In the movie “Heat,” Robert De Niro’s character, an experienced bank robber, shared advice he once received about not getting attached to anything you aren’t willing to walk out on in 30 seconds flat if you feel the heat around the corner. The parallel here is that a hotel investor needs to institute and maintain strong discipline—even during prosperous times.
The hotel industry today is generally enjoying positive upswings in revenues, cash flows and property values. But we can’t forget that just a few years ago our industry was in deep despair. In order to ensure survival during the next downturn, you need to be prepared today. You need to have the ability to “walk out in 30 seconds flat” when you feel the heat, if you will.
With this in mind, here are three key tenets to adopt and enforce throughout the life of a hotel investment:
1 Build a fortress with your capital structure
Have a structure in place that maintains a healthy alignment of interest and incentives and shares risks appropriately. The cost of capital is certainly important, but is not the be-all and end-all. Have the right type of partners who: (a) value the relationship, (b) leverage each other’s strengths and (c) truly understand the hospitality business. Also, the capital structure should be customized around the hotel investment plan and should set the stage to successfully execute this plan.
2 Don’t starve the hotel of capital
Maintaining a high-quality hotel requires that the owner not only meet or exceed brand, lender and investor expectations, but also carefully addresses the needs and wants of key market demand segments. Yes, you can overspend and the capital investment should be practical, but far too often owners neglect physical plant upgrades or asset value enhancers (e.g., great bar, meeting space, fitness center), resulting in a huge “cost accrual” that can ultimately hinder a refinancing or sale.
3 Maximize competitive positioning
Identify your strengths and weaknesses as compared to your competitive set—play to your strengths while improving upon your weaknesses. While brands can be strong risk mitigators, they do not provide great service, offer memorable hospitality experiences or develop strategic marketing plans—great operators and owners do. Also, consumer preferences evolve. Technological adaptation is the key to staying on message, with food, drink and fitness offerings driving many “buy” decisions today. Listen closely to guests and exceed their expectations.
Being reactionary to unexpected economic downturns increases the odds of failure. Manage risk by maintaining discipline 24/7. Doing so in prosperity should help “lower the heat” during tumultuous times and position your hotel to maximize long-term, multi-cycle success.