Hotel asset management

Published on January 31, 2024   18 min
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Hi everyone, I'm Sally Chang. I'm an Asset Management Analyst at Hotel AVE, a hotel consulting and asset management firm headquartered in Providence, Rhode Island. After graduating from Sookmyung Woman's University in Korea, majoring in hospitality management, I got my master's degree at Boston University, also studying hospitality management. Before joining Hotel AVE, I worked as an analyst at hotel real estate company, working mostly on distressed assets. Today I'm going to talk about what asset managers actually do and why they are centered in hotel real estate and investment work.
Let's start with what asset managers do. The overarching goal of the asset manager is to increase the value of the hotel real estate on behalf of the owner. If you look at the hotel as an investment, generally there are three main groups that are involved in that hotel asset. The owner, who provides the main capital to the hotel. The management company in which they operate and manage the hotel day-by-day and asset manager, the asset management team plays a role to connect and match the interests of the owner and operator to achieve the best possible profit for both groups. To give you more intuitive and straightforward insight into how owner and operator could have different interests, let's take a look at the summary P&L of a hotel.
Okay, If you look at the P&L on the right-hand side, all the lines above GOP, which stands for Gross Operating Profit, are in the hands of the operator. They generate revenue and manage expenses accordingly. Aside from the base management fee, which is usually based of percentage of gross revenue, operators could gain incentive fees if they could efficiently manage or control the hotel's expenses above their budgeted or certain that operating income margin. Their main goal is to minimize the costs as much as possible. On the other hand, from the owner's perspective, who are in charge of the bottom part of the P&Ls as you can see on this slide, they want the hotel to be maintained well in a long-term perspective, considering the value of the hotel in the future. This is where owners and operators could potentially have conflicting opinions on how they want to manage expenses. Now we're going to take a look at the small question here. Insurance company owners are often interested in long-term cash flow of the hotel, which requires to be operated under well maintained condition. For example, there was a damage on the roof due to parking. The hotel has an option to patch a leak for a cost of $30,000 or replacing the entire roof for $300,000 between management company and insurance company owner. Who do you think they would pick? Which option and why? Now, operators went with one cheaper alternatives which is $30,000 to fix the issue, which will help to reduce the cost to fix roof, but owners would want to do the full examination on the entire roof or safety system of the hotel, which would cause higher costs of $300,000. That choice would benefit the hotel in the long run.