What exactly is a boutique hotel?

In today’s hotel market one may well ask what exactly is a Boutique Hotel? It seems the word BOUTIQUE has been misused and marketed irresponsibly by many hotel owners and operators worldwide. Nowadays you see the word associated with 2-star Days Inn styled rooms at so-called ‘eco’ resorts where the only eco aspect to their operation is a few plastic bins for so-called separate waste disposal in the guest rooms. Both the word ‘eco’ and ’boutique’ are clearly overused and in most cases not at all relevant to the property marketing itself as being so.

So for ” boutique” some education for those in need of it.

A Boutique Hotel needs to reflect the following. Small, fashionable and independent; when lacking innovative design and stylish high quality personal operations and impeccable amenities, these small hotels are in violation of the fundamental boutique motif and are merely small. Add to what boutique should reflect in a hotel, innovative design, distinctive, individuality, flair, original, and creativity, and you can see how this word has been turned into more than rather a vague term confusing the market, and undermining those that actually achieve it.

Cool, or hip or historic, themed, marketed for business or leisure and more often than not both, the meaning is now an extension of the original boutique hotel urban properties where the key descriptive components were fashion, elegance, glamor and style. Nowadays the word transcends these earlier definitions and crosses many hotel classifications, from small to not so mall, luxury to affordable, urban to resort, chic and cool to traditional. Boutique Hotels have many sub segments.

Ignoring the attempts by chains to be boutique-ish, the W brand for example, and the Malmaison Group in the UK, boutique hotels independence has enabled owners and operators to keep at arm’s length corporate standards of the chains that more often than not hinder the creative ideas of those employees on site in supplying distinguished and personalized hospitality services to the travelers they know.  In boutique hotel operations it is much more than employees knowing each guest’s name, which in some of the so-called larger boutique hotels is an impossibility anyway.

It is in my mind more a return to traditional hotel keeping, knowing your guests and fully understanding their requirements as individual travelers and then actually delivering that service in an exceptional manner, all within an environment that has innovative design, distinctive characteristics, where individuality and flair shine through, and the whole experience to the traveler is original and creative.

Some development priorities summed up:

  • An at home feel in both size, elegance and throughout it is of a different perspective.
  • Inviting, at peace with itself, snug, social.
  • Top of the line, select and personalized. Personalized means sincere and warm.
  • Home made, hand-made, not the standard factory produced stuff. This goes not just for the set up and fit out, add to that food, beverages, paper, amenities.
  • Hello to the designer! Square foot by square foot thought through!
  • Concepts that are of quality, from design to delivery.
  • Amenities unseen near you, out of the box, from soaps, to personalized jams, cookie wraps, cocktails on arrival, smart phone, limos to the office, and the house essence.
  • And time and time, time to create, time to prepare to deliver!

For boutique hotel development planning and management that deliver on the true concept of the word, contact mark@turnerlodgingco.com.

Hotel brand franchise affiliation vs the independent alternative

It’s probably more or less impossible to 100% evaluate the benefits of one hotel brand franchise affiliation to another and also compare it to going the independent route and get it 100% right taking into account numerous aspects including perception in the market of one brand or franchise to an other.

It’s complicated, difficult, and challenging.

300 odd franchise/brand/chain management options in the market make this a real headache. Then how to decide between the one chosen as your 1st preference and going the independent route.

Yet, a certain owner I recently met, new to the UK, was more focused on asking me for advice as to “ what brand would you choose” as if I had the answer out of a hat! He liked my idea on one with the comment “ yes, I know owners who think highly of them”.

It’s not about past performance with others, it’s what best fits your unique circumstance. That circumstance being highly technical, re investment, location, positioning etc etc etc.

Assuming one has a preference, how to address the independent alternative as an option?

In the past being or not being associated with a franchise has involved, as the primary focus, understanding how much business has been or could be driven through brand reservation systems and the online presence. Trouble is one can’t estimate how much business a property could have achieved by being a stand-alone, by itself, if it was an independent for comparisons sake.

One has to also figure out the comparison in the cost of booking aspects from a brand/franchise to being an independent. How much is an owner paying for all those guest promotional programs, the advertising, and its contribution to a central reservation system? Complicated, just look at group and other business that is driven at property level and then possibly added into the affiliation reservation system count.

In brief, franchise management fees can be as a % of revenue 7% to 10%, with 9% that’s 45% of one’s net operating profit if a hotel generates a 20% NOP, which is about average.

45%!

Now lets assume 25% of one’s rooms generated business has been through the affiliation, the other 75% through the hotel’s direct efforts. Taking the 9% as above the actual bottom line effective cost of rooms achieved by affiliation association is 36%. That’s the ratio of affiliation fees paid on rooms revenue to the % of business this affiliation has in rooms income terms benefited a property.

Not cheap is it!

Where do we break even in this circumstance? How much business is needed to break even with a 9% fee cost to owner? How much additional business does this affiliation need to generate that one could not have achieved by being an independent operator?

With a 100 roomed hotel achieving 70% occupancy with a ADR of $100 the fees equate to $229,950. With a department profit of 75% that’s 3066 room nights required, or an 8.4% in real term increase in occupancy.

Brands and franchise affiliations do work, a lot has to be said for going that route, however not for all, and in my view not for many that have this relationship.

With the modern world changing, with ecommerce evolving at break neck speeds and with so many options for independent properties to take advantage of the more than 60% of hotel bookings on average influenced through the web, according to some experts, owners would do well to think through very exactly what benefits going the independent route can offer.

Greater flexibility in pricing and positioning, more precise control, more control and options to choose service levels, in design, in marketing, more influence on management, more flexible use of capital to meet positioning standards. Probably easier to sell and exist the investment. That’s a very simplified view.

For advice on the independent route and putting a business plan and operation in place to take advantage of today’s ecommerce, non franchised/chain reservation systems, putting a sales team together, and a marketing program for a stand-alone resort, that would not cost that 9% annually, contact me via mark@turnerlodgingco.com.

Risk Analysis of Individual Hotel Assets

Given that most investors seek to minimize risk, asset managers need to understand and neutralize asset risk within hotel investments

That means.and the bottom line is..”working down in the trenches,” that is evaluating, negotiating, and administering various aspects of the property’s performance is the first step.

The ability to understand and to neutralize risk brings value to investors. It is important to remember that hotels are risky investments.

To manage risk, the best asset managers use a set of tactics that can allow the property to “ride the cycles.” This means finding ways to magnify revenue enhancements during the “fat” part of the market cycle and conversely, it means adopting procedures or making changes to minimize costs during the “thin” part of the cycle when demand shrinks.

Managing the business risk of the property is an important means of reaching the asset manager’s goal of increasing the overall value of the property.

Asset managers can also work with owners to manage financial risk. This involves taking advantage of financial leverage in a proactive fashion. The optimal level of debt depends on the point in the cycle. When riding up, increasing the loan-to-value ratio by adding debt can magnify equity returns. When riding down, decreasing the loan-to value ratio by retiring debt enhances the probability that the deal will continue to be worthwhile. Structuring debt to allow a quick, low-cost prepayment is part of proper asset management.

To implement strategic policies that minimize risk, asset managers need a strong understanding of the specific levels of risk a property faces. They need a set of tactics to manage risk. These include the risk-adjusted discount rate, using the weighted cost of capital, or a risk-adjusted cash flows. Here, one estimates cash flows, taking a sort of “bad things might happen” approach.

Also Asset managers consider a number of scenario analysis techniques. Simulation is the best and most widely used. One specifies the probability of distributions for a range of variables or inputs for a model.

A more basic version of simulation is a sensitivity analysis. Here you consider changing one or two inputs at a time, then measure how sensitive an item is to changes in the inputs. For example, what happens if the average rate falls? What happens if occupancy increases dramatically? This method has obvious limits, because situations in which only one or two variables drive changes are rare.

The difficulty is in specifying with any certainty the changes that are likely in a best-case or worst-case scenario.

For advice on how you , as an owner, can use these techniques to minimize your hotel investment risks contact mark@turnerlodgingc.com

 

The hotel acquisition process (Part 1)

As simply as possible, the hotel acquisition process 

The complex relationship between a business and real estate makes the process of buying into a hotel as complicated as one wants to make it, or as simple as a buyer wishes it to be.

Without question it is those buyers who are better informed who get the best deals.

An informed buyer needs to go through a process that will maximize the amount of information and relay the cost/benefit ratio.

As with the procurement of any business there is an acquisition process, a step by step approach.

Namely

  • Ascertaining the acquisition criteria
  • Sourcing the product
  • The initial assessment and the decision to proceed with seriousness
  • Ascertaining the price while compiling a business plan

In part 2 we will cover

  • Negotiation of the deal to a LOI to buy
  • The due diligence process
  • Closing the transaction

First up, ascertaining the acquisition criteria

A prospective owner will look at any purchase in many different ways, be it with an active or non active role, is it a short or long term play, is yield and cash return the key.

What ever the decision-making process is motivated by certain criteria stand out for consideration.

  • The properties type and its location
  • The size and potential cost per room
  • The risks involved with new competition entering the market
  • Is the management structure changeable, is the franchise affiliation changeable, is a management brand or franchise required.
  • The presently achieved cash flow and its potential cash flow and yield
  • The risk analysis to cash flow stability and growth.
  • Where is the upside potential, be it in management related areas, in repositioning through renovation,
  • The potential appreciation or depreciation in asset value

Each buyer will have their own answers to these, in conjunction each buyer needs to have clarity and a strategy within a defined decision-making program as they enter into the hotel buying process.

Sourcing the product

Your acquisition group

A broker

An appraiser who understands your market

An accountant who has hotel clients who can determine the correct net operating profit and if the revenue achieved is all from that business and that costs and controls are adequate, he can also helping the compilation of a business plan.

A market consultant, your asset manager, this is our role, where we help you find out how this property may perform or improve its performance and what strategies could be applied to achieve your financial goals, this is where we can help you put the business plan together.

Your legal adviser, who understands the hotel industry. Critical they do.

Possible an architect and or an Interior designer. If renovations and upgrades are required down the road and with the engineer they can review all the physical components of the building. Electrical, plumbing etc.

The initial assessment and the decision to proceed with seriousness

Obviously many hotels will not pass the initial screening process for numerous reasons.

The most common is an asking price that bears no resemblance what so ever to a sensible yield % based on the net operating profit being achieved.

This is mainly due to realtors accepting to list properties, and in many cases encouraging them to do so, at valuations they somehow dream up all based on what they perceive is a real estate value. Hotels are businesses and their value is mostly reflective in what net income they generate. Obviously some buyers over the years have not caught on to this hence the numerous stream of crazy priced hotels and resorts on the market here in Costa Rica. Same applies to Panama.

Once you find one that may be a possibility a site and property analysis begins and at this stage a possible go or not a go decision needs to be made.

Ascertaining the price while compiling a business plan

Based on an initial property and market analysis the aim is to come to a suitable bid price.

This bid price evolves around ascertaining what potential earnings can be achieved by your management team from the property, obviously an analysis of the present trading results by your experts and an analysis of what future market conditions will be like and the potential properties performance within that market need accessing. A preliminary business plan is then drawn up, key questions are how can we unlock value, by your team and management.

Firstly it is important to understand the market. Simply put this involves ascertaining  the present and the ever-changing dynamics of demand.

An assessment is made on how these market dynamics balance with the hotels concept, its mix of rooms and facilities, the quality of the building of both hard and softs, if applicable franchise or brand affiliation and associated revenues directly generated, the management and options for other organizations suitability to the property, and the capital structure and its future capital investment requirements. The hotels trading history and the projected market performance are complied with assumptions as to future market performance, a base line business plan for the property, with net cash flow projections over 5 to 10 years.

With this information, and your exist strategy with the potential disposition price taking into account your finance costs a professional will work with you to define the discounted value at today’s pricing, giving you the maximum price you are prepared to pay.

Then you have a solid foundation for the next decision as to how to proceed.

Is this an opportunity for a turnaround with good upside potential, or has the property reached its peak in earnings taking into account future capital investment requirements?

Obviously your appraiser will advise on the general market conditions and the weakness or strength of the local market to assist this process of defining the bid price and making that bid offer.

The hotel acquisition process simplified (Part 2)

Negotiation of the deal, BTW please see part one of the hotel acquisition process

So the bid price has been in principle accepted so we need a document outlining the project and the analysis as to what led you to that position.

This guiding paper being the foundation of the operational business plan would include,

A description of the property, the market summary and the projected market opportunities, all the financial information with the cash flow projections, financing aspects, management and brand affiliation opportunities, renovation costs and an engineering plan in general regarding future requirements related to the building .

Now the process of serious negotiations can begin, and the buyer needs to take these next steps forward with due care.

The hotel procurement terms consist of these most important aspects of a deal.

The price, the financing package including seller options, title and property condition, default aspects, an agreement on what is defined as a hotel asset (this list consists of, but is not limited to the land and property, cash, all inventories, prepaid deposits and expenses, all equipment be it fixtures fittings and all equipment, from linen to spoons to security cameras, vehicles, licenses and permits  as well as staff lists, all operational human resource records, all sales and marketing information, clients data lists, suppliers, key accounts, accounting books of record).

Numerous aspects are involved to come to an agreement to the final sales price.  Seller financing will push the price up, long payment terms will push the price up. Can a mortgage be taken over? What is the financial strength of the buyer and how quickly can the property be bought? All will influence the price.

Also a list of contingencies come into play, such as the buyer not being able to secure  financing, get the required licenses and permits to operate, achieve the deal line of due diligence completion.

The contract aspects evolve around agreeing on a non binding letter of intent, or an other option is to go straight into a binding agreement with a list of all the way outs, (for what ever reason during the due diligence process, lack of financing, unable to obtain permits etc.).

It costs more and takes longer to negotiate a binding agreement with outs, and the negative aspect of the LOI initial approach is that you are lengthening the whole process.  You are trading off wasting time with this process compared to  a gamble the due diligence results will be to your satisfaction by going straight into a non binding contract.

Letters of intent can serve good purposes when complicated transactions are being negotiated, for certain legal reasons, if a group of investors are involved.

What goes in and what does not go in these non binding letters of intent or a binding document with outs will be carefully discussed with your lawyers and all advisers. For example does the buyer want the seller to not be able to sell to any one else during and initial period, perhaps the whole due diligence period? Can this be negotiated? Is there a time line for all this process to be completed?

Probably both parties will want to be able to be able to terminate at any time without damages, and as a buyer may be spending a lot of cash during the due diligence period, then they need to have full clarification of their rights to enforce the seller to proceed with the sale.

The due diligence period incorporates the following:

  • A legal description of the property
  • All employees, name, remuneration package details, position, all benefits.
  • All engineering plans and architectural specifications will be provided
  • All insurance aspects with details of all coverage with the costs and details on all limitations
  • All inventories detailed
  • An accountant will audit the profit and loss statements
  • An audited balance sheet for the last five years will be produced
  • Capital and construction expenditure for the last five years detailed and an estimate  of  projections for expenditure required next three years
  • Details of any actual or possibly pending legal threats or litigation against the property.
  • Details of any mortgages on the property.
  • Fire, health and safety reports with an engineers report
  • Land tax and property tax applicable with proof of payment last 5 years
  • List of all supplies of services.
  • List of all tenants, rents, lease details
  • Occupancy and average rate the last three years clarified
  • Recent appraised valuation of the building
  • Reservations and deposits
  • Service contracts with third parties, with details on all issues the buyer will assume like franchises, licenses, permits, management agreements, union agreements.
  • The current operating year profit and loss statement with comparison to previous year will be ascertained to which the management will comment and add certain costs that may be missing so a true reflective NOP can be clearly determined
  • Trade names and copyrights.

Following successful completion the final purchase and sale contract is drawn up.

The content and issues outlined in this document are normally like this.

The property description, the list of assets being purchased, title and survey aspects, all licenses and permits and franchise agreements, the date of transfer,  all the financial terms with the terms of finance and information related to present trading results, the details of the due diligence with the obligations and  rights of both parties, occur and the rights and obligations of each party, closing documentation, closing expense obligations, and legal aspects.

In addition since staff are the most important ingredient of a successful business and one is buying into their expertise their needs should be very much at the forefront of the buyers mind.

The take over of the staff should evolve around the sellers officially terminating all employees on the day the property changes ownership, and then the buyer re hires them (or whoever they wish to hire) on a probationary basis. Management should by this time have a good idea on the benefits of re hiring most staff as the analysis of staff strength should be a critical component of the due diligence process. Aspects covered include staff medical records, pension and benefits, and vacation days owned.

Often a buyer will decide that all staff can bring forward their benefits and an accounting transaction is worked out. Legal advice being taken regarding assuring the buyer avoids taking over any liability issues.

The hotel closing day transactions incorporate calculation of that days property’s revenues and expenses and the physical stock take of all inventories included in the purchase price.

Once the necessary calculations have been worked out and the cash transferred the buyer is the owner!

For advice along the tricky road of hotel acquisition contact mark@turnerlodgingco.com.

Asset managerment of a hotel, the basics

The asset management process for a single asset is a process. It starts with determining the owner’s objectives for the asset and once the asset is acquired and integrated into the owner’s systems. Next,  there is an extended period of monitoring the ongoing performance of the asset. Lastly, the asset manager facilitates concluding the investment in an orderly fashion.

Step one is determining the owner’s objectives. Without a thorough understanding of the owner’s objectives, the asset manager can not perform their role effectively. The asset manager becomes involved the instant an owner decides to acquire an asset. In this step, there is a pre-acquisition phase and an absorption phase. In the pre-acquisition phase the asset manager supports the transaction team as the asset comes into the portfolio. The asset manager is concerned with strategic considerations, such as highest and best use, and tactical considerations, such as capital expenditures, physical review, and a product improvement plan if the property has a franchise. The result is an asset management plan that codifies the plan for the property once it is purchased.

Next, the asset manager monitors ongoing operations. This is the phase where the asset manager has the largest role.In the end, an asset manager must be able to answer a key strategic question: is it more profitable to continue to operate the hotel, or to sell and redeploy capital to other opportunities? In other words, do we sell or do we continue to hold?To answer this question an asset management plan becomes the bible. Creating and updating this plan is continuous. taking into consideration the conditions within the overall market cycle, the condition of the financing markets, the overall portfolio strategy, and the place of this asset in pursuit of that strategy. All of these influence the asset’s relative position in the strategic asset management plan.

Next, one considers the owner’s investment criteria and their influence on the strategic asset management plan. These include the size of the investment relative to other investments in the portfolio, the desired holding period, the desired equity returns, the desired returns from cash versus returns from appreciation, and the relative risk of the asset.

The strategic asset management plan is informed by an enormous research and analysis effort, which results in the assessment of the property’s performance. First, a physical plant evaluation, and next, the asset manager evaluates the operations and management. This includes analyzing the historical performance of the hotel and assessing the strengths and weaknesses of the operator.

The asset manager performs a market analysis, a competitive supply of the market, the demand generators in the market, and the overall economic environment in which the hotel operates.

Finally one may perform an affiliation analysis. Is the property suitable for a brand affiliation? What services could a brand provide?

All of these evaluations feed into asset performance. Asset performance is measured by a benchmarking effort. An asset manger needs to understand both the existing and the desired market positioning of the hotel, the hotel’s market penetration the overall financial performance of the property both over time and compared to other hotels

The bulk of the asset manager’s job is devoted to ongoing monitoring of the asset’s performance and objectives. But it is crucial to frame that ongoing work. By constantly considering whether the asset should be sold or held, asset managers keep their ongoing analysis in tune with the financial needs of ownership.

For owners wishing to know more contact Mark at mark@turnerlodgingco.com

Managing Hotel Capital Expenditure

Capital expenditures can be a contentious issue between owners and operators. The asset manager is charged with verifying that the capital expenditure budget is properly designed to meet the goals of ownership.

Fundamentally, the asset manager is the voice of the owner. Accordingly, the asset manager’s role is to implement the owner’s strategic vision for the property. The owner has expectations for the value of the property, the highest and best use of the property, and the return on investment for the property.

Consider a property comparing two possible major capital expenditures. The first is a new lounge that costs $250,000 to freshen up and build. The second is a new boiler that costs $250,000 more to get the energy-saving features. For the sake of the comparison, imagine that the owner expects the same benefits from either. But in the first case, the lounge generates revenues, which then produces more cash flow. Here the operator gets paid both the base fee and the incentive fee. Both stand to increase if the lounge succeeds. In the second case, the boiler will reduce costs. The benefit comes in the form of cost savings. Here the operator’s benefit would likely be smaller, because they only would be entitled to an incentive fee. So the operator sees more upside from the lounge, whereas the owner sees the boiler as the safer and potentially more rewarding use of capital expenditures. This is a simple example of some of the moral hazard built into the Cap Ex planning process.

As the example suggests, the asset manager must be aware of the costs and benefits that accrue to both the owner and the operator in capital expenditure projects. The asset manager plays a key role in supervising the overall long-term planning by making sure that the property manager’s short-term plans are consistent with the owner’s long-term vision for the property.

Obviously the capital expenditures can be a source of friction between owners and operators.First, owners often believe the operator takes too much control of the Cap Ex process and invests in items that enhance the brand or operator to the detriment of the owner. Second, owners fear that the operator will lose control of the process and come in over budget.

The operator’s principal frustrations with capital expenditures are threefold. First, operators find that owners often have an inconsistent vision of the plan. Asset managers change, and a new asset manager often means a new long-term plan. Second, operators find that the owners do not communicate their Cap Ex vision effectively. Finally, operators contend that owners do not properly fund Cap Ex, to the detriment of the property. This is especially important if the property is not doing well and the Cap Ex is consistently deferred.

The asset manager needs to “communicate up” to the owner regarding the property condition, the life-cycle position of major capital items and systems, the anticipated short- and long-term Cap Ex needs, and the funding needed to execute the plan. The asset manager needs to “communicate down” to the operator the owner’s expectations and priorities.

There are additional considerations in the Cap Ex budgeting process. The asset manager needs to:

  • Evaluate the reasonableness of operator requests
  • Evaluate the thoughtfulness of operator requests (in other words, evaluate the quality of the analysis)
  • Consider the importance of the anticipated holding period in determining the owner’s objectives
  • Consider how economic conditions affect the funds available for Cap Ex
  • Consider how returns available from alternate investments might affect the funds available for Cap Ex

The asset manager must take all of this…………and much more………. into account and communicate it to the owner and the operator.

Clearly, a good asset manager needs to be aware of both the owner and the operator positions during the Cap Ex budgeting process.