World Panel
Viewpoint 3 August 2020

In Step: Owners and Operators moving forward, together (or not)

Hotel Ownership, Development and Management

— 11 experts shared their view

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This viewpoint was created by
Demian Hodari, Associate Professor of Strategic Management at the Ecole Hôtelière Lausanne (EHL)
Peter Norman
Senior VP, Acquisitions & Development at Hyatt Hotels Corporation

There is no magic wand or a specific solution that fits all situations today. Regardless of the type of contractual relationship the parties should be communicating on a regular basis and working together to find the solutions that work for both parties if their relationship is to stand the test of time.

Robert Herr
General Manager at The Bürgenstock Selection

The unexpected arrival and consequences of the pandemic for owners, operators and managers (OOMs) has shifted focus from just running a profitable business and generating net returns for owners, operators and managers to now having to secure long term liquidity and to a large extent even solvency for the business. The race for survival has already started and in this race each party can only survive longer if they can meet and strive in the following environment: effective governmental support systems, strong balance sheet of their business and a mind set that previous responses to world crisis are not enough and a complete new approach is required so that all parties come out of the crisis in a stronger position than before they entered the pandemia. The longer the pandemia lasts - and that is a real possibility - the more these support systems will be strained and alone are not enough to ensure survival. see more

OOMs can only achieve this gargantuan task if they work closer and more transparent together than ever before. Each party will have to understand what the other party requires in order to survive as a business whilst ensuring that their own business model does not become an "endangered spieces". It will require relinquishment of certain table stakes that underly and support the different business models. OOMs need - at least for the time that the pandemia dictates the travel terms - align their own rules and contractual terms between them in order to secure survivability for all. This has to remain priority number one and only then new and better adapted business models in response to such drastic events can develop. There is no winner in this race if one benefits to the detriment of the other party and only then will stronger relationships between all stakeholders emerge to better withstand such crisis in the future.

David Bowd
Chief Executive Officer at Salt Hotels

Stringent revenue management is the key now to a faster recovery, many markets are not seeing rate resistance and yet rates are dropping as a knee jerk reaction or panic. Be prepared previous booking patterns are no longer relevant and a new pattern will emerge (for many showing very last minute reservations). Flexible cancellation policies are critical to encouraging more reservations in an ever-changing landscape.  see more

For the future I think diversity in market segments and nationalities should be a primary focus, Having all your eggs in one basket does not aid a speedy recovery if those markets or regions are suffering or delayed in their recovery. Also, a focus on local / drive business can also aid a speedy recovery both in room sales and Food & Beverage.

Philip Bacon
Senior Director, Head of Planning & Development and Valuation at Horwath HTL

In the short term, financial survival and building consumer confidence are the key issues for both owners and operators. Take a long, hard look at the impact of re-opening or staying open. Is now the time for renovation or change of use? Discounting doesn't work. It didn't work after the GFC and both operators and owners need to be aligned in creating a sustainable revenue strategy. Focus on adding value and providing specific packaging that addresses what guests really want right now. Review cancellation and deposit policies to reduce exposure to volatility in consumer demand brought about by government intervention. Don't reduce the marketing budget; communication with customers, old and new, will be vital as the market comes to terms with a new world order for travel and tourism. see more

In the medium term, operators should focus on maximizing and delivering profits, rather than revenue – will EBITDA per square meter finally become the key metric? Owners will have to become more agile in agreeing to make changes to, and invest in their assets. Listening to the market will be even more important for the business plan. Change in consumer behavior is a constant factor for almost any business, but the expected changes in global travel trends and in consumer needs and wants will have a life-changing impact on both business and leisure tourism. 

Marco Rentsch
Managing Director at PwC’s Global Hospitality & Tourism Center of Excellence

The current situation is likely to speed up several trends we have seen before C-19. Firstly, owners will likely want operators to take on more risk. As a counterbalance owners will need to support operators in adjusting their service offering. This follows the increasing trend of convergence. see more

Secondly, operators will have to innovate to leverage existing infrastructure and human capital, offering services beyond the confines of the assets they manage.

Moreover, operators will have to optimise their cost base. Entering collaboration models for staffing and procurement and distribution beyond levels seen today.

Post C-19 sales of non-performing assets will likely introduce new players in the market, fulled by private equity “dry powder”. Also, groups with strong balance sheets will likely use the situation to further grow their portfolios.

In order to prepare for the next down-turn investors and operators will have to be more realistic and balanced in the underwriting process. However, considering the severity of the current crisis it is unlikely that investors, other than private equity players and expert section investors, will have significant appetite in the sector. Hence, naturally decreasing the over-supply driven by capital seeking unrealistic high yields we have seen pre C-19. After a market “clean-up” the sector could therefore be in an attractive position. For demand to return both owners and operators have to lobby their respective lawmakers. The focus should be on a sensible lifting of travel restrictions to happen as soon as possible. They should also negotiate other relief/support packages such as VAT decreases, and/or continued support with conditional loans. Such support, however, should only be targeted at businesses which have done their home-work pre C-19.

Anne-Marie Auriault
Founder & Managing Director at Pimlico Asset Management, and Independent Board Member

Owners and Operators are in a long-term relationship, and a good dialogue is key among the parties.
However, owners are likely to be the party who pick up the bills, which is a greater burden for them at the moment. see more

As partners, they have been reaching accommodations on the use of FF&E reserve for rolling costs of business, staffing level, extension of temporary fees relief, manage and control operational costs. There are also several relaxations on brand standards and extension of Product Improvement Plans (PIP) deadlines.

Additionally, some owners are also using their termination rights to renegotiate their agreements with their operators.

It is crucial to remain flexible and agile, and there will be tensions in the next coming months to keep a low-cost structure in order to recover from the current crisis.

Peter Szabo
Senior Associate at HVS Hodges Ward Elliott

Beyond ongoing operational measures, which in themselves may result in a permanent reduction in fixed costs, owners and operators are having a close look at how sustainable the allocation of risk and reward is in their relationships. Many owners who have capped their returns in the past through fixed leases, in exchange for limiting their risk in theory, have found that in the world of COVID-19 they ultimately have to share the pain and are not always receiving their expected fixed incomes. see more

As they can no longer view their asset as a risk-free investment, many owners will reconsider the real operational risk they are assuming and the reward they are getting in exchange. The result is likely to impact European hotel operating structures in two ways, both of which will help make our industry more resilient and speed up recovery in the future: 1) Increased securities demanded from leased hotel operators (e.g. higher guarantees, higher rent coverage ratios and a closer look at an operator's covenant strength), and 2) More variable leases (as opposed to fixed leases), to ensure owners are compensated for the operational risk they are assuming. 

Alex Sogno
CEO - Senior Hotel Asset Manager at Global Asset Solutions

All stakeholders need to review the business model. 1) All invoices and contracts with should be reviewed, renegotiated or cancelled. Since 2008, we accumulated cost, which can be cancelled during this challenging period. 2) In addition, the payroll (largest expense in hotels) needs to be constantly reviewed versus pick-up in room, but also in F&B, and other operating departments. 3) The profitability by outlets should be checked every day. 4) Budget zero should be prepared for 2021. 5) In terms of revenue, the RM will also need to train the team for more upselling/cross-selling to ensure we maximise the opportunities on each guest.

Scott Woroch
Partner and Managing Director, Kadenwood Partners

Hotel owners and hotel operators need to work even more closely together to survive the unprecedented challenges of the Covid-19 pandemic. Hotel operators must establish procedures that prioritize the health and safety of employees and guests, in a highly visible way, in order to generate consumer confidence. Given that travel is to a great extent limited to local and regional, operators should mine their loyalty programs and stay histories to create targeted offers to those local and regional guests.  see more

Hotel owners need to "hang on" -- work actively with their lenders, equity partners, and with local and national governments to patch together economic solutions that will carry them through 2020 and into 2021, until a vaccine is readily available, and the public is more willing and able to travel. There is no single "silver bullet" that will guaranty survival; those that do survive will do so as a result of their creativity, flexibility, and adaptability.  

Dominic Seyrling
Director – Investments at Archer Hotel Capital

People are probably tired of hearing that this crisis is different than any other before. However, for anyone in the hotel industry it does one thing – it puts the brand, the manager, and the owner in the same boat, and that's a first. When no revenue can be generated, our fixed cost businesses all run a loss. see more

This means that, for what is hopefully a short period of time, the interests are aligned and for the most part all stakeholders are working in tandem to dig themselves out of this hole. I don't want to say the short term is not a concern. With our hotels running daily losses it clearly is. However, my eyes are firmly set on the future and I truly hope that the current crisis will have a fundamental positive impact on our industry.

Brand managers have only now admitted that their own support infrastructures are too heavy because they have historically not paid for them. Dried up revenue-driven cost reimbursement fees are harshly exposing the problem leading to huge lay-off rounds. Sadly, these lay-offs are necessary to keep many companies afloat. In my view this is the one-time opportunity to adjust our respective business models to create an environment of less friction, ultimately for the benefit of the customer. My hope is that COVID 19 sharpens everyone's senses and the focus going forward will be for the brands to focus on developing the best brands, the operators to adjust business models to keep them efficient in a sustainable way and owners to make sure they are on financially sound standing (without leveraging up when leverage will be available again) to withstand then next crises. 

Saar Sharon
Managing Director at West Ridge Asset Management

Owners and operators must automate the check in check out and arrival process including keyless entry to rooms. Up-sell and cross-sell digitally. Reduce staff costs and reduce F&B activity be that through breakfast in a bag, reduced breakfast menus, closure of restaurants and reduced hours of service and simplified Menzies. Break even costs must come down! see more

Convert unused meeting and F&B space to other uses.