Asset Management is a journey in value appreciation exceeding the market norms and what standard Hotel Management and Brand Company relationships can deliver.

Fiscally, value can be created in two very simple ways:

1. Cost Cutting
2. Growing Revenues

Cost Cutting

Cost cutting is very straightforward and generally produces a one-time impact on financials. While cost-cutting may be justified, it is typically not material enough to create a step change in long-term values. Cost cutting can have the opposite effect, damaging product value, customer experience and the ability to drive premium revenues.

Asset Managers can identify and create efficiencies in hotel operations, which in the longer term, deliver a more sustainable solution to reducing overall costs.

Growing Revenues

Growing revenues is a journey that starts with pre-opening a new build hotel and it can occur any time you choose to challenge the status quo for established hotels.

Growing revenues through increasing market share is the most desirable outcome; increasing revenues, especially through RevPAR, is typically sustainable and will significantly impact bottom-line annual financials, creating asset value appreciation.

Usually, the task should focus on a two-to-three-year horizon and outcome. It requires the evaluation of the following:

• Current hardware and market/competitor fit
• Capital expenditure needs and opportunities
• Brand fit and the service/product offering
• Management skills and strategic abilities
• Current and potential demographics and segmentation of the consumer
• Product positioning and other repositioning opportunities
• Knowing when in the asset lifecycle to hold or sell.

The above requires a strategic vision and commitment by all stakeholders for change, challenge, and the desire for success.

Professional and experienced Asset Managers can develop the strategy and be the custodian of its implementation on behalf of the Owner.

Asset Management – Investment versus Cost

Some Owners view Asset Management advisory as a cost, which may be true if the engagement focuses on compliance and short-term outcomes such as that achieved mainly through cost-cutting. An Asset Manager whose sole directive is on costs would typically only need to recover less than one cent in each dollar of hotel expenditure to operate the hotel to compensate for their fee.

However, a progressive Owner will consider Asset Management as a strategic imperative to execute the plan and achieve their investment goals. Investments take time to mature, and strategic Asset Management is no different. Strategic change needs to engage all stakeholders, which requires time and commitment.

The value of strategy and the investment to support it is fundamental to achieving wealth growth. Businesses and individuals employ specialists, generally a “team” with complementary skills and backgrounds, not a single voice, to gain an advantage. Hotels should not be an exception.

Capital Value (Valuation) analysis

Two examples based on a three-year horizon

We highlight below the Capital Value analysis over a three-year period assuming a successful strategy provides an uplift to the hotel’s market share. This example assumes an incremental market share of 2.5% from an index (RGI) of 1.00 to 1.025.

We analyse this across two scenarios

• A 200-room hotel
• A 400-room hotel

Both have an annual occupancy of 80% and a room rate of $250.

Assuming the 200-room hotel currently has an EBITDA of $3.5 million (19%). At a Cap rate of 6%, the hotel’s Valuation is $58 million.

By achieving an increase in RevPAR of $5.00 (over and above inflation), the flowthrough to EBITDA would equal an improvement in Valuation of approx. $5 million or 9%, equating to over ten times the three-year investment in Asset Management.

Similarly, the 400-room hotel is estimated to have an EBITDA of $9.9 million (26%) with a valuation of $165 million, adopting the same Cap rate.

The same $5.00 RevPAR increase flowthrough to EBITDA would equal an improvement in Valuation of approx. $10 million or 6%, a return of around 20 times the three-year investment in Asset Management.

Summary

Achieving real asset value growth through market share gains requires a deep understanding of customer demographics. Who is your target market customer; what do they want; and how to deliver an experience that meets or exceeds their expectations?

It also requires an Asset Management team who, with experience and knowledge of the business, can influence the Operator to implement and drive the necessary changes.

Hotels should be something other than a commodity where consumer purchasing decisions reflect price rather than the value proposition and the overall customer experience. Experienced Asset Managers build the value proposition and reputation to drive premium rates based on actual value for the consumer, delivering financial success for the Owner. As shown in the simple examples above, such a strategy can bring significant value gains for a small investment.