Hotel Asset Management Guide: The Budget Process
By Mariano Faz, Head of TFG Asset Management and Yung Dang, Assistant Asset Manager
The fourth quarter of every year is undoubtedly the busiest time of the year for all hotel stakeholders including operators, owners, and asset managers. The concerned parties will review, analyze and approve budgets for the following year. Challenges during the budgeting process will arise because they directly affect the operator's performance clause. As owners' representatives, it is imperative for asset managers to revise and challenge processes, but also motivate the operator to work diligently to generate the optimum and realistic returns for the following year, taking into consideration past performance and external market conditions.
Upon receiving the budget, the asset management team is required to analyse the figures, from the top line to the bottom line, covering capital expenditure and operating expenditure. The asset manager is required to review the year-end rolling forecast and establish a detailed comparison to the previous year's performance and that year's full budget. In most cases, the first draft received by the Asset Manager is highly conservative.
Once the asset manager has conducted a thorough analysis the owner, the owner's representative and the hotel operator proceed discuss the budget. The operator will protect their interests and will generally attribute any downfall in the segmentation to the market conditions. This form of justification would highlight any outstanding performance in the previous year as a result of specific conditions or one-off events.
Contrary to the conservative top-line forecast, the majority of CAPEX that we have studied in Asset Management generally exceeds the ones presented the previous year.
Another point of contention between the owner and the operator pertains to expense provisions. The operator often attempts to increase the provision each year, in order to ensure that the property is maintained to brand standards. In contrast, the owner is primarily concerned about managing expenses. The asset manager functions as an intermediary, ensuring that the investments are mandatory and cost-effective.
The conversation during the first budget meeting revolves around top-line revenues. The majority of operators normally forecast conservative growth, which raises the probability of achieving the year-end target and fulfills the performance clause. Hotel owners, on the other hand, prefer more optimistic figures. In order to assess proposed room revenues, the asset manager is required to compare last year's performance against the budget for each market segment and question any major discrepancy in segmentation for each season, or month.
The asset manager should compare the top 20 accounts productions and historical room rates during the previous year to the budget for each segment monthly. The presented budget should be a reflection of the strategy and positioning of the hotel.
Another controversial point is the profitability of the F&B outlets. Hoteliers actively market the rooms through different channels, but tend to dedicate less effort towards marketing their restaurants.
If the asset manager identifies any major discrepancies in trends throughout the years, they are advised to query the data and propose a solution for rectification. The life cycle of a restaurant is generally shorter than that of a hotel; therefore, the concepts in place at the hotel must be regularly reviewed by all parties involved in the budget negotiation process.
After having analysed the top-line revenue, the next point of contention revolves around the expenses. The asset manager must review the expenses across each department on a monthly basis. It is imperative that asset manager maintains an asset management model so that the data can be extrapolated and used to make informed decisions. For example, operating expenses are relative and be comparable if translated into a ratio which quantifies the expense against the number of occupied rooms (i.e budgeted utility cost per occupied room versus the previous year. Any major variance must be questioned to the operator).
Fixed charges requires particular attention, and comprises the license fee, insurance, rental fee, management fee, FF&E etc. The asset manager must review the contract to review the management fee and ensure that the percentage allocation is correct based upon what the operator is projected to achieve. In addition, the appointed asset manager must also verify that the FF&E allocation is consistent with the terms specified in the Management Agreement.
The hotel's vision and strategies are discussed throughout the budget meeting, based on the projected revenue and expense figures. Conflicts will arise as the operator and owner may not agree on a firm strategy. Items which are important to the operator may not necessarily be prioritized by the owner. This further highlights the importance of the asset manager in managing each party's perspective and influencing the strategy for the year ahead.
The first round of budgeting is the most time consuming, while modifications to the budget should take a maximum of two weeks. Corporate or regional teams will revise the draft before presenting it to the owner and asset manager. Unresolved issues and further revisions of the changes in the first draft will be addressed during the second budget review. The third draft submitted to the owner is normally the final version, although it is possible for the owner to make some minor changes. Ideally, the budget should be approved and closed before 31st December.
This article provides a brief review of budget round tables and what can be expected during the process, which can take up to three full months, given the time that elapses from receipt of the first draft until the closing of the budget. The asset manager and the operator enter several rounds of negotiations to discuss strategies behind the figures presented.
Upon the asset manager's approval, the final budget will be submitted to the owner. Most often, if the owner appoints a credible asset management company, there will not be any resistance from the owner in approving the budget in a timely manager because the asset manager would have undertaken a comprehensive analysis.
Assistant Asset Manager
Phone: +971 4 455 0100
Fax: +971 4 455 0200