Introduction
If you are the owner of a portfolio of hotels, you are undoubtedly already aware of Hotel Asset Management, and how it can increase the value of your investment; you probably employ or work with one or more professionals in the field. If they are members of HAMA (Hospitality Asset Managers Association) or ISHC (International Society of Hotel Consultants) they already know and use these techniques. In fact, several members have written or contributed to textbooks on the subject; others are reaching college-level courses on it. But, if you own a single hotel asset, or perhaps even a small group of hotels, you may not be taking full advantage of all the strategies and techniques that professional hotel asset management has to offer. This blog is for you. A professional asset manager, I have operated as Burr Company since 2004 to asset manage select hotels and assist owners with acquisition, disposition and value-enhancing strategies. My experience includes asset management of over $900 million of hotels, including Marriott, Hilton, Hyatt, St. Regis, Westin and Embassy Suites. Previously, I was a large hotel General Manager, a multi-unit Vice President, a Franchise Operations Director for one of the brands and a Principal at one of the leading hotel consulting firms. This Blog will set forth asset management “secrets” to help the single-hotel or small hotel group owner get more out of his or her investments.
First Secret: You Need to Have an Exit Strategy
It’s no secret to any hotel owner – or prospective buyer, or for that matter, to an army of brokers, lenders and consultants, that the hotel industry is a challenging place to be right now:
· Our national economy and perhaps much of the worldwide economy is reeling from the effects of the housing crisis, the retrenchment of the financial industry and the big run-up in the cost of oil. Unemployment is rising, inflation is threatening, businesses are cutting back and travel is slowing.
· Money remains available for financing, but interest rates are higher, and the terms and borrower requirements are much less favorable than they were. Lenders are again demanding personal guarantees, lower LTV (loan to value) ratios, amortization of senior debt from day one and greater debt service coverage.
· The cost of non-hotel elements of business travel: air fares, rental cars and business meals are escalating even more rapidly than hotel room rates. In the face of earnings pressure, at best, or declining profits, at worst, companies are cutting back on people, and on their travel and on their meetings.
· Leisure travel is being cut by the reality that more money is needed for necessities so fewer discretionary dollars are available. People are planning fewer vacations, and ones that are shorter and closer to home. Foreign visitors are still creating room demand in gateway cities but many domestic, middle-class customers are trading down in their choice of hotels.
· Hotel profits are under pressure, being squeezed between softening demand, and higher costs of labor, fringe benefits, energy and foodstuffs – to name just a few.
· Hotel cap rates have increased and values have declined. A willing buyer will commit to purchase only at a higher cap rate – a lower multiple of earnings. Frustrated sellers are reluctant to accept those offers because they are so far below what was quoted to them less than two years earlier.
The good times will return! Keep in mind that the hotel business has been and will continue to be cyclical. Though it lags by several months, hotel demand is highly correlated with national GDP. Just remember what happened to hotel business, and to hotel values following the September 11th terrorism events. The steep decline was later followed by far greater increases. Or go back a little further, to the times of the RTC crisis. At that time, lenders viewed a hotel loan about as favorably as cancer. I recall sitting in a bank lending officer’s office, with a hotel owner in the 90’s. The loan was current, and had been kept that way despite the hotel’s poor performance, because the owner, a former director of that bank, had dipped into his deep pockets to meet his obligations. But the term loan was due, and the owner was trying to renew. “No way!” said the loan officer, “we just are not making any hotel loans.” A less substantial owner may have lost the property at that point. Many did at that time. Fortunately, this one had other businesses and other resources. He got a new loan and invested more money to renovate the hotel. When the next up-cycle came, he sold it at a nice profit. Because he had a vision (of better hotel performance and greater value) and an exit strategy (a plan to sell at a target price) he cashed out of his hotel investments a winner.
Take a look at the real estate investment alternatives. Apartments and self-storage facilities appear to be making comebacks but retail is losing its luster, office buildings are mixed and industrial sites are questionable. Every one of those investments involves finding a tenant and signing a term lease. Only in the hotel business, if economic conditions permit, can you raise the rent every day. With the threat of higher inflation looming (and many say it is already here) where would you rather be? The latest forecasts from Hospitality Valuation Services (HVS) predict an average 8% increase in U. S. hotel values per room in 2009, followed by a rise of 17% in 2010 and another 8% in 2011. This follows value declines of 5% in 2007 and (forecast) 4% in 2008. During the “boom” period of 2004-2006, U.S. room value growth ranged from 27% to 21% annually. Indeed, “Timing is everything!”
Unless your name begins with “Sheik,” or perhaps “Warren,” you need to recognize, from the day you build or buy it, that will be out of your hotel investment at some point. Let’s look at some possibilities:
If you are the owner of a portfolio of hotels, you are undoubtedly already aware of Hotel Asset Management, and how it can increase the value of your investment; you probably employ or work with one or more professionals in the field. If they are members of HAMA (Hospitality Asset Managers Association) or ISHC (International Society of Hotel Consultants) they already know and use these techniques. In fact, several members have written or contributed to textbooks on the subject; others are reaching college-level courses on it. But, if you own a single hotel asset, or perhaps even a small group of hotels, you may not be taking full advantage of all the strategies and techniques that professional hotel asset management has to offer. This blog is for you. A professional asset manager, I have operated as Burr Company since 2004 to asset manage select hotels and assist owners with acquisition, disposition and value-enhancing strategies. My experience includes asset management of over $900 million of hotels, including Marriott, Hilton, Hyatt, St. Regis, Westin and Embassy Suites. Previously, I was a large hotel General Manager, a multi-unit Vice President, a Franchise Operations Director for one of the brands and a Principal at one of the leading hotel consulting firms. This Blog will set forth asset management “secrets” to help the single-hotel or small hotel group owner get more out of his or her investments.
First Secret: You Need to Have an Exit Strategy
It’s no secret to any hotel owner – or prospective buyer, or for that matter, to an army of brokers, lenders and consultants, that the hotel industry is a challenging place to be right now:
· Our national economy and perhaps much of the worldwide economy is reeling from the effects of the housing crisis, the retrenchment of the financial industry and the big run-up in the cost of oil. Unemployment is rising, inflation is threatening, businesses are cutting back and travel is slowing.
· Money remains available for financing, but interest rates are higher, and the terms and borrower requirements are much less favorable than they were. Lenders are again demanding personal guarantees, lower LTV (loan to value) ratios, amortization of senior debt from day one and greater debt service coverage.
· The cost of non-hotel elements of business travel: air fares, rental cars and business meals are escalating even more rapidly than hotel room rates. In the face of earnings pressure, at best, or declining profits, at worst, companies are cutting back on people, and on their travel and on their meetings.
· Leisure travel is being cut by the reality that more money is needed for necessities so fewer discretionary dollars are available. People are planning fewer vacations, and ones that are shorter and closer to home. Foreign visitors are still creating room demand in gateway cities but many domestic, middle-class customers are trading down in their choice of hotels.
· Hotel profits are under pressure, being squeezed between softening demand, and higher costs of labor, fringe benefits, energy and foodstuffs – to name just a few.
· Hotel cap rates have increased and values have declined. A willing buyer will commit to purchase only at a higher cap rate – a lower multiple of earnings. Frustrated sellers are reluctant to accept those offers because they are so far below what was quoted to them less than two years earlier.
The good times will return! Keep in mind that the hotel business has been and will continue to be cyclical. Though it lags by several months, hotel demand is highly correlated with national GDP. Just remember what happened to hotel business, and to hotel values following the September 11th terrorism events. The steep decline was later followed by far greater increases. Or go back a little further, to the times of the RTC crisis. At that time, lenders viewed a hotel loan about as favorably as cancer. I recall sitting in a bank lending officer’s office, with a hotel owner in the 90’s. The loan was current, and had been kept that way despite the hotel’s poor performance, because the owner, a former director of that bank, had dipped into his deep pockets to meet his obligations. But the term loan was due, and the owner was trying to renew. “No way!” said the loan officer, “we just are not making any hotel loans.” A less substantial owner may have lost the property at that point. Many did at that time. Fortunately, this one had other businesses and other resources. He got a new loan and invested more money to renovate the hotel. When the next up-cycle came, he sold it at a nice profit. Because he had a vision (of better hotel performance and greater value) and an exit strategy (a plan to sell at a target price) he cashed out of his hotel investments a winner.
Take a look at the real estate investment alternatives. Apartments and self-storage facilities appear to be making comebacks but retail is losing its luster, office buildings are mixed and industrial sites are questionable. Every one of those investments involves finding a tenant and signing a term lease. Only in the hotel business, if economic conditions permit, can you raise the rent every day. With the threat of higher inflation looming (and many say it is already here) where would you rather be? The latest forecasts from Hospitality Valuation Services (HVS) predict an average 8% increase in U. S. hotel values per room in 2009, followed by a rise of 17% in 2010 and another 8% in 2011. This follows value declines of 5% in 2007 and (forecast) 4% in 2008. During the “boom” period of 2004-2006, U.S. room value growth ranged from 27% to 21% annually. Indeed, “Timing is everything!”
Unless your name begins with “Sheik,” or perhaps “Warren,” you need to recognize, from the day you build or buy it, that will be out of your hotel investment at some point. Let’s look at some possibilities:
You are out of money [“the well is dry!”]
Either the hotel isn’t doing well or other investments aren’t performing or financing isn’t available. The hotel needs cash and you don’t have it or can’t raise it. This is what the brokers refer to as “a distress sale” and the selling price is going to be favorable only for the new owner.
The picture isn’t pretty [“it soon will be raining on my parade!”]
A new competitor is coming in – the brand is out of favor – the location is no longer prime – demand is declining -- the property is older and needs much upgrading and refurbishment – a union agreement (or the threat of one) or a legislative mandate such as a “living wage” or retroactively applied building code change has changed the economics – and so on. For whatever reason or reasons, a large outflow and/or a small inflow of cash are foreseeable. Clearly, this hotel will not produce the desired return on investment in the near or medium-term future.
My ship has come in [“here’s my pot of gold!”]
There are at least two versions of this: One is the “Greater Fool Theory” where a prospective buyer wants the hotel so badly, for whatever reason, that he is willing to overpay for it, giving you a handsome profit.
The second is where the land the hotel occupies has become so valuable that it makes economic sense to buy the property, tear the building down, and replace it with a different, more profitable use –shopping center, mixed-use development, offices, condos and the like.
The time is right [(again) “timing is everything!”]
The bulk of the tax benefit has been realized – Opportunities considered more attractive (or safer) are available – cash is needed for other purposes -- estate planning (or estate settlement) needs dictate a sale – the partners are arguing about objectives or future strategies. These are just a few examples.
If a potential or planned exit strategy is thought out, it can be modeled in a pro forma and the effects of various strategies considered and refined. The forecast and an asset management approach can then be utilized by the owner to increase his total return on the investment by:
o Managing the outflow of capital expenses (and maintenance costs) appropriately.
o Structuring financing and lease versus buy decisions for greatest benefit.
o Making short-term decisions on a host of other items, including service contracts, booking agreements, sales & marketing activities.
o Creating an audit trail of exceptional expenses to make a case to a prospective buyer as to why the net operating income (NOI) should have been higher.
Several hotel owning companies periodically do an exercise called a “re-buy analysis” on the hotels they already own. Considering present property and market conditions, new opportunities or potential threats that have arisen, capital needs, return on investment objectives and alternate opportunities available, would they buy that hotel asset today? Would they now revise their strategies from what was originally put in effect? If the answers are “No,” and “no,” perhaps it is a good time to recycle the capital and the property should go on the disposition list. A “harvesting strategy” is then put into effect: limit capital replacements and maintenance and, depending on the timetable and current status, either boost the sales budget or cut it back. This is a great asset management discipline that should be applied by any hotel owner on an individual asset basis.
A sound exit strategy, put in place at the time of entry, will greatly increase the likelihood that when you do exit your hotel investment it will be on your terms, to your advantage and that you will have increased your return during the holding period. This is the first in a series of Hotel Asset Management secrets.
Next: Make Sure the Right Contingency Plans Are in Place.
