Operational cash flow is only part of the game. Buying a property at the right time for the right price, managing and improving your asset over time, and selling when the market is hot is what makes for a good hotel investor.
A typical hotel has only a single operational use: to provide transient accommodation services. That operation is far more complex and volatile than, say, managing a retail complex or office tower. Whilst you may have handed over the responsibility for the management of this business to your preferred specialist operator, you are still the owner of the physical asset, which may also include more than just a hotel. Managing the operator is one thing, but they have just one, simple objective: making as much profit as possible, using your asset and your invested capital.
To manage your asset well, maintain its competitiveness in the marketplace, enhance the asset value of the building and prepare the property and the business conducted therein for a future sale, you need to understand both the competitive market as well as the operator’s intents and objectives. The asset value on sale is not just determined by its trading historic, but much more by its trading outlook, which is dependent upon expected market conditions, the physical condition of the property, and the competitive position of the business conducted in that property.
In the real estate world, Asset Management is defined as the oversight of the day-to-day management of a real estate property and the responsibility for maintaining and preserving the physical asset. In the financial services sector, Asset Management is simply defined as the process of managing client investments. Hotel Asset Management is more complex than that: it aims to protect the asset and maximise the return on investment for the owner, through the optimisation of both operating returns and investment returns.
The Asset Manager acts as the Owner’s Representative to make sure that a hotel is acquired for a reasonable price; is then operated properly during the period of ownership; and ultimately is disposed of at an appropriate time and price. Most operators don’t think like owners, as they have an inherent conflict of interest: they like to spend the owner’s money.
The Asset Manager works for the owner, and seeks to align the conflicting interests associated with the operation of the business and property. The operator may, for example, request or even insist on capital injections for renovations and upgrades, which may or may not be reasonable.
Typical Asset Management roles and tasks include the following:
- to monitor ongoing financial performance;
- to monitor the competitive market;
- to monitor the asset;
- to support and review the budgeting process;
- to advise the owner about management issues;
- to advise the owner about investment strategies;
- to monitor the investment community;
- to select and manage operator(s) and consultants;
- to negotiate and administer contracts; and
- to approve and monitor capital expenditure.
AHS Advisory can assist with any or all of the above. In the most basic format, we are simply your Trusted Adviser. Experienced operators will recognise our skills, and welcome our involvement to strengthen their relationships with the property owner and investor.
Due Diligence needs to be undertaken by both the buyer and the seller of a property. Because the value of an accommodation property is driven by the potential of its operations as a going concern, in preparation for a hotel transaction three main areas need to be investigated:
- a physical Property Inspection: the quality and standard of the rooms and facilities, general state of repair, outstanding and upcoming capital expenditure exposure, licenses and permits;
- the historic Performance Analysis under the incumbent operator, especially where the rights of this operator may be protected by the management agreement; and
- the outlook for the competitive market for the property, which will determine its future cash flow potential. A detailed Market Demand Study is often required, as set out in the Market Research section.
Our insights and practical understanding of hotel operations, as well as our knowledge of market supply and demand, makes AHS Advisory an invaluable member of your due diligence team.
AHS Advisory is not a licensed valuer, even though we do prepare detailed cash flow forecasts and can apply a Discounted Cash Flow (DCF) methodology to assess the worth of a property. A valuer places a lot of emphasis on the assessment of historic cash flow performance and comparable sales analysis to arrive at a property value. Our particular skill is in the preparation of Future Cash Flow Projections, based on a supply and demand analysis, competitive positioning and market penetration. This future trading outlook is often the weakness of a valuer, especially when a property will be repositioned and/or rebranded.
Unless you need a formal valuation, we can assist you with a more practical and insightful assessment of the Property Worth, as a benchmark for a transaction, as a guide to prepare an offer, or to support your negotiations.
Another area where we can assist is in determining the potential for a property upon acquisition, through refurbishment, renovations, repositioning, rebranding, extension or complete redevelopment. By incorporating the impact of these changes in our cash flow projections, we can assess the worth of a property to you, which is not always the same as the value of a property on the open market.
Finally, we are well positioned to review and advise on information received from other parties: assessing third party valuations, forecasts, projections, business plans, operator reviews, management agreements and redevelopment proposals.