Build, buy, hold or sell? Late-cycle owner strategies
This article was originally published on Hotel News Now.
Use this guide to determine which strategy you as an owner should pursue in 2018.
This year, some analysts talk about how the cycle is “getting long in the tooth” since we have been expanding for over 90 months.
Since the tourism industry is resilient and still growing, success is very possible for another several years. Further, 2018 will be very prosperous with the likelihood of tax reform, strong consumer confidence, a durable job market and a robust global economy.
If you’re considering whether to buy or hold a hotel today, the quality of your team is paramount. One operator cannot optimize revenues and expenses, make sales calls and handle the financial end of the business. Substantial due diligence is required to ensure the hotel has the right management, brand, renovation and business plan/budget. Hospitality might be an art, but it surely has become a science with revenue management, distribution-channel management, social media marketing, website development and much more. If building or renovating, an architect, designer, contractor, lawyer, brand, management company, engineers and lender are required as well as a great operating team.
In buying, I prefer a compelling story—a need for renovation, brand change or management change can get the numbers up. Changing all three can be a home run if you know what you are doing. A strong market and a healthy market mix with a strong base of business will ensure operating leverage. Operating leverage is created when fixed costs have been met and additional revenues “flow through” to the net income line.
There are five key areas that can provide the framework for success: location, product, management, marketing and financial structure. Location has everything to do with the submarket in which the asset competes. An area that has strong barriers to entry—government regulations, cost of land or other barriers—is a safer bet than an area where there is no limit to the amount of new supply coming in. Moreover, location refers to the market demand generators. A strong market should include multiple types of demand generators such as corporate, leisure and group that provide for the aforementioned operating leverage.
The second strategy for success is the product, which might include choosing the right brand. Marriott International, Hilton and InterContinental Hotels Group are three of the main hotel franchising companies. The “verticality” of brands—i.e. Marriott’s 30 brands, Hilton’s 15 brands—makes the market very complex. Additional critical points to review include system reservation performance, impact policy, recommendations from other franchisees, support for the property and growth of the brand.
Today, millennial travelers are helping us throw out some of the tried-and-true strategies of the past decade. Product quality is paramount to profitable operations, and independent, boutique hotels are enjoying a period of significant success. This, along with brands desiring to expand, has led to a plethora of new “soft brands.”
The third and fourth strategies, marketing and management, can be the difference between being able to pay the lender or not. Some firms are good at marketing and driving top-line revenue. Others are good at management and controlling expenses. Some charge back their corporate overhead, others charge only for direct property expenditures. It is hard to find that balance of good marketing and management, but it is very important. Interview a few firms and choose one that suits you best.
Lastly, it is virtually impossible to succeed without the proper financial structure in place. Today, first-mortgage money is typically low-leverage, averaging just 65% of acquisition cost, and less if it is new development. This might generate a need for a second mortgage or mezzanine loan; since this money is higher-risk, there is a premium attached to the rate. A structure today may be 65% first-mortgage debt at say 5.5% interest, 15% mezzanine debt at say 10% interest plus 20% borrower equity.
A return-on-investment analysis will determine if the project will succeed. This is the single most important element in the decision to purchase or build.
Many institutional funds and real estate investment trusts have invested in full-service hotels or in the urban, focused-service/upscale lodging sector. This leaves an opening for the entrepreneur today to look at turn-around opportunities or smaller, focused-service hotels, perhaps in secondary markets.
There are some key tenets for success that are clearly required, including persistence, hard work and honesty. Avoid mediocrity, move quickly with reversible decisions and slowly with non-reversible decisions, seek out committed people, review accountability for everything and do not be a spectator—get in the game!
So, if after reading this you feel like today requires too much work, sell—you should get a good price! Now all that is needed is the goal and a set of action steps to achieve the goal. If the entrepreneurial spirit lifts you, go for it! Have a great 2018!
Leadership in 2018
What will leadership look like this year? It’s not always the same each year. Yes, leadership books might provide the same basics of leadership skills and yes, leading by example is a great foundation, but today I am exploring the combination of mentoring, coaching, leading and managing in 2018. I recently posted my top 10 trends in 2018. These include technology, lobby design, local food sourcing and more. Clearly, as leaders, we must be aware of trends in our industry. After all, many of us do not have someone to ask, “what’s going on out there?” And it can be lonely at the top!
I usually need a trigger to pen something like this–my favorite work subjects are typically technology changes, economic forecasts, strategy, marketing or management. But I had a great trigger, a wonderful vacation that served to rejuvenate my thinking, improve my mindset and hone my workouts. It also allowed me to read three novels and three non-fiction, leadership books. It served to provide a foundation for my 2018 and I hope you gain at least one insight in my attempt to help your outlook on 2018 as well. If you do not gain any new information, at the minimum, please stop for a moment and appreciate what we have. We are blessed to be part of a noble profession that allows our guests to travel comfortably and our team members to make a living.
I started vacation with the book, Thrive by Arianna Huffington. She had a great passage that read, “when you are rested and focused, what’s coming next appears to slow down, allowing us to manage it with calm and confidence.” After all that occurred in 2017, I felt that passage was particularly appropriate for hospitality leaders. We have lived through crises, many of them life threatening this past year. As I sat on a panel at the American Hotel & Lodging Association conference in New York this past November, I realized how talented and prepared many of my colleagues are. But according to Laurence Gonzalez in his book Deep Survival: Who lives, who dies and why? “only 10 percent of us stay calm and focused during a crisis. The other 90 percent will panic.” Based on this, I am committed to providing leadership and resources to our team in this critical area in 2018.
One way for me to do that will be to remain mindful and appreciative of every single day! I noticed this past year was marked with far too many moments of stress, moments where I became more of a work machine than a mentoring or coaching resource. As leaders, it is our duty and privilege to serve our team members in these capacities. In addition to planning a more restful and focused approach to life, I plan more strategic delegation to key, up and coming leaders, more “no” answers to requests on my time where my presence may not make a material difference and a laser focus on a successful 2018 for our team members (lots of mentoring, coaching, leading), guests, capital partners and owners.
I’m saving the other leadership books I finished last month for deeper discussions down the road, including the use of meditation. But I did read a great piece called “The Business of Being Well,” written by Local Measure, a customer management solutions platform. It featured some hotel industry senior leaders (Chris Nassetta, Hilton and Keith Barr, IHG) and was very well done. In it, the big three wellness categories jumped out—fitness, nutrition and sleep. Coupled with mindfulness, I believe wellness can get all of us back on track if we derailed a bit in 2017.
President Harry S. Truman once said, “not all readers are leaders but all leaders are readers.” May all of you read and lead in 2018 and enjoy a very happy, healthy and prosperous New Year!
What economic indicator will you monitor most closely in 2018?
Question: What economic indicator will you monitor most closely in 2018?
Bob Rauch: Purchasing Management Index
The Institute of Supply Management (ISM) provides monthly data that shows trends in U.S. manufacturing. Their Dec. 1, 2017, report shows that new orders, production and employment are continuing to grow, inventories are contracting and supplier deliveries are slowing. Economic activity in the manufacturing sector expanded in November, and the overall economy grew for the 102nd consecutive month. These are key indicators of economic growth for 2018.
This benchmark data has been most accurate for me.
For the full article by Contact Reporter, Roger Showley, click here
Trends 2018 – What’s Happening in Hospitality
Each December, we come out with my trends for the following year. Last year we led with Artifical Intelligence and Robotics. In May, 2017, we hired our first robot as Employee #25 at our Fairfield Inn & Suites. Designed by Savioke, Relay the Robot (we call him Hubert) has been a big hit! This year we are leading with the lobby design side of the business—every hotel seems to be doing something to encourage the “millennial mindset” traveler to “hang out!” So, feel free to comment, here are our picks for 2018:
- Hotel lobbies become the center of the hotel universe akin to those found in communal work spaces such as WeWork – millennials and those with “millennial miindsets” have been the center of attention of all the brands and independents alike; open spaces with lots to do.
- Technology, led by mobile, digital keys and in-room entertainment gets a big upgrade and blockchain, which is a clear and incorruptable path from the hotel to the guest has the ability to create more direct and lower fee transactions. This direct route is a potential disruption to OTAs and that is a possible game-changer.
- Food and beverage revenues become critical, restaurants become simple and healthy with a focus on locally sourced suppliers. Perhaps more importantly, profits may return to hotel restaurants!
- The internet of things (IoT) becomes a thing by translating the smart home experience into the hospitality world. Technologies such as sensor-activated thermostats, digital room keys and in-room streaming services are all possible today.
- Voice activation. Amazon Echo and Apple’s Siri are consumer versions of this technology. Getting the Internet of Things upgraded to the network is coming soon and voice activation will be at the top of the list.
- Robotics hits full stride and Artificial Intelligence is enabling the hotel industry to do incredible things. From creating hyper personalized guest experiences to identifying unrecognized revenue opportunities, this is happening now. We are already planning to hire our second robot!
- Virtual Reality (VR) is no longer just a gimmick. It can and will be used in some form frequently in 2018. Coupled with augmented reality, (AR) (think Pokemon Go phenomenon) VR and AR will develop rapidly this next year. It is already widely used to sell adventure travel.
- Crisis management and cyber security will gain in importance as the addition of Active Shooter training is added to a hotel’s playbook and cyber crime continues to increase dramatically.
- Data and analytics lead to winning the loyalty game as data can segment guest profiles to infinite degrees, creating a comprehensive picture of who’s staying at our properties. We can track guest habits, interests and preferences as well as reason for travel, booking date, date of last stay and much more.
- Bleisure – Bleisure looks like it’s becoming more common with millennials – having a plan to “extend the stay” after people book corporate stays is working all over.
At this time of year, it is also appropriate to offer all of our friends, colleagues, friendly competitors and the entire industry a happy, healthy holiday season and a Happy New Year! Have a Merry Christmas, Happy Hanukkah or just a season of joy! To a great 2018!
Bob
What’s to be thankful for about this economy?
Question: What are you thankful for, economically, this Thanksgiving weekend?
Bob’s Answer: Frugality
I am thankful and feel blessed for having a loving and frugal wife, two wonderful daughters who are off the payroll and successful, a career in the hospitality industry that has been everything I have ever wanted and a great team at RAR Hospitality. They all value the dollar and know that happy team members please our guests who then return and spend dollars at our hotels. May the economy continue onward and upward!
For the full article by Contact Reporter, Roger Showley, click here.
Housing shortage: Solve it with a building boom?
This weeks Question: Can San Diego build its way out of the housing crisis?
Bob’s Answer: YES
But the question should really be “will” San Diego build its way out of the housing crisis, and that remains to be seen. Many neighborhoods that are located near areas of rapid job growth have resisted developer desire to build housing stock.
This resistance creates projects that might become financially marginal, reduces the number of units needed to satisfy housing demand or both.
Something must change to avoid a housing crisis.
For the full article by Contact Reporter, Roger Showley, click here.
LIIC members surprised by disasters and acquisitions
During a recent meeting, members of the Lodging Industry Investment Council talked about what has caught them off guard in recent months.
Unexpected events
Andrea Foster, SVP of development at Marcus Hotels & Resorts, said she wasn’t expecting the “acceleration of happenings that are impacting our industry” that are out of its control, referring to recent natural disasters such as Hurricanes Harvey and Irma, and the Wine Country wildfires, as well as the shooting at the Mandalay Bay in Las Vegas.
“We’re getting to a point now where things that we cannot foresee seem to be happening more quickly, and that’s sort of our reality … that one thing after another (is happening,) and that’s concerning. We can look and see that we have labor shortages; we can look ahead and we can see we have labor costs rising, construction costs are rising. We can plan (for) that,” she said, but not for these other unexpected events.
Larry Shupnick, SVP at Interstate Hotels & Resorts, said he was surprised his hotels in Napa Valley were not damaged by the recent wildfires, and benefitted a bit from housing people.
“Our three hotels in Napa Valley were not damaged in any way by the fire, and we housed, for probably two weeks, all of the people from utility companies (and) first responders,” he said.
Charlie Muller, principal at Solid Rock Group, said the company’s Houston property was not damaged by Hurricane Harvey.
“Kind of an off-guard moment was the unfortunate, but somewhat fortunate, Hurricane Harvey in Houston,” he said. “We had an asset down there that is the beneficiary of some pretty good business because it had no damage at all, so it’s been an unusual lift for us in an otherwise depressing performance of an asset.”
Buying and selling
For Greenwood Hospitality Principal Aik Hong Tan, the lack of acquisitions at this point in the cycle has been surprising.
“From a pipeline of sales, acquisitions in particular, there’s not as many as I would think this late in the cycle,” he said, adding that a lot of people are refinancing versus selling, which is traditionally more likely this late in the cycle.
Rick Frank, board member at American Hotel Income Properties REIT, said the company has “been possibly the most prolific buyer of hotels so far in 2017,” and he was surprised by the locations of a few recent hotel acquisitions.
“Over the last two weeks, I approved a deal to buy a Days Inn in Fargo, and a no-name hotel in Whitefish, Montana,” he said, “and in all my years in the business, I never thought I would approve a hotel acquisition in Fargo, North Dakota, and Whitefish, Montana.”
Scott Andrews, managing director of hotel franchise finance at Wells Fargo, said he’s heard that some developers are looking into acquisitions, even though the costs of acquisition are high, because construction costs are worse.
For the full article on HNN click here.
Will San Diegans benefit from proposed federal tax plan?
This Week’s Question: Would San Diegans, on balance, benefit from the proposed federal income tax changes?
Bob’s Answer: YES
The state will soon have the highest taxes in the U.S. for income taxes, state sales tax, vehicle tax and the gas tax. The Trump plan lowers the income tax rates, eliminates loopholes, preserves tax incentives for mortgage interest and much more. However, the proposal eliminates the deduction for state and local taxes hitting California’s wealthy taxpayers hard. It is time for California to enact its’ own tax reform and thank Prop. 13 for relief.
To read the other EconoMeter panelists’ answers to this weeks question click here.
Reduced 401(k) tax benefits: A worthwhile tax reform?
Question: Should Congress reduce the deductibility of 401(k) retirement savings to make room for tax-rate cuts?
Bob’s Answer NO: While it might be argued that the growth spurred by upper-bracket tax cuts is worth reducing the amount Americans can save in their 401(k) accounts, it would be a bad idea. To accomplish any real reform, lawmakers will have to make hard decisions. In states where people use the deduction heavily, such as New York and California, resistance will be the strongest and alternatives to reducing the deductibility of 401(k) savings must be found.
To read the other EconoMeter panelists’ answers to this weeks question click here.
Best Management Practices for Less Experienced or “Mom and Pop” Owners
If you are considering a management company because you feel you are not keeping up with the nuances of distribution channel management, human resource management, digital marketing, accounting and the changes in the industry that have driven us from art to science like revenue management, you are not alone.
There are best practices for every facet of the hotel industry and there are many ways to approach improvement of your hotel management short of hiring a company to manage your hotel. If you have decided that you need a management company due to inexperience or desire to retire or semi-retire, there are three things you should look for:
Common values and culture: When looking for a hotel management company, it’s important to look for a company that is aligned with your own values and company culture. Having common beliefs about how your hotel should be operated and your guests taken care of will help you be on the same page as your management company.
Management style should also be considered when looking at different management companies. Does the management company require onerous paperwork from managers, thus making it difficult to be the face of the hotel? Perhaps you prefer a company that encourages “management by walking around” rather than having managers sitting behind a desk all day. There are various styles and it is important to understand the style you are comfortable with that will ultimately provide the healthiest of both relationship and returns.
Innovative technology utilized within the day-to-day operations should be a focus when searching for a management company today. The art of hospitality is now becoming the art and science of hospitality. Staying aware of and implementing technology that will help your property increase revenue, operating profits and net income is crucial. Technology should not be implemented for technology’s sake but it should aid your hotel in staying ahead of the competition and meeting your guest’s expectations while protecting the value of the asset at all times.
If, on the other hand, you feel you do not want or need a management company, one thing that a “mom and pop” owner can do is hire a management consultant firm for specific tasks. These might include accounting, marketing, human resources, training and more. Further, a consultant can advise you on when to sell and how to position your hotel for sale; they can review brands, soft-brands or approaches to managing as an independent and much more.
How do you know if you need support in today’s more scientific environment?
There are three simple tests. The first is revenue—are you able to develop a business plan for 2018 that shifts market share from OTAs to a direct channel and are you completely aware of all business that is in your market area and how to fight for it via digital marketing and sales? The second is operations—do you have comprehensive operating procedures for front desk, housekeeping, engineering, safety and security, food and beverage, sales and marketing (that includes your web site) and analytics that tell you what is going on in each area? The third is accounting—do you have P&Ls that reflect variances, are completed in a timely manner and are set up with the Uniform System of Accounting for hotels and are you able to put together a 2018 budget utilizing all available data?
There are answers to every question in hospitality and we are here to help! I will be at the Lodging Conference in Phoenix this week and the American Hotel & Lodging Conference in New York later this month. To a great November, tax reform and the holidays!