management and brand encumbrances, these new investors act much like institutional investors. For management companies, this means that the investors’ expectations of long-term growth stability are communicated up front and they are left alone to do their job. For investors, this means they can invest their funds and step back and watch their assets’ worth grow without putting forth the time and manpower required to support a daily operating business.
Surfs Up For All
This new wave of investors to the hotel real-estate market has made the waters surfable for both large and small management companies. While large management companies have started to hire new business development personnel or have joined in raising funds likely to grow their managed portfolios, smaller firms have been able to take advantage of the single-asset buyers using 1031 money to enter the hotel market. Once the smaller management companies are able to prove themselves to and develop relationships with these new investors, they can grow their portfolios as their investors do the same. In the current investment environment, growth is imminent.