A good asset manager can offer hotel owners needed perspective and influence with brands and operators, among other benefits.
Editor’s note: The final topic of discussion in this series of articles on hotel asset management is focused on the criteria owners should look for when selecting an asset manager. Given the magnitude and implications of this decision, this topic will be addressed in two parts.
Asset managers come in lots of shapes and sizes, making it increasingly difficult to separate the wheat from the chaff. Before delving into selection, it is worth revisiting why an owner needs an asset manager in the first place. I believe there are at least eight compelling reasons.
Because of inherent and irreconcilable differences in goals and objectives, rarely is a hotel operator sufficiently aligned with an owner. This lack of alignment is especially acute with branded operators where the growth and protection of the brand almost always trumps the individual needs of a given hotel.
Hotel operators are, for the most part, focused on the “hotel business.” A good asset manager also focuses on the “business of hotels.” The perspective of balancing operating standards with owners’ financial objectives will rarely occur without the active involvement of a knowledgeable owner or asset manager. Perspective also relates to differences in time horizons. Except for group sales, where future bookings can extend well into the future, hotel operators are typically focused on the present (meaning the current year). Good asset managers are simultaneously looking at the present and planning for the longer-term investment horizon.
3. The law lie of averages
Attention swimmers! A man can drown in a lake with an average depth of one foot. Financial statements out of “experiential context” can be very misleading and provide a false sense of comfort. Let’s say an owner receives a financial statement showing, for instance, a 22% food cost-of-goods-sold. Is that good or bad? Generally, the answer is to look at the performance of other comparable hotels. But there are dozens of variables that impact COGS in food-and-beverage. So, one must start by knowing what their food cost should be (referred to as a “food cost potential”) because comparables are, at best, marginally relevant and, at worst, totally misleading. Even many experienced operating companies do not properly understand—or properly execute on—best-practices evaluation tools in key operating areas that have a material impact on the bottom line. And by the way, budgets are not an effective proxy since they are typically based on prior performance—which may not have anything to do with optimal performance.
4. Leveling the playing field
When there is an imbalance in the knowledge and experience between two parties, the party with less knowledge and experience is at a distinct disadvantage. In hotels, this manifests in suboptimal budgeting, misreading performance metrics, accepting poor excuses for sub-optimal performance, etc. And, as bad as it is to have an operator with unbalanced power/influence in the relationship, it can be just as bad for an unknowledgeable owner or underqualified asset manager to force their will onto the hotel’s operation, as it may actually compound a problem. An experienced asset manager levels the playing field—especially when that experience covers multiple brands and property types. Not only does the asset manager have knowledge comparable to that of the operator—they have the added benefit of a broader perspective. That is, they see what other brands and operators are doing and can accumulate best practices without prejudice.
5. Informed second opinions on key matters
By their nature, hotel operating agreements are living documents. Besides the major annual approvals of the business plan, there are multiple events throughout the year that require owners’ input and/or approval, including the all-important hiring of Executive Committee members. On what basis will an owner make such decisions if not through the involvement of a knowledgeable advocate?
Most individuals and organizations perform better when they have active oversight and are encouraged/pressured to improve. Naturally, that challenge can come from anyone, regardless of expertise. But as mentioned above, pressure for pressure’s sake is often detrimental. Where an owner has enforcement rights, an uninformed directive can have unintended consequences. Where an owner’s rights are limited (as is the case in most brand management contracts), a heavy-handed approach by owners can create intransigence or even vitriol in the owner/operator relationship. We have found that operators almost always respond favorably to suggestions/demands from those who have been in their shoes, especially when they are factually substantiated, thoughtful and intended to improve performance—not just criticize it.
7. Individualization versus one-size-fits all
Brands and management companies (particularly the larger ones) value efficiency over creativity. While this may be easier and more profitable for the brand/manager, it is not necessarily the best thing for an individual hotel. Even the best global systems and standards will not optimize the performance uniformly for all hotels. Every hotel is unique in some respects (especially from a market/marketing perspective) and a knowledgeable asset manager is the best way to ensure that the brand/manager thinks and acts creatively versus simply taking pages from the operator’s playbook.
Some asset managers are more influential with brands/operators than others. This is due to one or more of the following factors: the number of the operator’s hotels they oversee; the fact that they represent many developers and owners in selecting brands/operators; relationships with senior level executives in that particular company; and their successful asset management history with the operator. Such influence manifests in numerous ways that are advantageous to an owner. For instance, getting the best management team members the operator has to offer, being first in line for new (worthwhile) brand initiatives, and flexibility on standards that don’t make economic sense for a particular hotel.
The bottom line is that effective asset managers do what owners would do if the owner was an expert in hotel operations, sales, marketing, revenue management, F&B, industry trends/best practices—and had a solid working knowledge of real estate finance, hotel development, accounting, risk management, brand physical and operating standards and contract law—and had access/influence with the brand and/or operator of their hotel.
Part II of this topic will offer clarity on those characteristics that serve to define best in class asset management firms and key consideration for selection.
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 60 hotels comprising approximately 25,000 rooms valued at roughly $15 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, Phoenix, New York, Los Angeles, San Francisco, Fort Lauderdale, Minneapolis, and Honolulu. For more information, contact 978.522.7000, visit CHMW’s website at http://chmwarnick.com/or follow us on LinkedIn www.linkedin.com/company/CHMWarnick or on Twitter @CHMWarnick.
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