GHN Perspectives: Kristie Dickinson, CHM

Hotel Investor Strategies for Creating Value and Protecting Interests During a Renovation

Capital expenditures, or “CapEx,” are among the most significant costs faced by hotel owners and have a material impact on asset value. Whether it be investment at acquisition to meet brand requirements; investment during ownership to maintain or enhance competitive positioning; or, investment upon sale where capital needs play directly into pricing, property condition and the cost to maintain the physical asset are relevant at all stages of the hotel investment cycle. While there is a sizable cost to hotel renovation, there is also tremendous upside to reinvestment if capital projects are planned and managed through an ownership lens.

Capital Planning vs. Project Planning: Recognize the difference between Capital Planning: the long-range view of capital needs of an asset over the investment horizon, taking into consideration the anticipated hold period and targeted returns; vs. Project Planning: the act of planning the execution of a specific project within the capital plan. In most instances, Owners (or their representatives) are the only ones in a position to truly understand and consider the impact that a particular project will have on an investment. Leaving critical decisions in the hands of solely the brand, operator and/or the project manager may potentially leave the Owner’s investment interests vulnerable to short-sighted decisions and competing interests. In short, Owners need to be leading the charge or seeking representation during the capital planning and project execution to ensure interests are protected and capital is spent in a manner consistent with enhancing value.

Brand Balancing Act: Brands are often in the driver’s seat when it comes to determining capital requirements, dictating not only what projects are necessary but by when Owners must comply. Standards are ever-evolving, as brands continually reinvent product and service delivery to keep pace with guest trends in an effort to increase market share. This can lead to a severe case of Owner whiplash, given the pace at which capital budgets can be whittled away. Managing brand requirements is a balancing act and Owners must steer the process from an investment standpoint, questioning and negotiating projects that don’t serve to improve operation, enhance value or require unnecessary and often unanticipated capital infusion. All properties are unique and Owners must bring an ROI-focus to brand requirements to be sure the “one-size-fits-all” makes financial sense at the individual asset level.

Copyright (c) 2013 Global Hospitality Resources®, Inc., San Diego, CA USA All rights reserved. 1

Kristie Dickinson Vice President CHM

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Spend Smart: “On-time-on-budget” is the mantra most closely associated with capital projects. While these are valid goals, they can present a slippery slope if not overseen by Ownership. Challenges, as well as opportunities, arise during a renovation project. Regardless of the impact to the schedule and budget, Owners should have an opportunity to weigh in on key decisions that could potentially enhance the project or negatively impact the investment. If there is absent owner involvement or representation, these critical decision points are often overlooked in the vein of getting it done. Active owners have the distinct opportunity to influence the project along the way to ensure the goal is “spend smart” above all else to deliver long-term value.

Cost Savings or Shell Game? Simply put -- be wary of reported cost savings. Despite popular belief, “found money” is often the result of someone making a decision to delay, revise, defer or shift funds in one area at the expense of another. A classic example is the project manager that found significant savings attributed to eliminating the need to complete a central plant project which was instead funded through an outside party. The result, immediate project savings and a huge capital lease which impacted the operation for years, ultimately costing Ownership double. If it’s too good to be true, it probably is.

Expect the Unexpected: It’s not a matter of if, but a matter of when and what surprises lie ahead for Owners embarking on a renovation or major capital undertaking. Active Owners closely involved in projects can anticipate issues and devise a plan on a more proactive basis than those not involved, who may be forced to make decisions in a short timeframe without considering the alternatives. Owner Advocate: Whether protecting their own interests or relying on a third-party expert (asset manager, consultant, etc.), hotel Owners need to have active representation during the renovation process to oversee and anticipate issues and ensure a thoughtful, investment-minded approach.

The lodging industry has witnessed a significant uptick in project volume in 2013 and experts are projecting a continued increase in renovation activity in 2014, and beyond. Now is an optimal time for Owners to revisit their capital plans and ensure they have assembled a team that will put their interests, and their hotel investment, first.

CHM is a member of GlobalHotelNetwork.com.

Copyright (c) 2013 Global Hospitality Resources®, Inc., San Diego, CA USA All rights reserved. 2

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