Optimizing for dual success of operators, asset manager
Optimizing for dual success of operators, asset manager
06 JUNE 2016 8:19 AM

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.

Irreconcilable differences?
“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.

 The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Columnists published on this site are given the freedom to express views that might be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.


  • weldonmather June 6, 2016 10:59 AM Reply

    Great article, the crux of the issue is that hotel schools are only belatedly running asset management and investment appraisal modules, and they are still electives. Until this becomes a mandatory core element of the education of future hospitality professionals, there will always be a knowledge gap between the operators and the real estate professionals. Asset managers will always be in demand to bridge this divide, which is probably a good thing in that they act as arbitrators and negotiators, and can bring logic and compromise to bear on sometimes intractable positions.

  • Max Starkov - HeBS Digital June 8, 2016 1:24 PM Reply

    Very timely, highly relevant article! The misalignment of interest between asset managers/owners and operators is even more obvious in how distribution costs are being accounted for. OTA Commissions (Ex. Booking.com; Expedia’s agency model, etc.) are accounted for in the property’s financial statement as COGS in a single line item titled "travel agent commissions," with no differentiation from brick-and-mortar travel agents’ commissions. Merchant OTA commissions do not even hit the property P&L. COGS are deducted from gross room revenue before NOI (Net Operating Income) is calculated. This “unlimited commission potential” allows OTA bookings to grow exponentially without being restrained by the property budget, which as we will see below, isn’t the case with direct online bookings.

    Direct bookings and their distribution costs (ongoing website technology upgrades and content optimization, dynamic content personalization, reservation abandonment programs, hosting, SEO, paid search, online media and retargeting, first-party and real-time data marketing, email marketing, social media engagements, consulting, etc.) come from the Sales & Marketing Budget, which is a line item in the property budget.

    Across the HeBS Digital hotel client portfolio, the average brand.com distribution costs were 4.5% in 2015. Compare this to the hefty OTA commissions of 18%-25%. So it is extremely ironic that the most cost-effective bookings – from the direct online channel, are severely restricted by the property’s sales and marketing budget, while the most expensive bookings – from the OTAs with cost of distribution of 20% plus -- are not restricted and can grow exponentially.

    It is time for asset managers/owners to start scrutinizing operators based on ProPAR (Profit per Available Room). This will introduce an unparalleled distribution channel transparency about the cost to acquire each booking, and will allow owners and managers to focus on and prioritize the most efficient and cost-effective distribution channel . In addition, cost of direct distribution via the property website should be treated in exactly the same manner as OTA commissions i.e. as COGS and deducted from the gross room revenue before NOI is calculated, thus unleashing the property’s ability to adequately fund the direct online channel efforts, boost bookings via the property website and drastically decrease OTA dependency.

  • John Smith, CEO, HTL Capital Advisers June 8, 2016 5:02 PM Reply

    There’s only one thing more bizarre than the owner of a hotel being prepared to sign away for 20 years or more, its right to make decisions about the management of its own asset – and that’s the preparedness of a secured lender to sign away its right in foreclosure to remove an underperforming hotel operator, by granting a non disturbance agreement to the operator! Rick’s incisive and well written article summarises what many advisers in the industry have been saying about hotel management agreements for decades, but the truth is that there’s no point blaming operators – they have simply created and perpetuated a great business model (for them). Owners have only themselves to blame for the present status quo by continuing to sign up to what, from an investment viewpoint, are often stupid operating agreements. And its not from a lack of options, at least for those owners prepared and able to do something about the problem, because franchising offers a form of partial solution, as does operating independently and even growing one’s own brand in the process. Some owners can’t or wont do this because they don’t have the experience or interest in investing the time and effort in learning how to manage their hotel asset (or hiring others to do it for them in house) – which of course goes to my point again that some owners (and their lenders) really get what they deserve. But in the end it’s all just as well, or else smart asset managers like Rick would have to find another career!

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