Industry Update
Opinion Article 8 May 2020

Hotel Asset Management – In Good Times and Bad

By Hank Fonde, Senior Director at CBRE Hotels Advisory

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The practice of asset management for hotels entering the third decade of the 21st Century has evolved into an intricate process of analyzing layers of data and operating results, and then acting based upon the conclusions. The process requires great focus. Asset management is the practice of managing the value of the owner's investment. And now that process becomes more urgent, but also more important than ever before.

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When we began writing this article, it seemed that a relevant analogy would be to create a theme based on the year 2020 with perfect vision on increasing asset value. What a convenient theme that would have been. However, the Black Swan interrupted (and changed) everything. We don't even know what the changes are, but we know they are coming at us at the speed of light.

The theme of the article had to change, and hotel operations and asset management had to react with a great deal more than a pivot. Asset value has been decimated (at least for the present) and now the question is, "How and when can it be restored?"

Thirty years ago, asset management was rare in lodging, other than owners watching out for their own interests, usually inhouse. Of course, financial institutions and lenders had their own asset managers, but they focused exclusively on the performance of outstanding hotel loans or portfolios. That is, until a downturn occurred, and then they became managers of real estate owned (REO) until the assets could be sold, usually at bargain prices. Liquidating at discount levels is a contradiction to asset management, whose purpose is to maintain and increase asset value.

But then 30 years ago, revenue management was in its infancy, and the internet had not yet taken over as the platform for commerce. Nor had social media become a powerful force in marketing. Pandemics had not been a factor in business strategy. In today's world of multiple hard and soft hotel brands and boutique concepts, the lodging environment had already become complex for owners, operators, and guests. Now more complexity has been violently infused into the world of operating a hotel business.

Asset management is also quite different today. Gone are the days of simply "managing the manager," replaced by an extraordinary level of collaboration. Asset management has expanded from operating oversight to navigating the asset through all cycles of its life.

At CBRE, we realize that asset management begins during the development of the hotel asset or during pre-opening and concludes upon exit. All asset management strategies are targeted and executed to maximize the owner's return. Today we get involved with clients in the early stages of planning their projects. We collaborate in developing the plan for the concepts and selection of the brand, and we assist in design and programming. We identify architects and contractors and provide objective analysis for selection. We assist in capitalization structure by providing analysis and discussion of debt and equity options. We identify and select partners, investors, and management companies. And then, yes, we represent ownership interests in operating the business(es). All of these tasks are united in that we protect and honor the owner's objectives. Add to that equation the new requirement of navigating through the climate changes of financial downturns and pandemics.

From the macro to the micro, the differences in our industry were already so numerous that it became hard to focus even within similar or same brand categories. You could argue that hotels have always been different individually, and even homogenized brands like Hampton Inn can vary wildly; however, the rules change when applied to independent and boutique hotels. And yet, as advisor to our clients, we field questions like, "What is the average flow-through that I can expect for my concept or brand?" The most likely answer is, "That depends." It depends on the multiple variables affecting the hotel's performance, not the least of which is the performance of the operator in addressing those variables. Asset management and flow-through are interrelated. Asset management enhances flow-through potential. This retention increases income and subsequently, asset value.

The old saying was that your hotel was as good as your general manager. Today your hotel is also as good as the team you build to oversee it and the effectiveness of the team's collaboration. Is a football team as good as its quarterback, or do team members and the front office have something to do with it? A great quarterback and a great general manager are certainly desirable, but to be effective, they still need the right system and the right structure. Today more than ever, it takes talent, but it also takes teamwork and oversight.

Hotels are unlike any other type of real estate. In today's world, when the financial statements are reported after the 15th of the following month, it's too late to correct the mistakes and quite often a trend is emerging from performance. Despite well-intentioned plans, a hotel manager's daily routine can often shift to reacting to the issues requiring immediate attention. It's difficult for an offsite owner to comprehend that the manager's priorities can often become divergent from the owner's. Asset management helps to keep operators focused on the owner's objectives amidst the countless and constant distractions. Contributing to the challenges with a pandemic or other Black Swan event makes it even more important to have above-property leadership in place and available. Strategic guidance is critical in the uncertain marketplace.

CBRE is fortunate to utilize resources not available to our competitors to deliver this knowledge and support to our clients. CBRE Hotels Research specializes in analyzing and reporting on both the historical and future performance of the lodging industry. We prepare a variety of forecast and benchmarking reports, as well as maintain extensive databases of hotel income statements and property prices. These reports and data provide the foundation for strategic planning by all who have an interest in hotel property financial performance, and they give us a significant advantage in operations oversight.

This process ensures the continual focus on increasing asset value. The value of asset management should be determined by the increase in value of the asset over the life of the asset. Successful asset management yields current and annual increases in value through revenue increases and expense control. The annual benefit of asset management typically covers the cost of its associated fees, but the more important measurement is the increase in value over the asset life.

The life of a hotel asset can be viewed almost like a yield curve, beginning with planning and opening, navigating through the early years to stabilization, and then carefully curating the revenue and profit opportunities over the long haul. And now we are reminded, it also includes industrial triage during downturns. We must also remember that hotels cannot become endless annuities. The improvements age and deteriorate and require replacement. At some point, you reach the point of decline where capital replacement costs exceed profit potential. Asset management will call for an exit strategy well before this point, and in fact, most appropriately at the point of maximum value in a buyer's market. Nevertheless, the landscape is littered with asset relics whose owners failed to act strategically, perhaps because they failed to engage the enhanced leadership and guidance of an asset manager.

Hank Fonde

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