Hosting Management Companies: Expert Management or Incremental Revenue

As a hotel owner/investor with perhaps one or two hotel assets, you have invested your hard-earned capital and risked dipping into your loans in search of a profitable lodging operation. Also, given your limited exposure to the hospitality industry, you may have selected a professional management company to operate your hotel. Perhaps a “top tier” management company, a company that not only franchises hotels but also provides management services. Alternatively, he may have selected a “second tier” company. That is, a hotel owner/franchisee with dozens, maybe even hundreds of hotels managing their own and others’ assets. Or perhaps he has chosen a smaller boutique firm with possibly one or two hotels of its own looking to increase its management portfolio. No matter who you have selected, you expect them to have your best interests in mind with every decision they make. Well, that may not exactly be the case.

The goals of lodging owners and investors are rarely fully aligned philosophically or financially with the goals of their appointed management or sometimes even their brand. Operators and brands often have competing objectives, which are in direct conflict with maximizing owner profitability. For example, brands have an interest in upholding brand standards and creating “brand equity,” which may not always be in the best economic interests of an individual lodging asset. Safe brands will argue that what’s good for the brand will have a trickle-down effect on you, but changing your new wallpaper behind reception from a shade of beige to a shade the brand wants installed in all of its hotels (which I that a major brand has asked them to do, which will remain anonymous) is actually a misuse of capital that will never affect revenue or guest satisfaction.

Hosting companies, on the other hand, have an interest in growing their portfolios and revenue (typically a percentage of yours), but may not be motivated to help your hosting operation achieve its maximum financial performance. short or, worse still, long. term. They may also lack the expertise or incentive to control costs, seek the best market position for an individual property, maximize a hotel’s market penetration, or possess the knowledge to find their way through the myriad of distribution channels. old and new.

Given that average management fees, currently hovering around 2.5% of a hotel’s total gross revenue (including incentive fees), are significantly below the rates of yesteryear, it’s not surprising. In recent years, in an attempt to increase revenue, management companies focus on generating incremental revenue by adding properties to their listing at lower rates. Many of these companies maintain the same amount of staff and resources by distributing them among more assets.

Take the following example. At the current rate of fees, an additional $25,000 in hotel revenue is about $500 in fees. Let’s face it, $500 is not a significant enough return on the additional efforts, staff time, and resource allocations it would take for the management firm to generate that additional $25,000. However, as a homeowner, it can make the difference between paying your mortgage with cash flow or out of pocket.

The economic facts just don’t add up. Consider a typical select service hotel with 100 rooms, an average daily rate of $70, and an annual occupancy of 70%. Average rates for this hotel would be around $35,000. With hotel revenue from management companies at this low level, what can an owner really expect from them? While your hotel may benefit from any purchasing power, it will also absorb the expenses associated with travel related to management companies, bookkeeping services, co-op marketing, etc. This is often an area where some less scrupulous management companies recoup some of the revenue lost in recent years.

When rates are at this low level, the game becomes volume. It is not my intention to criticize any management company. I was the COO of three small to medium-sized companies operating national brand and independent luxury hotels and currently represent many hotel owners through our consulting practice. I see both sides of the problem. But… there are few volume-focused companies in any industry that you can think of as known for their outstanding levels of customer service.

So what’s a homeowner to do? Become an informed owner who takes it upon himself to monitor the performance of his hotel (or hires someone to do it for him). Please note that for $35,000 a year in fees, your services may be restricted to the limited supervision of a property manager; let’s hope it’s good. If you hire a management company now or are in the stages of interviewing one, ask yourself a few questions about your relationship and how you will be informed of your hotel’s level of success. You may not need all of the information suggested below, but you certainly need some. ask yourself…

Get a report from a company representative who is on site for a day or two each month detailing their findings from the physical plant, operations, and sales efforts by the personnel they oversee? Does their finding match yours?

Obtain timely monthly operating statements that compare results against budget and last year?

Receive monthly reports on hotel performance as measured by third-party companies, such as
1) Smith Travel Research’s STAR report to review your REVPAR performance against a precise competitive set and market slice;
2) TravelClick Hotelligence reports to measure your GDS penetration;
3) Distribution channel contribution reports to review your brand, Internet, wholesale, GDS and other contributions to your revenue?

Receive monthly booking pace reports to review your revenue position compared to the same period last year along with an action plan for improvement?

receive monthly sales reports such as; Top Clients Report showing the productivity of the hotel’s top 20 clients and the changes in their productivity from year to year; reports on the returns generated by advertising expenses in pay-per-click, GDS, print and other advertising media; and vendor productivity reports to determine who sells and produces in your hotel?

Obtain reports on the effectiveness of your reservations department (such as coverage and conversion reports) and the quality of a guest’s stay through calls or secret visits from buyers?

or receive monthly reports on the satisfaction levels of your guests and your staff compared to your brand or similar hotels?

Receive reports on industry performance in the areas of profitability, expenses, labor costs, REVPAR generation, and market penetration from your hotel at least once a year to benchmark your management company’s performance?

or receive annual reports on changes in the market, such as more or less new or closed competitors, businesses or industries in the area?

Or receive an annual marketing plan with monthly or quarterly updates on progress?

Receive assistance in planning and implementing capital projects?

receive an annual report on asset condition and franchise compliance?

As an owner, the ball is in your court and many times you hire a management company because you are too busy to get involved in the details necessary to ensure you maximize the return on your hotel investment. Maybe it’s time you took some time to investigate if this is happening?