Asset Manager Panel Learning from the Other Side

Transcription

1 Asset Manager Panel Learning from the Other Side CHLA s 2015 Annual Conference November 3, 2015 C. Barry Robinson, MBA, CHA, CHAM Dave Johnstone, CHAM Senior Vice President Chief Investment Officer Hospitality

2 Asset Management The fiduciary responsibility of managing a hospitality investment to accomplish the stated financial objectives on behalf of ownership. HAMA Hospitality Asset Managers Association formed in 1992, an association of professional individuals dedicated to the enhancement of hotel and hospitality asset values whose roster includes some 200 members in the United States alone; it now has five affiliate chapters in Japan, China, Asia Pacific, Europe and the Middle East & Africa. Representing insurance companies, REIT s, private equity, individual owners, pension funds, etc.

3 CHAM Certified Hotel Asset Manager started in 2012, a professional designation recognizing advanced certification for qualified hotel asset managers. A select group of senior hospitality professionals whose advanced knowledge in all facets of hotel operations and ownership developed over several years. Their knowledge is validated by taking and passing a comprehensive exam and by also meeting other designation requirements including the demonstration of being a senior or lead hotel asset manager for at least seven (7) years. Administered under the guidance of HAMA.

4 The Asset Management Process Strategic plan asset Market analysis and asset positioning Evaluating brand and chain affiliations

5 Hotel Operations Accounting Marketing and sales Leadership Human resources Rooms Food & beverage Other operating departments and revenue Revenue management

6 Real Estate and the Physical Asset Real estate terminology, economics and the RE cycle Development and construction Engineering and maintenance Insurance, risk management and disaster recovery Property taxes and assessments Planning and managing capital expenditures Mixed-use assets

7 The Umpires Story Three umpires were talking while walking out of a baseball umpire convention

8 Contracts & Legal Aspects Management Agreements Franchise Agreements Space Leases & License Agreements Ground Leases Loan Agreements Other Legal Documents & Considerations

9 Management Agreements (CO/ JMB & Perkins Coie LLP) Historic Cases Wooly vs Embassy Suites (Wooley) 1993 CA court of Appeals Pacific Landmark vs Marriott (Pacific landmark) CA Court of Appeals 1993 Gov Guarantee Fund vs Hyatt (Skopbank) 3 rd Circuit Woodly Road vs ITT Sheraton (Woodley Rd) Delaward 1998 FHR Turnberry vs Turberry Isle Resort (Fairmont vs Turnberry) SD Florida 2011 Marriott vs Eden Roc (Eden Roc) NY Appellate Court 2014 FHR Turnberry vs Turberry Isle Resort (Fairmont vs Turnberry) SD Florida 2011 Marriott vs Eden Roc (Eden Roc) NY Appellate Court 2014 Castillo Grand (St. Regis FLL) Setai Miami Mondriian Soho MSR Resort Golf Course, LLC (Bankr. S.D.N.Y July 2013) Not Published

10 Management Agreements Agency Old English Common Law Very common across cultures The law of agency is an area of commercial law dealing with a set of contractual, quasi-contractual and non-contractual fiduciary relationships that involve a person, called the agent, that is authorized to act on behalf of another (called the principal) to create legal relations with a third party. Personal Services Contract Any business enterprise with the primary purpose of providing personal services. Personal-service activities encompass a wide range of professions, including law, medicine, engineering, design, finance, accounting and even performing arts. As the name implies, a personal-service activity focuses on directly providing a personalized service, such as legal advice or medical treatment, to an individual or group for compensation. Personal-service activities do not require the use of capital in order to generate material income.

11 Agency Coupled With An Interest Agency coupled with an interest is when an agent has possession or control of the property of his principal and possesses a legal rights against interference by third parties. It is an agency relationship in which the agent is given an estate or interest in the property that is the subject of the agency. It is distinguished from situations in which an agent merely derives proceeds or profits from transactions. An agency coupled with an interest may also be referred to as a power coupled with an interest or a power given as security. In an agency coupled with an interest, the agent has some legal right to (an interest in) the property that is covered by the agency arrangement, and his position as agent continues until that interest ends. Generally, the ownership of the principal's property does not pass to the agent, whereas in a full trust agreement, ownership does pass to the trustee. If the agency is coupled with an interest, the agency usually cannot be revoked by the principal before the expiration of the interest and is not terminated by the death or insanity of either the principal or the agent.

12 Management Agreements Power vs Right to terminate by owners 50 year no cut contracts are not holding up in court. Personal Services Court won t issue injunctions on Personal Services Contracts. Inability to enforce Personal Services Contracts trumps Agency Coupled with Interest. Agency Coupled with an Interest is only valid if the Manager has the EXACT same interest as the Owner. Marriott has used argument of Independent Contractor Maryland Law (MI HQ) says you can enforce Personal Services Contracts. Says you can t terminate me. Being challenged based on 13 th Amendment conflict you can t force me to do business with you Owner s will negotiate out of Maryland based law in their contracts.

13 Calculation of Damages MSR Resort Golf Course, LLC (Bankr. S.D.N.Y July ) Hilton brought proof of claims for $334M /Included Base Fee (2%) Overhead (1%) Group Svc Exp (2%) Brand Damages Grand Wailea expansion fees/ HMA ran to 2024 with 10 year renewal w/ cure clause to termination provisions Court determined Only net profits are recoverable. Based on projections. 2.5% inflation/ 6% CapEx Reserve. Deduct.25% of Revenue (8.33% of 3% Management Fee) for overhead. Discount Rate calculated at time contract was executed. WACC considered for properties risk adjustment (increased risk for Iconic Resorts) GW 12.6% vs 11.6% for other properties. 5 years of Group Service Fee. Key Money rejected. No Brand damages. Too speculative. Standard to show loss of good will or reputation is high. Damage claim rejected for expansion.

14 Lower vs Upper Court Analogy Trial Court = Justice Appeal Court - Law

15 Financial Analysis & Benchmarking Benchmarking Hotel Revenues Benchmarking Hotel Expenses Space Optimization/ Highest & Best Use Sources of Benchmarking Information Business Intelligence & Reporting Systems

16 Sources of Benchmarking Continues to be more standardized/ less speculative More available directly to Owner s & Asset Managers More dashboard/ real time analytics Google Analytics for Social Media rankings Trip Advisor etc. Meta Data allowing more aggregation of big numbers and statistical analysis, trending and forward looking projections (GDP related analyses etc.) (Dr. Karen Xie Tuesday Breakout)

17 Benchmarking Revenues The Standards STR PKF Hotel Horizons The New How to calculate Airbnb leakage? Beyond other Brand competition creep.

18 Benchmarking Revenues - Airbnb Varies greatly by market. Does not appear to be a major Colorado factor to date. NYC is ground zero/ Several reports N.Y. State Attorney General, Bloomberg Report, HVS for Hotel Association of NYC. Finding of HVS: Direct Loss $451,426, % Ancillary Loss Food $88,880, % Beverage $20,537, % Other Operated $11,850, % Miscellaneous Inc. $14,669, % Total $135,938, % Construc. Loss $1,088,756, % Indirect Effect Loss $101,616, % Induced Effect Loss $114,665, % Tax Employee Benefits $28,549, % Proprietor Income $ 835, % Tax-Production & Import $78,257, % Household $31,287, % Corporations $11,161, % Lodging Tax $76,503, % Total $226,594, % Grand Total $2,118,987, % Rounded $2,100,000,000

19 Benchmarking Expenses Host Reports Channel Distribution Costs Net RevPAR

20 Channel Distribution Costs (Kalibri Labs) 468 hotels from / Same store 340 hotels. Commissions rose 2x the Rate of Revenue Growth. Contribution to Operating Expenses Prototype NYC 2012 Low contribution commissions + Sales/ Marketing 70% High contribution 80% Upper/Upscale 104 managed properties with brand affiiliations. Finding 1 Flow through was not improving & customer acq cost rose almost 23% Finding 2 - External Costs grew 54% faster/ Brand Allocation costs grew 37%/ Retail Commission 34%/ 48% rise in commissions in Franchise properties. Finding 3 Local Marketing & Sales Budges were hold down. Finding 4 Rising external costs further tilt the balance of spending Finding 5 Total acquisition & retention cost vary widely by Brand (Blind data) Finding 6 Top 10 Brands included in the study showed commission growth from 10% to 72%.

21 Acquisition Costs Conclusions (Kilibri Labs) Customer acquisition cost should be a major discussion item between Owners & Brands. If Brands become less able to deliver un-commissioned revenue, they have lower economic value. While costs have been offset by reductions in local spending, owners shouldn t allow local Sales & Marketing to be crippled. In new HMAs, customer acquisition cost must be clearly stated and ownership has the right to approve incremental fee. Tracking the costs of customer acquisition should be an ongoing focus for every property. Luxury and Upper Upscale segments were studied, but all segments should be concerned. Calculation of Net RevPAR must become a priority. Contribution to Operating Expenses and Profit (COPE%) Revenue minus Commissions and Transaction Fees.

22 Business Intelligence & Reporting Systems (Rainmaker) Piloting at one of my Hotels. A securely hosted cloud based hospitality business intelligence application. HotSos module Immediately identify underperforming hotels, dates, segments, channels Ability to benchmark across a portfolio Standard Room Types, and channels Customized reporting Data uploaded nightly Ability to assess mix and pricing Asses Channel Performance (Booking Engine/ Central Resv/ GDS/ Hotel/ OTS etc) Compare recent production to trend. At a Glance view of performance to budget and pick up. Review of future performance with pick up and comparisons to last year. Report Card view of key Negotiated Accounts. Measure effectiveness of direct marketing campaign. Guest spend by booking channel. Deep dive into daily pickup. Benchmark mix of sales across a portfolio. Benchmark room types across portfolio. Benchmark Channel performance.

23 The Investment Decision Capital Structures Bill Sipple and Geoff Davis Debt Terms and Tests- Bill Sipple and Geoff Davis Equity Sources and Returns- Bill Sipple and Geoff Davis Portfolio Risk Assessment Bill Sipple and Geoff Davis Valuation & Techniques Buy/ Sell/ Hold/ Refinance Bill Sipple and Geoff Davis

24 Valuation & Techniques (Penn State Study- John O Neil, MAI,ISHC,Ph.D) Traditional methods Direct Cap on current NOI/ Discounted Cash Flow/ Trailing 12 with Cap Rate/ Sales Comp/ Gross Multiplier/ Replacement Cost. Penn State Index approached from Statistical Analysis (Back to Big Data) Occupancy/ ADR/ # Guest Rooms/ NOI per Guest Room 3000 hotel sales transactions Underlying issue owners, operators and analysts want to understand effects of hotel brands on market value trends. Valuation is seen as art as well science. Previous research has not evaluated the relative strength of various brands contributors to hotel market value.

25 Valuation & Techniques Penn State Index results ADR (mean - $92.91) Occupancy (mean = 65.8%) NOI (mean $8,044 per room) Sales price (mean = $84,868) Cap rate (mean = 9.55%) Room Revenue Multiplier (mean = 3.46) Number of guest rooms (mean 210) Property age (mean 20 years old)

26 Conclusions of Penn State Study Significant brand effects were found in four hotel types (mi and midscale w/o F&B, midscale w/ F&B, upscale and upper upscale) Brands with significantly higher market values: Hyatt, Westin, Courtyard, Hilton Garden, Homewood, Residence, Summerfield, Country Inn and TownePlace. Brands with significantly lower market values: Doubletree, Sheraton, Crowne Plaza, Hawthorne,, Radisson, Howard Johnson, Ramada and Fairfield. Automated Valuation Model (AVM) -$42,873 (constant) +NOI per room x ADR x # of rooms x occupancy x = estimated value per room

27 Thank You