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Distressed Hotels:  Adding Value

By Jim Burr
November 2010

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 consider:

  1. 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:

    1. 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?
    2. 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?
    3. 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 positioning?

  2. Improve the hotel’s appeal and make sure the facilities are highly competitive in the marketplace.
    1. 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.
    2. 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:
      1. Do not overlook the sleep sets; they are the number one priority. Those that are sagging have to go.
      2. The room and bathroom need to be light and bright. Fortunately, this can now be done with low watt CFL bulbs.
      3. 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.
      4. 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 headboard wall.
    3. 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.

  3. Make Sure the Sales Department and Revenue Management Function are Hitting on all Eight Cylinders.
    1. 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.?
    2. Is participation in brand marketing programs challenged for potential benefit to the property and are results checked?
    3. 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.
    4. 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?
    5. 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?

  4. Start to “Dig for Gold” at the property.
    1. 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 include:
      1. Physical Property
    2. 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.
      1. Operations
    3. 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 value.

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.

Reprinted with permission from Cayuga Hospitality Review.  All rights reserved.


Cayuga Hospitality Advisors

Cayuga Hospitality Advisors Articles of Interest:

Managing Dynamic Data to Enhance Guest Experiences / David Sterling / August 2010
Let's Talk Tourism / Jason Swanson / June 2010
Making Meetings Work - A Step by Step Guide / Robert Woods & Florence Berger / April 2010
Demand Management: An Update* / Bill Carroll and Mac Noden / April 2010
Investment Decision Criteria for the Gaming Industry - Time to Revisit and Review / Stephen Sherf / March 2010
2010: A Year of Challenges for Restaurants; Thriving in Another Tumultuous Year / Michael Lukianoff / February 2010
Make Sure the Right Contingency Plans Are in Place; Secrets of a Hotel Asset Manager / Jim Burr / October 2009
Update on Adoption of International Financial Reporting Standards (IFRS) for the U.S. Hospitality Industry / October 2009
Do You Think Like a Leader or a Manager? / William P. Fisher. Ph.D. / October 2009
A Wake Up Call, The Shadow of 9/11: Terrorism and Premises Liability for Hotels / Carroll Dubuc / September 2009
You Need to Reset Your Exit Strategy / Jim Burr / September 2009
The Electronic Guestroom / Jules A. Sieburgh / September 2009
LEADERSHIP: The Basis for Management / William P. Fisher Ph.D. / September 2009

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