In developing and operating hotels, mistakes are plenty

The 2017 Annual Hotel Conference is Oct. 11-12 in Manchester.

At the Annual Hotel Conference (AHC), October 11 & 12 in Manchester, UK, James Devitt, the managing director of London-based Herald Hotels, which specializes in hotel investment consulting, will moderate a panel that is bound to be full of remorse—and hopefully some happiness, too.

He will lead: "Regrets, I Have A Few, But Then Again…Real Life Stories of the Pitfalls of Hotel Development and Operation." In it, his panelists—Kevin Charity of the Coaching Inn Group, Andy Janson of Jansons Property, Robert Nadler of Nadler Hotels and Peter Banks of the Rudding Park Hotel, will discuss, as frankly as possible, the mistakes they have made in the past and how they can be avoided in the future.

As a first-hand observer of investors and developers in the hospitality sector, Devitt has seen his share of successes and failures. He cheekily tells us ahead of the conference that the timing of the panel is perfect in light of the political blunders by the likes of President Donald Trump and the UK's Boris Johnson. "The world seems ready for a hotel bloopers show," he said.

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The panelists, he continued, were selected precisely because they have experienced the pitfalls of hotel development and operation or at least witnessed them from the sidelines. "We will try to highlight some of the risks and the steps which can be taken to minimize them, without losing the rewards of hotel development and operation," he said.      

James Devitt of Herald Hotels

As an observer of mistakes and victories, here Devitt offers his own takes:

1) What are some of the biggest mistakes you have observed of developers when they first enter into a development deal?

Hotels are a specialist form of real estate and the biggest errors are made by developers who are too keen to apply the lessons from their own specialist fields whether that be commercial or residential real estate and fail to understand how hotel development may differ. In many cases, developers do not understand how marginal hotel development can be and how little underlying factors need to shift to render hotel development uneconomic often during the implementation of the scheme. Many developments either run short of funds or exceed their timetable as a result and finding additional funding part way through a hotel development project is often very difficult.

2) What is your advice to developers before entering into a project?

Developers need to take advice which covers all the options on the type, scale, size, deal structure, operational structure, costs and funding, timeline and exit. Hotel feasibility studies often focus on how the pre-selected hotel might trade and tend to underplay the risks and competition in the market and the broader facets of a long-term development project. Developers often need cogent advice on alternative development options in the hotel market and the likely risks and rewards from following different paths. Specialist hotel developers are few and far between and the end market for the completed hotel can be narrow and fickle.

3) What are some of the biggest mistakes you have observed of buyers when they go into acquiring an asset?

Many buyers want to buy a hotel because they want to own a hotel. They have stayed and dined and want to entertain their friends and colleagues. They want their family involved in refurbishing it and they imagine the end result of their project in a magazine. They are simply not aware of the complexity of the business they are considering and that their ‘friends’ the professional hotel companies may not share their agenda in terms of spending capital or returns on investment.

Investors may not understand the difference between a hotel management agreement, a hotel lease and a hotel franchise agreement. Investors often choose to buy hotels without having specialist advisors by their side. In commercial real estate, investors have long seen the need to get professional advice on acquisitions but in the hotel world, most buyers act without third-party advice.

4) What is your advice to buyers before pulling the trigger on an acquisition?

Prepare a detailed business plan and be comfortable that there is enough flexibility in all aspects of the plan to enable the business to survive or adapt to changing market conditions. Consider the upsides and the risks carefully and identify the contingencies which can be adopted if required. Identify alternative investors who could acquire the hotel in the event that you might want or need to sell it. How deep or wide is this investor pool? On purchase, the buyer is likely to be paying more than any other buyer was prepared to pay for the asset. Recognize and accept this fact and the financial returns which it implies and implement the business plan confident that all risks and upsides have been considered.

5) What are some of the biggest mistakes operators of hotels make?

Operators tend to be eternal optimists and do not win contracts without presenting the upside. Owners earn their returns from the actual bottom line of the business whereas the operators may be remunerated in large part by revenue as opposed to profits. Operators can become fixated with their brands and brand standards which can be applied too rigidly especially in the case of PIPs on limited-service products. Appointing the wrong hotel management team in a particular asset or location can damage a business significantly and take time to repair. Attracting the best senior staff is often critical to the performance of a hotel and the owner is reliant on the hotel operator attracting the right candidates for these roles.

6) What is your advice to hotel owners when selecting an operator? 

Make sure that the operator is suitably incentivized to scrutinize the bottom line. Look at costs in terms of time, people and resources as well as money. Does your operator really understand the market and the competitive set? Are the normal benchmarks an effective way to judge the financial success of the business?

7) Where or what are the biggest opportunities currently in the hospitality sector for developers and buyers?

  • Choose the best in class of operators and brands, sectors and locations and try to secure your development or asset to meet their needs.
  • When market conditions are positive, hotel developers and investors need to move very quickly or otherwise the cycle will turn before the business plan can be implemented
  • Alternatively, be flexible as there are always pockets of opportunity in this varied sector. There is room for institutional investors, private-equity players and high-net-worth investors in the various types of hotel developments and investments available in the UK market.

8. How do you define a great hotel operator?

A great hotel operator succeeds because of its people providing thought leadership and innovation, service and value. In the UK, I would unwaveringly recommend those where I see happy and contented guests.

The Annual Hotel Conference is October 11 and 12 at the Hilton Hotel, Deansgate, in Manchester. Follow this link to register for the show. 

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