JLL Hotels Offers a Few Survival Tips for Hospitality Investors who Bought High

The real estate services firm, relying on its Strategic Advisory & Asset Management team, has just released a list of six recommendations to help the aforementioned segment of vulnerable hotel owners survive until the return of the glory days.

October 14, 2010
By Barbra Murray, Contributing Editor

Amelia Lim

Just three years ago, banks were giving away loans like candy and hotel investors were plunking down the big bucks for properties in hopes of reaping big rewards through repositioning–and then it was over. The credit markets froze and the economy went on a downward spiral, leaving many a hotel owner holding assets with depleted values and tumbling revenue. But all is not lost, according to Jones Lang LaSalle Hotels. The real estate services firm, relying on its Strategic Advisory & Asset Management team, has just released a list of six recommendations to help the aforementioned segment of vulnerable hotel owners survive until the return of the glory days.

“Hotels purchased at the peak of the market in 2007 were underwritten with really strong performance calculations, so there was an expected return that did not materialize as a response to what happened with the downturn,” Amelia Lim, an executive vice president and expert hotel advisor for JLL Hotels, told CPE.

In a panic, owners immediately put their focus on cost containment. They reduced staff and cut back guest services. Sometimes such moves may help, but if they are the wrong moves, they frequently prove to be no help at all. Lim points to a well-known brand that began leaving cards in guestrooms allowing guests to indicate whether they wanted their room cleaned; a ‘no’ garnered a small monetary credit to be applied elsewhere at the hotel. “It was met with limited success, so they’re still incurring the cost of that,” she said. “People still want that modicum of comfort and they want to come back to a cleaned room after a long day of meetings or activities. And therein lies the crux of cost containment. These hotel owners should take the long-term view and give guests the full experience to make them want to come back. You still have to maintain the amenity presence, and that can be accomplished by having a strategic and creative approach to how to cut back, while maintaining the guest experience. Some hotels have taken cost-cutting measures that don’t impact guest experiences–fewer chocolates on pillows, but a tray of petits fours in the lobby.”

And making selective capital investments, even during a time when parting with funds for anything that is not absolutely necessary can evoke nightmares, can be beneficial. “Capital expenditures dropped dramatically in 2009, yet we are aware of some owners who persisted with their capital plan and are now seeing an uptick,” noted Lim. “Owners that held firm with their capital expenditure plans will see value; they’ll see success in the long term. Some owners who had, for example, intended to renovate the bathrooms because they are old compared to those of the competitors may find that their top line has eroded because their guests have gone to the competition. So it is important to hold firm–negotiate with contractors, negotiate with vendors to make it happen.”

JLL Hotels’ tip sheet is all about being proactive. First off, continue to engage in marketing activities. “We’re seeing hotels sometimes wanting to slash their marketing budget, but that is very short-sighted,” she said. “Bite the bullet in the short term because, he or she who does not show up is easily forgotten. You have to show up.” So, despite drops in demand and average daily rates, investing in marketing is still a wise decision, because for guests, the hotel is only as good as the last visit. Maintaining a positive image and presence via marketing is a way to stay on the radar of guests and, perhaps, attract new ones.

JLL Hotels’ second suggestion involves the Internet. While many upper upscale properties turn to mass-market vehicles to fill up empty rooms, going down that road means incurring an automatic fee that is usually 25 percent of the revenue. Alternatively, a hotel can promote its own website as an effective means of facilitating direct bookings. In its capacity as a leading asset manager, JLL Hotels has seen the proprietary website approach in action and witnessed the positive outcome.

The third recommendation on the list—get analytical about average daily rates. Instead of having tunnel vision and making high ADRs the most significant objective, it may be more profitable to pursue a strategy that allows for less aggressive ADR goals during certain periods. Sell one room for $1,000 or 10 rooms for $100 each? But beyond the basic numbers, JLL Hotels stresses the value of being analytical in terms of crafting a strategy that takes the quantitative and qualitative measures of success into consideration.

The fourth tip on the sheet is about perception–not a guest’s perception of the hotel, but the outside world’s perception of the guest. During a recession and an emaciated jobs market, many business travelers do not want the person with loose lips in the Accounts Payable department to spread the word that they got a room at the same hotel that hosted the Queen of England when she was in town. Alas, making the effort to mask certain telling details, such as offering receipts that are not adorned with a hotel logo that is synonymous with upper upscale luxury accommodations, may go a long way in making guests more comfortable with their visits. JLL Hotels defines the concept as “combating the AIG effect with creative customer solutions.”

The hospitality real estate services firm also advises hotel owners to explore brand flexibility. Many brands are willing to permit owners to stagger capital investments in requisite changes so the hotel can maintain an acceptable bottom line while making the transition.

Finally, JLL Hotels highlights the importance of hotel owners’ reliance on asset managers, and not confusing the asset manager’s role with that of the property manager, who handles the day-to-day responsibilities. “The asset manager stands in the shoes of the owner and takes more of a long-term view of the asset,” Lim said. “We work as the liaison between the owner and the operator and we give a third-party view that is informed by the investment market. The perception of the brand, the financing structure–we bring it all together.” An asset manager’s multifaceted role can include working with accountants regarding changes in laws that could benefit the ownership entity, adding value through auditing management agreements and making suitable changes and managing debt servicing. “In this cycle, banks are reluctant to close on those suffering from what the market has inflicted, so we have to evaluate the streamlining, recapitalization or restructuring of debt. Asset managers can help you survive in the short-term, but in the long run, real estate is generally considered a long-term play.”

The strategies JLL Hotels outlines are designed to serve as a survival guide allowing hotel owners to be positioned for long-term success, because, as Lim pointed out, “downturns don’t last forever.” Indeed, the signs of an upswing in the hotel market are visible. Sales volume is on the rise–and so are prices. “It is an interesting phenomenon. We’ve seen REITs being very acquisitive because they have significantly lower cost of capital and they need to deploy funds, but there hasn’t been a flood of distressed assets–lenders have been working with borrowers–so they’ve had to up their purchase price. There is a demand-supply imbalance so it’s a sellers’ market because investors want to buy quality hotels but they can’t at the prices they wanted to pay.”

However, prices have not come near those 2007 numbers. “Prices are not what they were at the peak, but while they are still discounted, they are better than they were in 2009. From a value perspective, purchases that happened in 2007 were facilitated by unprecedented liquidity in debt markets. Financing markets will come back to a degree, but it’s disputable if they will ever be as liquid. And even though hotel revenue levels have recovered, you may not be able to get the same value because of financing.”