Actionable insights for maximizing profits
by RACHAEL ROTHMAN, CFA
I graduated from a competitive New York City high school nearly 35 years ago. I can still remember that feeling in early April when I and my fellow classmates received our college acceptances. For better or worse, it was over. We collectively breathed a deep sigh of relief, possibly for the first time since middle school, and got busy celebrating and being grateful for the community and friendships we had built.
As I got my first COVID-19 vaccine in late March, the two experiences felt oddly similar to me – if not relief, at least a deep breath. In the span of a little more than a year, we have whipsawed from, “No reason to panic,” to washing frozen food boxes from the store to #RevengeTravel, all with the speed and force of a mechanical bull.
Every day now, we see positive headlines marching past like a ticker tape in Times Square. Record stimulus. A landmark infrastructure package. Millions of vaccine doses administered in a day. The stock market at all-time highs. Rebounding employment, consumer sentiment, business investment, TSA traveler counts, and year-over-year RevPAR growth percentages in the hundreds.
IS IT OVER?
These headlines suggest the worst of the industry’s challenges are behind us. For those of us with the good fortune of navigating past cycles, we know that profits bottom after RevPAR and, with many properties struggling with cash flow, debt maturities, and expiring covenant relief, there still is significant work to be done. Fortunately, the industry’s toolkit is more advanced than ever. Here are 10 things select-service hotels can do to take the raging bull (market) by the horns and make the most of the recovery.
1. Build your advisory board; leverage your network. No one is expected to have all the answers. If you own a hotel, there is no doubt you have a network of lenders, consultants, brokers, thought leaders, and peers – all of whom you can leverage to brainstorm ideas, access funds, restructure a deal, or optimize performance.
2. Benchmark, benchmark, benchmark. One unique aspect of this recovery is the abundance of real-time data available to make more effective decisions. Hotel owners and operators can now benchmark their channel mix, customer acquisition costs, GRI index, and full P&L statements against a comp set of their choosing. Understanding how your hotel is operating is a starting point, but understanding how the most profitable peers in the market are operating is better.
3. Push rate, even if you are hesitant. Upsell. Make sure your channel mix is optimized. Know your demand generators. This year’s summer travel season is likely to see a spike in demand like none we have experienced in recent times. Delayed weddings, pent-up regional SMERF events, continued work-from-anywhere arrangements, and limitations on international travel will benefit local, regional, and highway hotels. Trepidation is normal, but occupancies are building, and potential guests cannot wait to celebrate like it’s 2019!
4. Decide if a hotel is the best use of your property. Pivot if necessary. Be realistic about your financial situation and competitive position in the market, and be open to bold change. If an asset was marginal prior to COVID, or the market is experiencing competitive encroachment, or capex needs are substantial, work with your advisors to consider the asset’s highest and best use. With demand from investors for alternative-use assets as high as ever, it may not be a hotel.
5. Commit capital only in markets and assets where it makes sense. View brand-mandated capital investments as somewhat flexible across your entire portfolio where possible. With cash at a premium, it’s important to analyze the market outlook and the forecast for your specific property within that market. For example, if your subject hotel is already over-indexing substantially in a market that is forecast for slow or no recovery, the return on that capital investment likely is low. Where possible, work with your brand partner to identify a market or asset where targeted reinvestment, even off-cycle, is more likely to generate a return, creating a win/win for both the owner and the brand.
6. Forecast diligently. Proactively work with your lenders. Once you are certain a property has long-term value above its cost of capital, make sure you and your team take the time to do a weekly P&L forecast, through the balance of the year, then monthly in 2022, then quarterly. Proactively approach your lender if there are constraints. Identify pain points. Solicit feedback and suggestions from your advisory board.
7. Get creative with labor. Prior to the pandemic, hotel wages were increasing 4% to 5% annually. Since then, many national retail chains have set new minimum wage thresholds, increasing competition for labor, and pushing wages higher across the board. Generally, it can be hard for select-service hotels to compete with the flexibility and wages that a national retail chain can provide.
8. Sweat the small stuff; ratings do matter. Pre-pandemic, properties with online reputation scores above 80% had the strongest rates and pricing power. They were taking market share. The renewed focus on cleanliness has made online reviews even more important. For those properties with strong reviews relative to competing supply in the market, we suggest pushing through rate increases above your initial comfort level.
9. Cut costs. Use your customized P&L benchmarking data and ask your network of advisors where they see opportunities you may not see. Working at a large global organization, we have teams solely dedicated to helping owners uncover opportunities for accelerated depreciation, meaningfully lowering telecommunications costs at no cost to owners, conducting building-efficiency audits, targeting guests based on length of stay and NOI potential, cleaning rooms on checkout, and grab-and-go hot breakfasts where brand standards allow.
10. Fight for every dollar. File your insurance claims. Petition to have your property taxes adjusted to reflect current business trends. Explore alternate sources of funding. Ensure you have explored qualification for EIDL grants, and used the PPP expense deductibility when possible. There are experts who work on these issues daily, and nothing would make us happier than to celebrate your success.
Rachael Rothman, CFA, is Head of Hotels Research and Data Analytics at CBRE Hotels. She can be reached at [email protected]. To learn more about CBRE Hotel’s forecast and benchmarking reports, please visit: pip.cbrehotels.com.