Finding the management-ownership harmony
15 JANUARY 2016 6:59 AM
A management company’s success can come from truly understanding ownership’s goals.
Global hotel transactions during the first half of 2015 reached an eye-popping $42 billion—including $24 billion in the Americas, which is a year-over-year increase of 73%, according to a recent report from the Hotels and Hospitality practice of JLL.
U.S. private equity funds were a major source of the funding, according the report. But Chinese and Middle Eastern capital played an increasingly important role as well, totaling $9.8 billion, up from $2.3 billion in the first half of 2014.
Among these new owners undoubtedly are short- and long-term investors. Short-term investors might try to “flip” their new assets to different owners after improving profit-and-loss statements and making minimal capital expenditures. Long-term investors believe the market or the hotel’s location in the market offers potential, and they are prepared to invest now to ensure a return over time.
This purchasing frenzy likely will be followed by a round of management-company appointments, given that many hotels are sold unencumbered by such agreements. At very minimum, new owners will expect their new operators to bring a fresh perspective and hit the ground running.
Finding a good fit
From my perspective—based on decades of on-the-ground experience in hotels—it’s important that owners hire management companies that fully understand their business goals and objectives. This is true whether the owner is buying an existing property or building a new one.
A management company’s success truly revolves around a solid comprehension of those ownership goals and objectives because when management understands them then they know what they need to deliver. It is only after owners and management companies have a shared appreciation of the goals and objectives that all parties have clarity as to what needs to be accomplished and why it needs to be accomplished. This clarity is a powerful factor in ensuring a successful relationship. Often management companies are given lofty goals and objectives from ownership, but I think understanding why is critically important.
Frequently there is an underlying thesis as to why an ownership company has made an investment into a hotel and what it believes are the opportunities for the property. The more the management company understands these views, the easier it is for it to build around the goals and objectives to deliver success.
Responsible management companies rely on an action plan and benchmarks to measure their success. The more transparent that process is, the better. Should members of the management team disagree with owners on any issue, it’s to their mutual advantage for the management team to speak up quickly so that the matters can be resolved.
Often, owners will have a stake in other types of real estate or other businesses. Operators need to understand upfront the extent to which these investments can affect the owner’s hotel assets. Operators should feel comfortable with that arrangement.
When owners are from another country or foreign investments are involved, language and cultural differences can complicate matters. The impact of an event in Shanghai or Mumbai can easily be felt in New York City and Chicago, affecting an operator’s ability to succeed. Thirty years ago, management companies, like the rest of the industry, kept a careful eye on their “backyard,” but the backyard was much smaller and more manageable.
The rise in popularity of mixed-use projects as a development model has added another wrinkle for operator’s vis-à-vis owners’ objectives. In a majority of cases, the mixed-use components are luxury hotels and high-end condominium residences, the sale of which often underwrites the cost of the hotel.
Marketing a mixed-use project holds the potential of blurring the lines of hotel operations and real estate sales. Owners and developers seek out a premium luxury hotel brand as a way of attracting potential condo buyers. It would be a mistake for any owner to think of the hotel as an “amenity” intended to drive condo sales. The hotel’s performance and return on investment should be judged within its comp set, not as a draw for condo sales.
Veteran operators also know that hotels cannot carry the cost of a mixed-use project if the residential units don’t sell. If the owner cuts costs that affect the hotel’s ability to serve the guests, the resulting failures could cost the hotel its reputation, especially if it is positioned as a luxury experience.
Finally, owners should know there isn’t a management company worth its salt that doesn’t keep an eye out for every opportunity to eliminate waste and streamline operations in ways that make sense. Experienced operators also know how to deliver the most efficient operating model possible.
These operators have developed programs, either on their own or with the help of outside experts, that examine how team members spend their time at work as well as the tasks they’re responsible for completing. Operators then set out to measure the time it takes team members to complete these tasks in an effort to identify the most efficient use of labor to deliver service.
Joseph (Joe) Berger is Executive Vice President & President, Americas for Hilton Worldwide. He is responsible for the operations functions of over 300 corporately managed Hilton Worldwide hotels and Hilton Grand Vacation resorts throughout North, Central and South America.
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