The Role of a Hotel Asset Manager
20/03/09 06:45 Filed in: Article
“Why do we need an Asset Manager, when there is already a hotel manager, a management company, a hotel brand and many other players to keep hotel owners up at night knowing they are paying fees to a whole bunch of people? Well, in a nutshell, the Hotel Asset Manager, or at least a good hotel asset manager looks at all facets of a hotel investment and guides the hotel owner to maximize hotel asset value in all manners that can be affected.”
- Sanjeev Misra
President
As our industry is a few months into what many economists are predicting will be the worst hotel RevPAR performance period in decades, many hoteliers have begun to look inside. Yes, I do mean into their hearts, minds and souls, but also into their internal operations. People have a variety of issues this year from finance related issues such as high leverage debt or loans coming due, as well as, significantly declining cash flows with no return to better profits on the horizon for quite a while.
This is when the hotel asset manager enters the phone booth, puts on his or her red cape and comes out to work.
I should probably step back and first enlighten our readers to what an actual effective asset manager does. For many years, I did not know what the role of the hotel asset manager was. Why do we need an asset manager, when there is already a hotel manager, a management company, a hotel brand and many other players to keep hotel owners up at night knowing they are paying fees to a whole bunch of people? Well, in a nutshell, a good hotel asset manager looks at all facets of a hotel investment and guides the hotel owner to maximize hotel asset value in all manners that can be controlled. Shown below is a little chart we use in our asset management proposals that shows all the areas where hotel value is affected:
A hotel asset manager needs to understand the owner's objectives: Is this a long-term investment? Is current cash-yield most important or total return? What risk-return profile is the owner willing to take? What is the cash position of the owner to withstand the fluctuations in capital markets?
With this profile information, the hotel asset manager can guide an owner to the optimal financing for their situation, can determine when is the appropriate time to sell a hotel given all market and internal variables, and can also guide capital improvement decisions. For example, just getting the lowest cost of financing is NOT the measure of good financing. The true measure is that the financing has the duration, flexibility, recourse requirements AND pricing that matches owner's objectives. We arranged financing for many of our clients in the previous two years when we were able to obtain floating rates at a cost of Libor + 150 to 175 basis points. These loans are now at effective rates below 2.5% in today's current market conditions. So even with economic times depressing revenues, our clients interest payments are in some cases less than 35% of what they were a year ago.
This is also a challenging year for owners who have seen 20% declines in revenue lead to almost a 20% decline in net income levels. What happened to income flow-through percentage? What operators are seeing is that that final 20% in revenues, that was great in the last few years, flowed directly to profits with little increase in operational expenses. The opposite is now occurring with revenue declines leading to almost linear declines in net income. Owners need to determine if they want to sell their asset now and take a hit on sales price or put additional capital into hotels to counter negative cash flows. Expense Reduction is also where hotel asset managers must earn their salt. In a year like 2009, no fixed cost should be considered a fixed cost. Hoteliers must look line by line into their P&L and determine what fundamental changes they can make to preserve their profitability. Since revenue increases will be challenging this year, we have moved quickly to impact expense items immediately. We have recommended radical things to our clients in 2008 and 2009, from outsourcing housekeeping operations, to cross-training staff and re-defining manager roles to renegotiating every single service contract and product pricing at the hotel. With creativity can come cash flow!
Shown above are only a few examples of where the asset manager should be involved and accretive to an owner's returns. At all times, a hotel asset manager's role and objective is to increase hotel value, in its most simplistic definition that means that we are increasing net operating income or increasing your hotel sales price.
If you have a hotel asset manager that is only sending a pretty report each quarter re-stating your Profit and Loss statements in pretty graphs and verbose language, then perhaps it is time to get a new asset manager. If you do not have a hotel asset manager and are facing some of the issues stated above, it is probably time to give us a call to see how we can help. Paramount Lodging Advisors Asset Management has reviewed hundreds of hotels in virtually every hotel brand family and every hotel segment. We have seen the worst of the worst and the best of the best. We bring our shared experience, education and acumen to our clients with proven success.
On average, we have helped our clients identify cost savings and revenue enhancements that increase NOI by at least 15%. We have an innovative and proprietary scorecard that ranks and measure the performance of the hotel management company in quantifiable terms so you truly know if your manager is doing a good job. Our scorecard also compares the hotel performance on both revenues AND expense performance to true competitors and your franchise brand averages to show you if there is real opportunity to improve your operations.
At the end of the day, to remain profitable and successful in 2009 and beyond will require hoteliers to re-focus their attention on the specifics of operations, structure and strategy to maximizing their investments in the hotel industry. The best hotel asset managers give hoteliers another discerning eye and larger 'tool belt' to work with and effect real change at their hotels. A good hotel asset manager, simply put, will increase the return on your hotel investment.