By Jim Burr
You have purchased, or may be considering the acquisition of a
hotel at significantly less than its replacement cost. You believe the
location remains sound, the brand is right or can be fixed, and
management is generally effective. You are optimistic that when pricing
power comes back and demand strengthens, it will do well for you. But
the “good ole days” may still be far off. Though margins should improve
substantially from present, many costs are still going to continue to
rise. Financing market terms are likely to lead to higher exit cap
rates. And brand standards catch-up requirements and building
“surprises” are likely to require greater capital investment than
projected -- unless you provided a generous contingency. What then
could and should you do to increase net operating income so that
greater value is created? Following are some actions you should
- Assure that the manager and asset manager, if in
place, have touched all the bases to wring excess costs out of the
operation. You especially need to look at:
- Organization structure and staff utilization -- Have
former training and development and other “nice to have when times are
good” positions been wrung out of the Executive Committee and is the
management staff right for current business? Are sound business volume
forecasting procedures in place, good staffing guides utilized,
overtime tightly controlled and staff productivity closely monitored?
- Have amenities, services and service levels, hours of
operation, and the rest been adjusted to reflect guest expectations and
actual customer use? Have outsourcing opportunities been explored and
exploited to cut fixed costs and possibly increase revenue? Have
potential activity traps such as an extra restaurant outlet, Sunday
Brunch and the like been evaluated and ended if unprofitable?
- Have leases and service agreements been thoroughly gone
over and renegotiated where appropriate? Have new “make or buy”
analyses been performed and acted upon? With earnings down sharply,
have property tax assessments been appealed? It is surprising how many
hotel owners have not done this. Are personal property records up to
date or is the hotel still paying taxes on items that have been removed
from service? Have recent audits been performed in areas such as
telephone equipment service charges, high-speed Internet costs, sales
taxes, preventive maintenance and energy conservation opportunities?
Have all low-cost or high-ROI energy-saving measures been carried out?
Many of these are simple procedural changes. Have competitive price
surveys been conducted to assure that food and beverage prices and
charges for ancillary services are in line with competition and hotel
- Improve the hotel’s appeal and make sure the
facilities are highly competitive in the marketplace.
- Take a hard look at the sense of arrival given to
customers. Visit the competitors and see how you compare. A few planted
flowers, a steam cleaning and perhaps some paint can often make a world
of difference at the entrance. A new floor surface, some lighting
changes, replacement of tired-looking furniture and new staff uniforms
can provide a new lift to the lobby. Get rid of the negatives, they are
distractions that serve to lower guest expectations and increase their
sensitivity to price.
- Moving to the guest rooms and bathrooms, get the
greatest possible customer impact with the renovation money you have
available. Whole-room renovation generally has greater affect, even if
done in fewer rooms, but if budget and condition necessitate piecemeal
renovation of all, be sure it is done against a master plan so that
when the remaining elements are tackled the newly added parts will
still fit. A few observations from experience:
- Do not overlook the sleep sets; they are the number
one priority. Those that are sagging have to go.
- The room and bathroom need to be light and bright.
Fortunately, this can now be done with low watt CFL bulbs.
- Even if the brand has extended the deadline for
flat screen televisions, be mindful that many select service and even
budget hotels already offer them. They should be high on your action
list. If the standard is below 42 inches, I suggest exploring with the
brand and looking at the potential payback on going to the next larger
common size to provide a competitive edge. If the rest of the case
goods in the room are good, the tops can be cut off existing armoires
and a piece of granite put in to provide a base for the new television.
- After replacing the carpet, if needed, which is one
of the necessities, if the look of the guest room still needs
refreshing, a good deal of punch can be achieved by revinyling the
- Follow the same strategy in the public areas: work
against a master plan and first fix the items that stand out as
distractions. Of course you will put a multi-year capex plan in place.
- Make Sure the Sales Department and Revenue
Management Function are Hitting on all Eight Cylinders.
- Are pace and sales production reports carefully
watched? Are ROI or at least ROS calculations developed for incremental
sales activities, including trade show attendance, local corporate
programs, weekend promotions, etc.?
- Is participation in brand marketing programs challenged
for potential benefit to the property and are results checked?
- Has the sales department been shopped recently for
effective and timely response to group inquiries? It is a good idea to
shop reservations, be it internal or outsourced, as well. A surprising
number of balls are dropped here. Upselling at the front desk, another
old, but valuable “chestnut” is another area that should be tested.
- Is the property web site an effective sales tool? Has
search engine optimization been put into effect and has it been
updated? Are E-mail and social media campaigns being used? If not,
should they be? If they are, is adequate effort being devoted to them
and is that effort cost-effective?
- Are revenue management actions mostly proactive, or are
they merely reactive? Are the total spend and total profitability of
groups carefully considered when rates are quoted? Are sales people
striving to get maximum penetration of a company or a group or other
target market before dumping off forecast excess rooms to a
deeply-discounted third-party site? Are packages and special events
being created to take greatest advantage of features or activities in
the community, so generating new demand, or is there over reliance on
the standard brand offerings?
- Start to “Dig for Gold” at the property.
- The late Conrad Hilton was one of the earliest
proponents of this and was highly successful at it. The vitrines he
created in hollow columns at the Waldorf-Astoria and the store leases
he negotiated to provide ongoing streams of revenue at Hilton Hotels
are legend. After the “quick hits” have been dealt with, it is time to
start digging into the physical property and the hotel operations for
“veins of NOI” that earlier owners and managers have overlooked, or
that have been made newly feasible by changes in the market or
technology or incumbent manager performance. The prospecting should
- Physical Property
- Scour the hotel for unutilized or underutilized space.
I have seen and/or been a part of turning a former maintenance storage
area into a concierge lounge, freeing up prime guest rooms formerly
devoted to this; adding new meeting space by converting unutilized
building areas, leasing rooftop areas to cellular service providers,
outsourcing a business center, creating a new banquet room from a
formerly unprofitable restaurant, carving out additional shops or a
Starbuck’s counter from unneeded lobby area, creating a feature pool,
transforming a low-volume gift shop into a popular restaurant, leasing
out unappealing and poor performing restaurant to an operator with a
local following and relocating a remote production kitchen to a
high-traffic area. These are but a few examples of steps that can be
taken to produce a high return on investment, and provide points of
difference that add to the hotel’s competitive advantage.
- A former boss likened this process to “turning over
rocks.” Hotel Operations should be systematically and repeatedly
scrutinized to unearth new opportunities for additional revenue or
greater efficiency. I’ve increased cash flow and raised NOI through
reviews of billing and collection procedures, labor management systems,
house laundry, telephone equipment and network fees, energy management,
maintenance department performance, broadband provision agreements and
others. I have also increased top line revenue and NOI by updating
competitive price comparisons, adding sales people against targeted
markets, strengthening hotel web sites and Internet marketing. Many
other opportunities are available; the potential and the payback will
vary with the property.
Even if the trend line of improvement is below what the
optimistic forecasters project, your efforts and your investments to
add value may still be very rewarding. At a 10-cap, an extra $100,000
you added in NOI translates into nearly $1 million in added hotel
Jim Burr, CHA, a graduate of the
Cornell University Hotel School and member of Cayuga Hospitality
Advisors, has more than 40 years hospitality industry experience,
including single and multi-unit hotel management, franchise operations
and strategies and consulting at the Principal level. After asset
managing more than $900 million of hotels, including Hilton, Hyatt,
Marriott, Westin, St. Regis and Embassy Suites, he is now the principal
of Burr Company specializing in Asset Management, Strategy Development,
Due Diligence and Workouts of Troubled Properties for a variety of
hospitality industry firms and lenders.
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