Hoteliers should proactively ID and mitigate risks

Hoteliers should proactively ID and mitigate risks
30 OCTOBER 2018 7:31 AM

Asset managers should be on the lookout for declines in revenue so they can get ahead of them to protect their clients’ investments.

Since 2014, gross operating profit margins have seen a steady decline as fewer hotels are able to achieve both top- and bottom-line increases (see chart below). Asset managers must proactively react to top-line risk and create and implement profit preservation plans to maintain (and grow) profit margins. This piece highlights ways in which asset managers can get ahead of anticipated revenue declines to protect owner returns.

Step 1: Revenue risk identification
One key component of an asset manager’s job is to challenge forecasts submitted by operators and identify potential upside or risk to revenue. Upon receipt of the monthly forecast, asset managers should review the following reports to assess the credibility of the forward room revenue projections:
• transient/group pace;
• room revenue pick-up in current year versus historical going back another two to three years if unusual circumstances occurred in most recent prior year or significant holiday calendar shifts exist;
• current, on-the-books data for future months; and
• forward market performance and trends (STR, other market reporting tools)

Based on analysis of the above reports, it is essential to identify any mathematical risk by looking at the assumed pick up for the balance of the year, the market dynamics and effectiveness of the current revenue strategy, to name a few. The current month, as well as future months, should be examined. The below example illustrates forward risk identification.
Example: For the month of October, a hotel has \$500,000 of revenue on the books. The hotel needs to pick up \$250,000 of revenue to achieve the current forecast (and budget) of \$750,000. However, only \$150,000 of revenue was picked up same time last year (STLY), and the hotel is currently pacing \$50,000 behind same time last year. This highlights approximately \$100,000 to \$150,000 of revenue risk for October. Immediately move to Step 2, discussed below.
Step 2: Creation and implementation of profit preservation plan
If top-line risk has been identified, asset managers must work with hotel operators with sufficient time to create and implement a profit preservation plan, which outlines strategies by department to offset the top-line shortfalls and achieve appropriate GOP/NOI. As a rule of thumb, 50% GOP to revenue flex to last year and budget is expected (except in union environments where 40% may be acceptable due to difficulty in adjusting labor closer in). A sample profit preservation plan is below.
1. The risk mitigation plans are most successful when responsibility is assigned to each particular profit preservation item to maintain accountability (i.e., general manager, director of finance, director of engineering, etc.).
2. Categorize each initiative based on level of top-line risk (“high,” “medium,” “low”) and ease of achieving.
3. These plans should be a living document: quantified monthly, highlighting revenue enhancement/cost savings compared to budget/forecast, so NOI impact easily is understood in advance for cash management purposes.

In summary, forward revenue risk identification is a must and should be part of regular monthly reviews. Proactive is the name of the game; otherwise, there will be insufficient time to implement cost contingencies to react to revenue shortfalls.

Nina Kleiman is an EVP at hotelAVE and leverages her 25 years of experience in lodging asset management, operations, acquisitions, and consulting to develop and execute strategies to maximize each owner’s investment objectives. Kleiman leads and supports hotelAVE teams to deploy industry-leading asset management practices focused on revenue management and profit opportunities as well as real estate, capital, and contract optimization. Her asset management experience is based on success working with a wide array of hotels from luxury to midscale, both domestically as well as in the Caribbean and Mexico. Asset cornerstones include the proactive identification of value enhancement opportunities via detailed research, industry analysis, and benchmarking including the optimization of hotel positioning, brand, third-party partnerships, and hotel strategic alternatives.

Silvie Cohen is a senior director at hotelAVE and is responsible for a portfolio of assets, which includes preparing owner reporting and analyses, analyzing operational budgets, and driving revenue strategy to maximize top-line results. Cohen also focuses on improving hotel online presence and reputation, through implementing effective e-commerce strategies. Additionally, Cohen has assisted with disposition and repositioning services, as well as producing operational reviews. Since joining hotelAVE in 2014, she has helped maintain and improve portfolio wide reporting and benchmarking tools.

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