One of the greatest sources of conflict between operators and asset managers occurs because of operators’ lack of appreciation for hotels as an investment.
This is the first in a series of six articles on the topic of hotel asset management. These articles will cover a range of topics, with the ultimate goal of providing a road map for more effective and productive working relationships between hotel operators and asset managers. (In these articles, I will use asset managers as a proxy for hotel owners and investors.)
The nub of the problem
In my experience, one of the greatest sources of conflict between operators and asset managers occurs because of operators’ lack of appreciation for, or indifference to, hotels as an investment.
Let’s start with a peculiarity of the hotel industry: There is no other form of real estate where owners are required to cede so much control to an agent retained to act on their behalf. I can’t count the number of clients from outside the hotel industry who have sat, mouths agape, as they came to the realization that their hotel operator (especially brands) would control virtually every major operational decision, get paid as a percentage of gross revenue and assume virtually no risk. That model is nearly 50 years old and, while a few things have gotten better – incentive fees paid after an owner return, and varying degrees of approval rights – the basic template has not materially changed. Nor is it expected to change any time soon.
The misalignment of interest between owner and operator in this model is so endemic and has existed for such a long time that it has resulted in an institutionalized lack of empathy for (and understanding of) the investment/risk side of the equation by hotel operators. That is to say, what is missing in the owner/manager relationship is respect for the money.
Having been on all sides of the issue (operator, owner, developer, asset manager, advisor), it is my strong belief that to bridge the gap, operators must blink first. Of what use is a great stage actor without a stage or an audience to view the performance? Somehow, someway, operators (including onsite management) must come to appreciate the capital that builds their “theater” and act accordingly.
Where to start: The hotel business vs the business of hotels
Generally speaking, hotel operators (companies and individuals) are in the “hotel business.” The hotel business is about providing lodging and related services at various quality levels to various customer segments, hopefully (but not always) for a profit.
Because most brands/operators no longer own hotels, profit has largely come to mean gross operating profit. Valued metrics of the hotel business are revenue-per-available-room index, customer service scores, third-party rankings, employee engagement, performance to budget, etc. Under the “asset-light” paradigm, individual hotels have become little more than a stair step to grow the reputation, size and footprint of a brand/operator with the ultimate goal of enhancing the cash flow and value of the brand/operator.
At the GM level, even those who are well intended are often ill-equipped to think like an owner for numerous reasons. For example, they are not schooled in real-estate finance; they are born and raised under the brand umbrella; they have been sheltered from the consequences of their actions/inactions; they lack an entrepreneurial spirit; etc. GMs must endeavor to educate themselves in matters of real-estate finance and development.
Most owners are in the “business of hotels.” That is, the hotel is an investment that is expected to earn an appropriate risk-adjusted return. While hotel business metrics can be important in the investment success of a hotel, they are a means to an end, not the end. And the only relevance of GOP is whether it is sufficient to cover all the other costs related to owning a hotel plus debt service plus a return on equity.
“It’s my asset!”
“Oh yeah? Well, it’s my brand!”
How exactly do differing priorities manifest in conflict? Let’s examine the asset manager’s perspective versus that of the brand/operator.
What to do?
These inherent conflicts will not simply go away with wishful thinking. Some are simply inherent in the nature of the parties. Here’s a place to start: empathy.
- For asset managers, remember that the brand/operator was selected for a reason and they are your vehicle for executing the investment strategy at the property level. Be reasonable. Asking Ritz-Carlton to run PORs equivalent to a Marriott is unreasonable. Asking a brand to allow every owner to pick and choose standards means no standards exist. Is that really in your interest?
- For brands and operators, put yourself in the shoes of the owner. They have made an investment that put you in business in a given location. They have a “right” to make a fair return on that investment. Be their partner in that endeavor!
Richard Warnick is Managing Director and Co-Chairman of CHMWarnick (“CHMW”), the leading provider of hotel asset management and owner advisory services. The company asset manages over 50 hotels comprising approximately 21,000 rooms valued at roughly $10 billion. CHMW’s owner advisory services cover virtually every aspect of the hospitality industry, and all phases of a hotel’s lifecycle, including ground up development and repositioning. The company is currently providing development advisory services for client hotel and resort projects valued at over $3 billion. CHMW has offices in Boston, New York, Los Angeles, Phoenix, Fort Lauderdale, Denver, Minneapolis, and Honolulu. For more information, contact 978.522.7000 or visit CHMW’s website at www.CHMWarnick.com.
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