In a fast-changing hospitality world, with constrained revenues and rising operating costs, having a hotel investment expert at your side can make all the difference for achieving your investment goals. To this end, we present a practice that is widely used in the United States and which would benefit from being better known elsewhere: hotel Asset Management.
The scope of action of an Asset Manager has evolved over the last ten years to become a profession encompassing the expertise of experienced hotel executives, management controllers, management and corporate-finance consultants, and real-estate specialists.
What is the role of hotel AM today?
Its first role is linked to the economic activity behind cash flows: unlike an office building, the cash flows generated by a hotel are directly produced by a service activity. Hotel customers are looking for a client-experience that matches their needs. Customers are increasingly well informed and less captive, so hotel owners need to control the ability of their teams to deliver a suitable service at an acceptable cost. If the manager is a hotel chain, it will seek to meet its contractual obligations whilst developing its network, its profit and its market valuation. In this context, the Asset Manager must guarantee respect for the owner’s interests and become a powerful factor in rebalancing the relationship with the manager. To do so, he will implement regular actions ensuring a fair sharing of the value created:
- Ensuring that management complies with contractual provisions,
- Verifying that there are no conflicts of interest,
- Seeking to optimize available space,
- Targeting a satisfactory return on the CapEx requested by the manager,
- Challenging the budgets presented,
- Questioning, by being forceful in their proposals, the standardized approaches which are the strength of a chain but which are not suited to all situations because each market has its own particularities and many hotels are far from being 100% standardized products.
An Asset Manager with financial skills will also deal with non-operational issues related to the optimization of your investment (cash-flow management, tax optimization).
The second role of the Asset Manager is closer to that of a real-estate Asset Manager: because a hotel is first and foremost a building that houses multiple services delivered to its ‘clients’. Unlike an office building, the rental contract between a hotel and its customer is short and therefore highly exposed to changes in the customer’s needs and to the problem of obsolescence because the customer is rarely captive. Thus, hotels must undergo regular maintenance (maintenance expenses) and periodic renovations (CapEx). The role of the Asset Manager is to enhance the value of the real-estate investment by controlling the life cycle of the hotel product as well as the market cycle of the hotel investment.
When to recruit an AM?
The Asset Manager should be at your side as early as possible, from the conception of your project, and ideally before signing a management contract, because your contract can have wide-reaching, long-term effects on the value of your investment. A poorly designed project or a poorly negotiated contract can negatively affect the valuation of your assets sometimes by more than 25%. The role of the Asset Manager will be to support you throughout the conception of your project, the negotiation of the management contract, and the choice of the brand in order to optimize your investment strategy. Their role will also be to anticipate the levers that enable you to control and influence your manager’s performance and to ensure the alignment of your respective interests for the duration of the contract (15 years on average).
How should you pay your AM?
The total cost of the AM should be under 1% of turnover and the package should include a variable share that depends on the achievement of your objectives. The duration of an AM contract is between one and three years, depending on the goals to be achieved.
In addition to the comfort of knowing that your investment is ‘monitored’ by a professional aligned with your interests and the opportunity cost of saving money by avoiding bad decisions, you can expect a return on investment, depending on each year’s budgets and challenges, ranging from 5 to 15 times the contract cost at EBITDA level.
Types of Asset Managers
Most AM structures are entrepreneurial in nature. This allows direct involvement of the managers, who will provide you with tailor-made, long-lasting support with all the discretion you need in connection with this function.
Since AM is still new in France, it is often offered by major international real-estate consulting firms. These structures offer a range of services from consulting to hotel transactions. The advantage of these structures lies in the trust provided by their brand name as well as the possible synergies between Asset Management and the other available services (Project Management, Transactions, etc.). A major and frequent drawback concerns conflicts of interest connected to relations with hotel managers and the high turnover of staff in charge of your account.
The Asset Management function can also be performed in-house. This is a valid option if you have enough hotels to ensure a diversity of situations that will increase the expertise of your Asset Managers and avoid value-destroying staff turnover. The entrepreneurial spirit represents a second challenge that should be cultivated through motivating sharing of the added value created.
What is the profile of a hotel AM?
White or grey hair or bold in some case!
It takes at least 20 years of experience to train an Asset Manager, who must have multiple skills: hotels, real estate, financial, tax and legal. To all the above we must add indispensable behavioural and human qualities as well as a keen intellectual curiosity and an open mind to continue learning throughout their career.
Before choosing your Asset Manager, there are several boxes to check:
- Weight of the Asset Management activity: knowing the weight of the AM activity is crucial in allowing you to assess the commitment of senior resources and the absence of conflicts of interest with other activities, such as transactions for example. It is also advisable to check the distribution of resources between company-owned and third-party hotels in order to form your opinion on the commitment of senior resources to third-party owners and the quality of service provided to them.
- The breadth of expertise available in-house: it is not enough to be satisfied with the number of years of experience in senior management. It is up to you to verify the nature and diversity of the experience acquired, the specialities available, as well as the ability to deploy Asset Management techniques and the results obtained.
- Knowledge of your problems: it is advisable to choose an AM who is familiar with the economic and cultural environment of your assets, otherwise there is a risk of probable failure. Your AM also needs to fully understand your issues and be fully aligned with your interests.
- Management style: some AMs exercise their authority without tact and without moderation, drawing sterile opposition from the manager. A strategic AM does not seek to dictate conclusions but rather to develop them in a team spirit. They are not looking to replace the operator, simply to work in conjunction with them. Make sure to choose an AM that is a team player.
- Teamwork: it is important to check your AM’s mindset since no one person alone has all the required skills (management control, real estate, marketing, strategy, purchasing, revenue management, human resources, etc.). Individual work? Teamwork? Partnerships with specialists? Seek to understand the means used to achieve your objectives.
- Absence of conflicts of interest : beware of Asset Managers who have affinities with certain hotel operators. Although their contacts among key players and their access to new developments in the network may be an initial advantage, this advantage will soon be offset by the conflicts of interest caused by such proximity. Independence and competence are the real assets to look for in your AM.
Sentinel Hospitality hopes to have provided you with constructive insights that will inform your next decisions to build a lasting partnership with your future Asset Manager.
Example of assignments carried out by Sentinel Hospitality
- For the owner of a 5-star Boutique hotel in Paris: audit of commercial performance. Changing the organization chart. Drawing up the annual budget. Setting up budget assessment charts.
- For a hyper-luxury hotel group: setting up hotel cost accounting under USALI (Uniform System of Accounts for the Lodging Industry).
- For the owner of a Palace hotel in Paris: negotiation of the management contract and implementation of Asset Management procedures.
- For the owners of a Caribbean resort hotel: audit of competitive positioning and distribution. Driving the change in positioning and the optimization of EBITDA.
- For an institutional player: recommendations for the implementation of internal Asset Management processes.
- For a real-estate development company: assistance with the acquisition of a project to convert an office building. Development of the hotel concept, Best Use analysis of the ground floor and basement spaces, drawing up the provisional budget, valuation of the project.
- For a Private Equity fund: support for the investment decision by analysing risks, business plans and investment recommendations in a pan-European hotel portfolio.
- For a French institution: support during the renewal of a hotel lease, negotiation of the new lease, and financing of the works.
- For the owner of a Palace hotel in France: bank refinancing.
Sentinel Hospitality is an Asset Management and consulting firm which specializes in helping investors to optimize their hotel investments. We are involved in the complex phases of acquisition audits, contract negotiations with managers, performance and change management, and repositioning of hotel assets. Our operations stand out for their multi-expertise approach: strategy, real-estate valuation, finance and management control. Our experts use the most appropriate scientific and management techniques to offer you a tailor-made approach to optimize the added value created. We are proud to cultivate long-lasting relationships of trust with our clients based on a perfect alignment of our interests with their objectives.
Sentinel Hospitality conducts its assignments in accordance with the deontological and ethical principles of the Royal Institution of Chartered Surveyors (RICS).