How Hotel Asset Managers Can Create/Add Value To PE Funds During A Pandemic
Co-written by Jedaiah Gwee, Vani van Nielen, Eliana Levine, Larina Maira Laube, and Paloma Guerra.
The damage inflicted by COVID-19 cannot be underestimated, it is imperative that hotel owners, including Private Equity (PE) funds stay vigilant and have aligned interests with all concerned parties. What better way than to engage the likes of a Hotel Asset Manager (HAM) who is an extension of the PE fund with relevant industry know-how and expertise. He/she will provide an array of services which can help the hotels navigate this period. For this to happen effectively, PE funds need to trust and have faith in their hired HAM to perform as it is a two-way street.
1. Impact of COVID-19 on hotels
Due to government restrictions and regulations, hotels have been closed and ceased operations. Owners have been pouring capital into their respective hotels to keep them afloat. Hence, they are making executive decisions with how the capital should be deployed, and they need someone to track the effectiveness of capital deployed. Many hotel operators and owners are at a loss of what to do. At the end of the day, both parties are looking to align their pockets towards profitability. As such, it is difficult for both parties to have aligned interests. This is where a hotel asset manager comes in handy.
2. What does that mean for PE?
In a time of crisis, especially a Global Crisis, PE may have investments in various sectors, various countries, and various regions with those countries. Exposure may therefore be impacted at different levels and to varying extents. Often, Private Equities have management contracts. When cash from operations was flowing, limited questions were asked. However, during crises where cash flows are disturbed, they need the assurance of ROI. Nowadays, with a HAM's close monitoring, regular and frequent forecasting, this ensures that each cent sunk into the operation is spent at the proper level. It is essential for close monitoring of revenue and cost.
Additionally, as Private Equities already have to struggle with a myriad of issues to cover (investors, loans, cash flows, covenant, legal) by having a HAM, there will be dedicated personnel with the industry know-how and expertise whose sole purpose is to ensure that the asset/portfolio is running smoothly with daily supervision done at the management level. Moreover, PE firms are hands-on owners who acquire assets that have value-added opportunities and show promise for upside potential, having a HAM will ensure those goals are achieved.
3. How can HAM assist the PE?
A hotel asset managers' role is to create value for the investors paying for their services. During this time, experienced HAM, who went through the different crises (SARS, global financial crisis..) or as part of HAMA where they shared experiences will be able to clinically diagnose and solve any underlying issue faced by the hotel. They will be able to assess and assist the investors in defining the short, medium- and long-term objectives for the asset/portfolio. Scrutinize operators plans for recovery, objectively pull them apart and ensure upside and downside scenario testing is applied.
Also, HAM will represent the interest of the owners (PE), without any conflict of interest. More specifically, brands are interested mostly on revenue, whereas management companies on GOP or EBITDA depending on their contract. The HAM objective is aligned with the investor's creation of value and cash flow. Additionally, the HAM will look at all revenue/cost opportunities even the ones that are beyond the knowledge of most hotel management companies (e.g., below GOP (rental space, insurance, lease/debt negotiations), or breakeven point analysis by outlets to determine the opportunity of opening or not).
Along with other monitoring tools, GOP flow-through/flex analysis will be needed to ensure that the operating team is "running a tight ship" and that the hotel is achieving better performances than the benchmark hotels. A crisis action plan, in coordination with the investor's objectives, will be negotiated with the operation and monitored by the HAM. Brand and/or management company support will be assessed, and HAM will ensure that the hotel receives all the attention it deserves. Changes or amendments to the hotel management agreement could be considered and negotiated on behalf of the owners. To deal with operations, weekly/monthly action plans will be looked at, along with CapEx, cash flow forecast, and daily liquidity management.
Conclusion
The crisis has come and gone, and they will come again. The expertise of asset managers are increasing, all the events past, present and future contributions to specific knowledge in handling hotels through different times that will come in handy for PE. With a global crisis, PE will understand that extreme measures must be taken. However, PE needs to trust that the asset manager is on top of their asset and deeply involved in all strategic and key aspects of it. In turn, PE can apply its own sensitivities to the outputs generated by the operator and tested by the asset manager, with confidence and so report out accordingly.
Glossary (words to add to your dictionary)
GOP Flow-through
- A KPI to gauge profitability growth as revenue increases (revenue conversion)
- Defined as the percentage of incremental profit that flows through to the bottom line from each incremental dollar of topline revenue
GOP Flex
- Measures the impact of profitability when revenue decreases (the profitability that is retained/saved as revenue declines
→ GOP Flow-through/Flex provides additional context when assessing a hotel's results. For example, it shows the performance of the operating team in terms of cost control given the revenue performance. These ratios can be used for room, F&B, Spa and any other operational departments.
Alex Sogno
CEO & Senior Hotel Asset Manager
Global Asset Solutions
