NATIONAL REPORT—The role of asset managers is often a complicated one. With the industry continuing to see strong fundamentals, Hotel Business in its March 7 issue wanted to get a perspective on how asset managers are addressing their responsibilities in the current environment and what expectations are for the months ahead.
To continue the dialogue, here on our website, we’ve put together a virtual roundtable to further explore what some leading asset managers and their companies are experiencing. Participants include Erik Johnson, VP, Benchmark Owner Advisory Group; Anjali Agarwal, EVP/asset management, The Chartres Lodging Group LLC; Larry Trabulsi, SVP, CHMWarnick; Jeffrey W. Dugan, COO/SVP, Condor Hospitality Trust; Jeffrey Kolessar, SVP/development, GF Management; Michelle Russo, founder/CEO, hotelAVE; Richard M. Niedbala, SVP, Lodging Capital Partners LLC; and Matthew R. Arrants, EVP/Pinnacle Advisory Group.
HB: How would you describe today’s dynamic among owner, management company, brand (if one) and the asset manager? Are you agreeing or disagreeing more with their efforts? Why? Why not?
Johnson: For the benefit of the owner, the major dynamic to be concerned with is between the management company and the asset manager. The combination of the two should equal something greater than three if all are acting toward a common goal. The brands set rules to work within and should provide a revenue spigot that the duo mentioned above needs to take full of advantage of.
Agarwal: The brands have oversight of hundreds of hotels. As owners and asset managers, we’re always pushing the brands to focus more on our portfolio of assets: How can we get more of their marketing dollars to promote our hotels? How can we get the global sales managers to direct more leads to our hotels? How do we increase exposure of our hotels in the eyes of the customer? The continuing emergence of new brands presents a challenge. The customer needs to know and understand what the new brand represents. Additionally, the brands tend to move slower when it comes to developing and adopting new technologies so this is an area where we continue to push them. On the other hand, recently the brands have introduced aggressive measures to regain control of their inventory and maximize direct bookings, which we are huge supporters of.
Russo: While the owner/asset manager/operator relationship remains strong and collaborative, the changing dynamic is the continued new-brand proliferation in response to developer appetite and brand growth objectives (as evidenced by the above average supply in many top 25 markets). New development activity is expected to moderate substantially and conversion activity is expected to increase. Brands are continuing to push conversion brands and soft brands, increasingly contributing key money and mezzanine financing to grow in target markets. Unfortunately, we are seeing brand saturation in markets where a brand family manages over 25% of a market’s supply, evidenced by challenges in achieving RevPAR premiums versus just fair share.
Niedbala: Brand/management company and owner/asset manager dynamics are seemingly always advancing. New technologies, demographic shifts and contemporary interlopers create differing challenges and opportunities for brands as well as for owners. As in the past, the brands and managers are generally more willing to want to entice guests with the latest and greatest technologies or experiences on the market while ownership continues to want to understand how much money will be made. As such, I do not believe we are disagreeing any more or less than previously, just that what we are disagreeing about is new.
HB: What aspects of asset management are the greatest challenges for your company?
Trabulsi: Consolidation of the brands, leaving fewer options for owners’ brand proliferation and focus by the management companies on growing room count for fee revenue, continued emphasis by management companies on occupancy versus ADR.
Dugan: Getting the right kinds of business in the hotels and finding balance in the market mix and stability of the asset. With a somewhat uncertain future, balancing base business with rate growth can be challenging and requires good coordination with the owners and management companies. As well, understanding the labor challenges and how to combat those in ways other than “everyone gets a raise” is key.
Russo: The greatest challenges in asset management come from the external environment. The current economic slowdown driven by the declining/lack of corporate profit growth most negatively affects business travelers (both transient and group). There’s an increased focus from companies on saving money on travel, as well as cutbacks and/or greater enforcement of travel policies. Rising economic and geopolitical risks, weak inbound international travel and strong U.S. outbound international travel due to the strong dollar and weakening global economies are especially hurting Top 25 markets. All of this is exacerbated by increased new supply, especially in the Top 25 markets.
Arrants: Dealing with brand standards as part of renovations is currently a challenge.
HB: How are you hedging against the anticipated cyclical slowdown?
Johnson: Diversifying market segments where opportunities allow. Looking at creative and non-typical org charts and job-shaping opportunities. Deploying technology to save labor and other expenses.
Agarwal: Over the past several years, we’ve prepared ourselves for the eventual slowdown or end of the cycle by creating asset-specific contingency plans that reflect tiered savings based on how aggressive we need to get to preserve bottom-line profit. We also have a “best practices” database that includes creative ways of solving a problem, as well as successful ideas that would benefit from being shared across our portfolio.
From an acquisitions perspective, while turnaround investments continue to be our sweet spot, we’re looking at deals that have a relatively quicker or minimal turn. We’re also maintaining relatively conservative leverage levels that will enable us to withstand a potential slowdown.
Trabulsi: We continue to be laser-focused on not increasing a hotel’s fixed-cost structure, even with volume (occupancy) at record highs. For example, for most of our hotels the 2017-budget process focused on not adding new management or supervisor positions. Additional focus is on job-sharing and cross-training, so that hotels maximize flexibility and keep solid talent fully employed during a slowdown.
Kolessar: Building a strong backlog of group business is a solid start, but we are also taking a harder look at brand capital requirements and design specifications. Both the timing of the next significant renovation and the negotiation of the specifics of design—elements that actually increase consumer satisfaction or lead to higher net RevPAR—must be open for discussion. As we move toward flat, or modestly declining, RevPAR performance in the face of new supply and economic uncertainty, asset managers need to have a strong focus on the long-run impact of requested capital spending.
HB: What are your words of advice for owners concerned with maximizing value?
Trabulsi: We frequently find ourselves in a position where we are recommending “spending money to make money.” Making money can be on revenue-generating ideas (like costs to turn non-revenue generating space into revenue-generating space); projects that are defensive (like a room renovation in a highly competitive market or one with new supply); or projects that can save money (like investing in energy-saving projects, like LED lighting). Each initiative can be looked at on its own merit, but the need to be flexible and able to re-invest in the property is critical to maximizing value.
Dugan: If you are buying now, know that you have to stay in for a while. The time to make quick money on turnarounds is past in most markets. As well, the uncertainty of the political situation is a great unknown. The delta between owner expectation of value and buyer expectation of pricing is wide right now and is not likely to change for awhile so deciding strategy on your asset is key.
Russo: We are in a dislocated period. Future group-demand booked continues to be less than same time last year; corporate demand is also down versus same time last year, with transient buoyed by leisure (similar to the trends in the last downturn). Investors also are concerned about cost of debt and LTVs have shrunk. New supply is above average in the major markets. There is not a deep buyer pool for assets. Given these fundamentals, it is not an ideal time to sell. To maximize value, it is time to retrench, focus on operational and ROI opportunities with quick paybacks and revisit an exit in a few years.
Niedbala: Do not be afraid to look at your operation from a different perspective. Realizing what has worked in the past may not be the best course of action. Competitors figure out how to sell against your hotel, your operator should be doing the same things. Look for underutilized real estate within your hotel. Keep in mind that the storeroom in the back may not be a new coffee bar, but moving the element of your operation that could a coffee bar into that space works just as well. Be creative.
Arrants: Hire a great asset manager.