The art of asset management

Artful management drives positive alpha and value for investors.

It starts with identifying each asset’s unique needs, then selecting an asset manager with the experience and expertise to meet those needs and positioning it for long-term success.

Criteria for selecting an asset manager

Looking at each asset by its needs is critical. “When we underwrite acquisitions, underwrite asset purchases, we know exactly what will unlock the value,” said Ash Kapur, managing director and head of U.S. Hotel Asset Management for Starwood Capital Group, noting, for example, it could be an opportunistic buy in need of renovation or a development play. “As asset owners, we try to mirror the asset’s needs to the competencies the management company has.”

Kapur noted that during the underwriting process when an asset’s P&L is found to be “screaming extremely low margins and high payroll costs,” Starwood seeks a management company that specialises in “running a lean ship.”  Or if the hotel is constantly “under indexed on ADR, but over indexed in occupancies, Starwood looks for a management that does well on topline revenues and a development company that can help renovate, reposition, and rebrand it.

“So it’s the needs of the asset that should decide which management company you pick, as every asset has its own requirements,” he added, noting that if it’s a food and drink repositioning, hire a management company that has a good food & beverage division. “The acquisition process should clearly spell out the strategy that this asset will go through.”

Three major factors guide the selection of third-party asset managers, said Cartarwa Jones (CJ), senior vice president of Investment & Portfolio Analysis at RLJ Lodging Trust, a hospitality REIT.

They are: breadth of operational experience, broad market experience and hands-on experience. “Asset managers employed by RLJ Lodging Trust have worked in a ton of U.S. markets where our hotels are located in.”

She also noted that standardized revenue reporting helps to better understand trend lines. “We constantly evaluate management companies and their performance. Having an in-house asset management team helps to drive operational performance.” Jones said, but noted that her company also uses third party consultants for things like energy performance to secure contractual cost savings across hotel portfolios.

“The way contracts are written today, management companies shave off the top, Kapur added, noting that incentivising management companies on the bottom line can increase profits. “They can take a higher fee,” he said. “We’re fine with that, because it pays for itself, eventually.”

How data and technology improves performance

“What CJ and Ash touched on is reflected in the data sets that indicate performance over the years,” noted Joshiah Mackenzie, vice president of marketing at Actabl, which offers hotel labour-management software. “There’s incentive structures that Ash alluded to, and there’s also data sets and reporting on ways of working together with different partners in the ecosystem that play a really vital role in this,” he added.

When looking at high performance, Mackenzie said that there are a lot of structures with similarities around using data to ensure that everyone is looking at the same metrics and having productive conversations that drive up performance and use data in a proactive way.

He emphasized that data reporting needs to be as close to real-time as possible, because the environment changes daily.  If every industry participant is looking at the same scorecards, they’re able to act on it and be more proactive in areas, such as areas of efficiency and guest satisfactioned.

Kapur stressed the importance of data integrity, noting that while AI is a major focus for hotel owners and operators to evaluate and improve performance going forward, the data fed to AI must be accurate. He said that currently AI is used as a vertical. “If I want to look at certain KPIs (key performance indicators), I’m looking at AI within that vertical. Or if I’m doing a deep research, it provides negative reviews over the last 12 months.

“What I think will be very beneficial is when those vertical AI buckets are a horizontal layer on top of all of those verticals,” Kapur continued. “That allows us to play across these verticals and tells us what’s working, what’s not,” Kapur continued. “Then that data becomes compelling, actionable.”

When navigating economic uncertainties, Kapur believes that the first step in approaching headwinds from a profit and loss standpoint is to look for opportunities that exist at top of the line, at revenue streams, rather than cutting costs.

He noted that during the COVID-19 pandemic, for example, he ran a Starwood company where  hotel rooms that had averaged 85 – 90 percent occupancy when other surrounding hotels were shutting down. These were not extended-stay.

“We looked at the opportunities that existed and focused heavily on revenues. We were very strategic and surgical on the kind of business we took,” Kapur said. “So don’t go up the quintessential ‘I’m going to cut costs,’” he recommended. “Focus on revenues.”

Growing the value pie

Whether the play is to hold or sell, Kapur stressed, “Good design and good service really matter.” For example, he said that when Starwood acquired a hotel in Miami’s South Beach district, “we repositioned it as One Hotel South Beach. It was a home run for the investors. We transacted at 1.4 or 1.5 per key—a great cap rate, and it was fantastic execution for the next buyer. But what made that property click was good design and great service,” he said. “stick to that, whether you’re independent or brand, it doesn’t matter.”

“When there is an opportunity to grow the pie it becomes very interesting,” Mackenzie interjected. “What Ash and his team have done with One Hotels is an extraordinary example of that. People are paying more than they would pay at a comparable hotel because of the investments in these areas (design and service),” he said.

“When thinking about a playbook for an asset, there’s many different dimensions, everything from guest satisfaction to backing it up with the product,” Mackenzie noted. “People need to feel relatively good about spending what they’re spending at a hotel, and there’s a lot of things behind the scenes that go into delivering that.”

He said that the first thing his company looks at when working with hotels to ensure a product delivers on price is the maintenance logs. This provides a sense of how much capital it will take to get an asset to a place where staff can provide an environment that keeps guests happy.

He noted that even in environments where capital investment is limited, a lot of relatively low-cost things that can be done in terms of culture. “There’s also an amazing business side to drive operational alpha by really getting close to the business and the mechanics of everything from, maintenance to guest service and create a performance driven culture at every level of these companies,” Mackenzie said.

“Think performance culture at every level of the ecosystem,” he continued, nothing that while investors or asset managers view this as a kind of table stakes, his company sees this as an opportunity, especially on the front lines where there is greater visibility into the kind of performance provided.

Mackenzie cited Hampton Inn’s investment in culture, as an example. The chains Hamptonality is built around the core values of friendliness, authenticity, caring, and thoughtfulness (FACT), which has resulted in a competitive advantage that differentiates the brand, driving customer loyalty and positive word-of-mouth marketing. It also has fostered a highly engaged workforce, contributing to higher employee satisfaction and retention rates.

Mackenzie suggested that technology also can drive performance by identifying opportunities to think like an owner but act like a smart operational general manager. This provides visibility into details of what’s going on in the asset or in a portfolio, enabling managers to look line-by-line for opportunities to grow the pie, create demand and capture it, drive rate growth, or save money.

Labour is the most controllable expense for most properties, he added, noting that the key is matching labour with demand. Mackenzie said that the biggest opportunities provided by technology is visibility before acting. AI could have an enormous impact by building a layer of data that ensures confidence before acting, he said, noting once the data for labour and other areas is digitized, technology can match it with demand.

To determine the best asset management process to drive long-term success, Jones suggested searching the organization’s hotel portfolio for ways to create value and drive revenue. She noted that RLJ Lodging converted a hotel in Charleston to a Curia hotel, which generated a 150 percent increase in revenue. “ADR went from $197 pre-postioning to  $309 post-positioning,” Jones said. “In addition, we were able to drive different ancillary revenues, like food and beverage.”

Data also is very important, as it enables benchmarking expenses on a per occupied room basis, said Kapur. He note that is critical to being a successful operator, as it identifies which hotels are doing a good job and which ones can be managed better. “We benchmark across chain scales, which enables us to understand why one hotel is doing so much better than another one in the same market,” he said, suggesting that the difference could driven by rate, or there may be something else that could improve the bottom line. like contracting for electricity over three years as a hedge against energy increases.

Timing depositions right

Lastly, it is crucial to think about the timing property dispositions. “What matters to us is raising funds,” said Kapur. “We’re fiduciaries for the L&Ps (loss prevention or income statement) and are driven out of maximizing returns,” he added. To achieve this, Kapur noted that it’s important to understand each asset’s game plan. “Once you’ve executed on an asset, hit a stabilized NOI (net operating income), that will tell you if it’s time to now sell.”

Kapur noted that execution requires discovering a rate that maximizes demand. The key to this, however, is pricing that the product can support. “The product has to tell a story, and service has to stay that story,” he emphasized. “If you get those two right—good design, good product, good service, you’re able to maximize on the revenues. You cannot do this independently— separate them.”

Jones said that public hotel owners ideally wait until it’s a “sellers market” to execute dispositions. “Maximizing returns for our investors is key, so it’s about the timing,” she added, but also noted that it’s also market dependent, as some markets are better performing than others in maximizing returns from a sale.