Hotels are no different. Only when one strays into the more theoretical end of physics does the workplace become more fraught with the potential for confusion. Whole conversations can be undertaken that would be incomprehensible to anyone with less than a decade of hotel experience, not forgetting the importance of throwing in a healthy dose of travel.
But rather than just speaking louder, better to find an experienced translator.
Within the hotel sector, many owners are only slowly coming to terms with the idea of handing over the operation of their hotel to an expert. The need for such specialism has grown in recent years, with operational knowledge mingling with asset potential and returns. The search for profit is increasingly challenging and the pace of change is accelerating. For too long, investors have assumed that an understanding of the real estate is sufficient; this is a big mistake.
OPERATIONAL ASSET MANAGEMENT
In the hotel industry, operational asset managers concentrate on creating value through the day-to-day business, working closely with the operator to obtain a much higher return, above-average revenue and greater flow-through. Those asset managers superintend the operator, optimize performance and strategic direction, support operations, increase the brand’s value and ensure the reasonableness of the operator’s costs. They guide the operation to increase the operating profit and the cash flow, with the goal of increasing the property’s value and and maximizing the ROI on exit.
An expert operational asset manager must work across brands and across continents, so that the owner can be truly assured that the decisions made are based on in-depth experience and market knowledge. As the hospitality offer varies, from economy up to luxury, information and understanding becomes more complex.
Good operational asset management must also encompass the wider investment strategy of the owner and their plans for the asset. Is now the time to sell, invest, rebrand or reposition, to look at other locations for expansion to drive scale efficiencies? We are seeing an increase in demand for asset managers in the hotel sector, not only from owners, but also from lenders, who need reassurance as the sector navigates through choppier times.
COST OF DOING BUSINESS
As cost pressures and the price of debt increase—unnerving even the most intrepid lenders—owners will look at creative ways to keep their hotels in the black. For operational asset managers, it is imperative to prove worth and add value. A good operational asset manager can work on the pull and the push, shaping the distribution model so that rates are maximized but also ensuring the costs are kept low so that pressure is taken off margins and profit targets can be met. The operational expert can advise on where to deploy scarce resources in effective strategic CapExp to maximize a property’s positioning to compete effectively, draw guests and maximize revenues.
That is one form of specialized operational asset management that the hotel sector is starting to embrace.
The other also concerns the search for profits, but relates more widely to wealth and managing all assets, tangible and otherwise. Usually, these kind of asset managers are insourced, and they are looking to increase the owner’s assets’ profitability, with assets taking in the wider scope of stocks, bonds or commodities. The wealth asset manager buys, maintains and sells investments. Their aim is to increase the value of an investment portfolio and achieve a strong ROI. Usually, this management involves some risk and the possibility is given to the client to choose risk exposure.
Both types of asset managers—operational and wealth—are necessary for the owners. The first enter into the operational details to improve the business. The second uses the results and the wide hospitality experience of the first to obtain a higher value for the asset.
BlackRock is the largest asset manager in the world and the first to manage more than $10 trillion. Of those holdings, hotels feature prominently: BlackRock has stakes in, amongst others, Wyndham Hotels & Resorts, Home Inns Group and Hilton Grand Vacations. It owns a number of assets, from luxury to hostels, and all across the wider spectrum of commercial real estate.
BlackRock is so colossal that it influences the wider investment community; through the deals it does but also through CEO Laurence Fink’s annual letter to fellow leading CEOs. In 2020, Fink said that the group would focus on sustainability, exiting any investments it saw as having high-sustainability-related risk.
He said: Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance. The evidence on climate risk is compelling investors to reassess core assumptions about modern finance. Others duly took note.
BlackRock has identified hotels as a way to increase wealth. If you’re reading this, it’s highly likely you share Fink’s opinion. We believe that you should treat your wealth management in the hospitality sector in the same way you treat your other investments and ensure that the team you have responsibility for its custody and growth are specialists.
The hotel sector has, traditionally, been isolated from the wider investment community, often represented by real estate funds as “other” among other CRE classes, such as office, retail and industrial. It has been seen as a small diversification play, a way of lending a bit of variety to a portfolio otherwise dependent on yield compression and managed by real estate experts.
Those days are gone, with institutions seeing the benefit of an operational asset able to generate regular income but also able to benefit from long-term asset appreciation as a result of active asset management influencing and affecting the outcome in both operational and real estate terms.
Brands and OTAs help take the stress out of filling beds; however, working with an asset management team means having partners able to understand and interpret the myriad complexities of running a hotel.
CEO & Senior Hotel Asset Manager
Global Asset Solutions