Hotel Asset Management Guide: Some Hotel Asset Management Best Practices

The role of the appointed asset manager is undeniably valuable for owners' whose properties are under the operation of a management company. The asset manager acts on behalf of the owners' interests with a core objective to optimize value and. Therefore, it is important for hotel asset management companies to remain aware of new skill sets and to be equipped with innovative practices to protect the objectives of owners. For this reason, we have been motivated to identify practices for hotel asset managers to leverage their owners' returns.

Principle 1: On the top line, the Hotel Asset Manager (HAM) needs to divert away from strictly focusing on Rooms strategies.

The risk of a hotel being treated as a commodity forces operators to solely compete on price, thus giving the hotel guests bargaining power. Hotel Owners tends to overlook opportunities to grow ancillary revenues and they can be strategically integrated with other facilities in the hotel's marketing activities. In this era, solely optimizing Room revenue is not an adequate strategy in the long run.

A qualified hotel asset manager will take a broader look at their revenue strategy and understand that it is imperative to optimise revenue in all departments, from rooms, to F&B, to spa, or any other operating revenue streams.

While it is vital to create a tailored segmentation strategy, it is also important to create value across all other operating departments. Asset managers must advise sales managers to map blueprints for each segmentation to understand individuals' needs and wants. For example, aside from maximizing room rates within each segment, the hotel must consider how they can encourage their guests to increase expenditure on other facilities offered at the property.

There are multiple ways to optimise ancillary revenues and asset managers may evaluate the decision to operate facilities in-house or outsource them. Many hotels underestimate the potential revenue that can be generated through F&B, viewing it as a department that supports hotel guests rather than functioning as a profit centre. Hoteliers tend to dedicate fewer resources and spend less marketing effort on maximizing the profitability of restaurants. They are often adamant about altering the F&B models, especially across large hotel chains and have yet to move away from the traditional model which typically comprises an all-day dining, room service, banqueting, and a specialty restaurant.

Principle 2: On the bottom-line, minimising expenses and capital expenditure does not lead to a high profit margin in a long run.

There are many cases where heavy investment is actually required to boost revenue and profit in the long-run. For example, the investment in lighting replacement from conventional bulbs to LEDs can be substantial. However, the payback period usually ranges between one and three years, as energy savings will increase to 75% - 80% with a lifespan of approximately 25,000 hours as opposed to 1,000 hours. Asset managers will understand that such an investment results in a high return on investment by saving costs in the long-run. Another capital intensive investment that is traditionally overlooked is the principle of investing in a hotel renovation plan to upgrade the property.

Renovation and refurbishment are some of the key drivers to improve the hotel's value. Sometimes, the Hotel Asset manager should not pressure the hotel operator to sustain high occupancies when the property needs a full refurbishment. The asset manager must initiate the refurbishment plan to stay ahead of the competition, allowing them to charge premium prices, increase revenue, profit and ultimately appreciate the value of the property.

In the case of a sale, the owner is always interested to increase the overall asset value. A good renovation plan will improve the Net Operating Profit (NOP) and consequently, the trading value. The key is to understand to what extent owners should invest in the refurbishment plan. Asset managers and hotel managers must be able to measure the impact of the renovation plan on the hotel's performance, image, positioning and value before sending the budget to the owners for approval.

Principle 3: On a tactical level, Hotel Asset Manager needs to analyse the hotel's positioning and competitive set instead of being overly reliant on the RevPAR index as the final performance metric.

The RevPAR index benchmarks a hotel against its competitive set and functions as a tool that allows the Hotel Asset Manager to evaluate the performance of the Operator. Operators have a tendency to select a favorable competitive set and may, for example, select competitors with lower star category or fewer higher room categories. The incompatible competitive set will boost the hotel's RGI and function as a false indicator of actual performance.

It is the hotel asset manager's role to conduct proper field research by reviewing the appropriate competitive set to position the owners' properties correctly. They are required to gather benchmarking data from the competitors and from Smith Travel Research (STR) reports. It is important to identify a suitable set of competitors at the beginning to provide a consistent base of measurement throughout the period of the Management Agreement. This will enable asset managers to understand the potential improvements and develop appropriate strategies accordingly. Performance evaluation should not be solely dependent upon the hotels' internal figures.

Principle 4: At a strategic level, Hotel Asset Managers need to properly implement the objectives of the owning company in relation to the acquisition and disposition of the hotel portfolio.

On a strategic level, the hotel asset manager must have the knowledge and understanding of the market to advise the owners on the appropriate acquisition and disposition strategies of their properties. In terms of acquisitions, mandatory preliminary research such as a feasibility study must be conducted in order to understand the level of expected returns.

Upon purchasing the actual asset, the Hotel Asset Manager must select the most suitable brand for the property. Not all brands are adequate for some specific markets and locations. The Hotel Asset Manager should understand the profile of the owner to select the appropriate operator.

During the life cycle of the asset, the asset manager should always keep the disposition strategy in mind. Multiple operational decisions can be postponed or advanced depending on the moment that the Owner is determined to sell. Understanding the hotel investment market is a determinant factor to effectively execute a sale. An example for a successful divestment strategy is Tata-owned Indian Hotels Company (IHCL)'s decision to go asset-light back in 2016 by a near-total equity exit from the Bermuda-based Belmond. The monetization of a 90-year-old property in Boston alone helped the group earn 1,250 crores, equivalent to approximately 193 million USD – 12 times the profit before tax reported in the previous year. This helped them to clear their debt partially.

The hospitality industry has been undergoing enormous changes in the past years and is predicted to accelerate in the future. Hotel owners see the lucrative investments but also voice concerns over their asset strategy, management and partner. For this reason, employing an expert in the field - a professional hotel asset manager is becoming more and more crucial for all types of owners, from individuals, to private equity firms and REITS.