The Midlantic's Asset Management Plan
SHA565: Developing an Asset Management Strategy School of Hotel Administration, Cornell University
The Midlantic’s Asset Management Plan SOMEWHERE, MID-ATLANTIC STATES, USA
S TRATEGIC PLAN Executive Summary Asset Manager: John B. Goode Property Summary Rooms: Floors/Bays: Property Type: Location: Address:
400 (6 suites) Me eti ng Space: 10 floors/415 bays Op e n i ng Date: Suburban Expansion: Suburban 1234 Sunderland Park Strategic Scorecard: Somewhere, Mid-Atlantic
Property ID: abc-123 Region: Mid-Atlantic Acquisition Date: 12 years ago Cap Ex Escrow:
5% of Total Sales
14,000 square feet (35 SF per room) 13 years ago N/A Strong Hotel, Strong Market
Disposition Strategy: Short-term hold Property Rights: Fee Simple Manag er (Franchisor): Chain Hotel (Respected Brand Operator) CapEx Escrow Type: Contribution
I. Executive Summary The Midlantic Hotel's operating performance has trended downward over the past two years although the forecast for next year is for a reversal of this recent operating trend. The hotel, which is situated in a secondary location to the more desirable Suburban Metro Center, relied heavily upon overflow from this submarket during more robust times. However, the deflating tech bubble in the Airport/Tech Corridor eliminated any transient demand that may have been pushed out in the past, and as such, Midlantic's transient demand softened, making it more dependent upon the insufficient demand within the office park in which it is located. The hotel's sales efforts to replace its lost transient demand stumbled last year and part of this year as the hotel attempted to “group up.” However, the property appears to be headed in the right direction for next year and beyond based on the current booking pace. The hotel should be considered a short-term hold candidate, with a disposition in a couple of years after the property has had a chance to recover the slippage in income from the past few years. Reasons for selling include the hotel's secondary location and position within the market, the path of growth away from the hotel's submarket, an underfunded escrow reserve that will require funding in [year +2], and the owner's numerous investments in hotels in the region. Still, there are operational and return-on-investment (ROI) opportunities at this property that can be executed over the next two to three years, which should elevate the hotel's overall value. Operationally, the property's sales team has not maximized its meeting space nor has it leveraged the size and equipment of its laundry room. From an ROI perspective, an opportunity exists to convert underutilized F&B space into more efficient meeting space that will allow the hotel to sell more group room-nights as well as further increase its banquet sales.
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SHA565: Developing an Asset Management Strategy School of Hotel Administration, Cornell University II. Positioning Statement The Midlantic is positioned to serve those business travelers visiting the Suburban Metro Center in the larger urban market. The hotel sits in an office park of 2.6 MSF (million square feet) and relies upon two demand generators for a significant amount of its overall transient business, Large Tech Company and Large Oil Company. With a recently refurbished ballroom and meeting space in [year 1], the hotel captures more than its fair share of local catering opportunities. Opportunity exists, however, for the hotel to be better positioned to capture more group rooms and catering in the future, and next year's budget reflects the hotel's new direction.
III. SWOT Analysis STRENGTHS
OPPORTUNITIES
ØCondition of property—renovated ballroom; new bedding ØOffice park location; adjacent to demand generators
ØAdditional 2.3MSF approved for office park development ØConversion of dark lounge to more meeting space ØPossib le brand conversion and/or physical expansion
WEAKNESSES
THREATS
ØLocation is a secondary fill area to the more desirable Suburban Metro Center ØSaturation of Chain Hotel product in market
ØLtd. service Chain Hotel product growth in extended area ØContinued rate discounting in market
IV. Plans and Actions The following are asset management's objectives for preserving our investment in the Midlantic Hotel or increasing its value over the next two to three years. Operational Ø Secure $200K to $300K in outside laundry contracts as a result of a recent investment in the hotel's laundry room equipment. Ø Ensure that hotel's sales department is focused on increasing group rooms from just under 20,000 room-nights annually to approximately 30,000 room-nights consistently; replace dependence upon lower-rated Other Discount business with more dependable and higher-rated group demand. Ø Increase hotel's group room-night catering contribution to levels more consistent with the hotel's positioning and product offering. Capital Ø Full guest room renovation in [year +2] ($4.OM); new bedding package installed this year but case goods are original (13 years old) and soft goods date back six years. Ø Freshen up F&B outlets ($500K), which are original to hotel's opening, in two to three years. Ø Replacement, this year or next, of hotel's roof ($800K) and cooling tower ($200K), both of which are owner-funded projects. ROI Ø Branded Coffee within hotel's gift shop. Ø Conversion of hotel's dark nightclub into meeting space. Other Ø The hotel has the potential for additional development on land to the rear of the property. The hotel has considered development of 100 additional rooms and/or creation of a junior ballroom over the past decade but has deemed that market conditions were not appropriate to pursue either. The land on which the hotel sits has a maximum development of 300,000 SF and currently 290,000 SF are developed. Ø Conversion of the hotel to a brand not currently represented in the Suburban Metro Center
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SHA565: Developing an Asset Management Strategy
School of Hotel Administration, Cornell University
market so that our asset can (1) mitigate the impact of existing and future Chain Hotel product in the market, and (2) elevate the pricing position of our asset to reflect its curb appeal and quality relative to the competition.
Disposition Target Date: In three years Ration ale: This asset is a short-term hold given that it does not fit our profile of being the best-located and best-quality hotel in a market with high barriers to entry. The hotel's location is the largest hindrance to this property being the lead hotel in the market, a characteristic that will not be overcome by any amount of capital dollars or flag changes. The property has underperformed its potential over the past two years, but asset management is confident that the property can emerge repositioned as a more competitive and profitable hotel with a greater emphasis on group business over the next two years. A sale prior to that time period based on a recent financial performance may understate the hotel's value. Another reason for selling the hotel is that the direction of growth in the Mid-Atlantic region appears to be concentrated in the Tech/Airport Corridor area rather than in the hotel’s market area. At this point in time, there is no discussion of any new demand generators entering the subject hotel's immediate market, but there is much speculation about potential growth in the stretch from Suburban Metro Center to the Airport. A final reason for disposing of this asset is the aggregate investment that the Owner has in the Mid-Atlantic region. It may be prudent for the company to reduce its exposure to this region, and invest in those hotels in markets that have less volatile swings economically.
Key Performance Indicators—rank out of 30 RevPAR: RevPAR Index: Total Revenue: Roo ms Margin: F&B Margin: HP Margin:
Year -2
GSS Overall Score: Brand Standard:
$111.98 110.6% $27292 79.3% 30.8% 39.3%
Ran k
12 13
13 17 11
Year -1
Ran k
$88.89 107.2% $23,088 78.8% 31.0% 37.0% 74 67
15 17 13 18 13
Pres e nt Ran k (Estimat ed) $80.32 17 NA $21,767 77.4% 13 33.5% 17 34.2% 17 79 67
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SHA565: Developing an Asset Management Strategy
School of Hotel Administration, Cornell University
Market Outlook •
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Through the first three quarters of this year, the metropolitan economy struggled from the weakness in the airline, tourism, and telecom industries. The anticipated gains from the federal spending related to the War on Terrorism have not been enough to offset the regional economy's larger hurdles of excess capacity in the tech sector and weakened consumer confidence. The metropolitan area has a 3.6% unemployment rate as of last month, which is up from 3.2% from the prior year. Still, the metropolitan area has the lowest employment rate nationally, well below the US average of 5.9% in the last month. Within the local market area, the local unemployment rate is only 3.0%. With the prolonged downturn in the high tech industry, office vacancy levels in the Tech/Airport Corridor have mushroomed from the single digits eight years ago to the high teens in the past year. In the local sub market, there are roughly 7.8MSF of office space, of which 18% is available currently, up from the 16% at the beginning of the year. Unemployment in the county has risen modestly during the recent recession but remains below 3.0% as of the beginning of the year. While the telecommunications industry remains depressed, economists predict that the Mid-Atlantic region will benefit disproportionately from the pending government contracts for security, surveillance, and intelligence technology development. The office campus, where the Midlantic Chain Hotel is located, has 2.7 MSF of office space developed and another 1.6 MSF available for development. The park sits on the eastern side of the intersection of Route 98 and Interstate 123. Late last year and early this year two office buildings were completed, including the 250,000 SF headquarters for Large Tool Maker, and a 295,000 SF speculative office building, which is only partially occupied. Located in the office park are major demand generators Large Tech Corporation and Large Defense Contractor. The build-up in defense work as well as the increase in the government per diem has resulted in an increased number of room nights for Large Defense Contractor as well as other defense contractors. Large Tech Corporation has traditionally been one of the top producers although its production has fallen off in the past year. The recent acquisition of locally based Medium Tech Corporation may create some additional demand. Large Oil Company's regional headquarters is located opposite the office park and this demand source is also a major contributor to the hotel, although recent volatility in oil prices has stunted roomnights from this source. Both Large Tech and Large Oil have negotiated down their special corporate rates for the past two years. Currently located in the office park, Regional Bank Company is relocating next year to Suburban Metro Center. This account is responsible for roughly $300K in total revenue and about 1 point in occupancy. Management believes that their hotel will remain the preferred property despite the company moving out of the Mid-Atlantic.
Five-Year Strategic Outlook (Key Events) 20xx 20xx+4
20xx+1
20xx+2
Opening of Convention Center
Presidential Election
World Sporting Championships International Sporting Competition
Strong year for regional activity
20xx+3 Presidential Inauguration
Congressional Elections
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SHA565: Developing an Asset Management Strategy School of Hotel Administration, Cornell University Operational Outlook •
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Fall-off in transient demand in the past year has left the hotel's ADR vulnerable and contributed to a decline in hotel profitability. Although transient demand is up 15 percent, transient ADR has declined by $30 YTD as room-nights have shifted away from the higher-rated Premium and Special Corporate segments and into the lower-rated Other Discount and Wholesaler segments. Not until the hotel shifts its mix of demand to the higher-rated segments will the property be able to return to the profit and profitability levels of the past. Two major demand generators, Large Oil and Large Tech, will continue to provide the bulk of special corporate rates at the hotel, but at slightly lower rates than in this year (and last year), with no guarantee of increased volume. The hotel is heavily dependent upon the special corporate category, which historically has represented 40% or more of this hotel's transient base. Lack of transient overflow from Suburban Metro Center and Downtown will create pressure on the hotel to replace with group demand. In the past two years, the fall-off in corporate transient was replaced with discounted transient segments such as AAA, Priceline, employee rates, and AARP. Ideally, the group room nights next year will be booked at a higher rate than what is achieved from the short-term discount transient and allow a yield at a higher rate among its transient customer base. Booking pace through the current month reflects a 10,000-room-night increase over the current year, or a 140 percent increase year over year. Of those room nights, 4,500 are from a new tour and travel account. Similarly, tentatives are up 66 percent for next year. All of this is indicative that the hotel will be slowly shifting its mix from the historical 80/20 to the more ideal 70/30 transient group orientation. Group booking pace will be supported by the addition of a new sales manager to the team late this year to prospect for new and local business. F&B revenues next year should increase at levels equal to or greater than inflation due to (1) an increase in group room nights, (2) the closure of the local food court, and (3) the opening of an in-house Branded Coffee. The sales department deployment needs to be better understood given the hotel's history in generating group room nights and group banquet volume. Midlantic underperforms other area hotels in regard to the amount of group room-nights generated per square foot of meeting space. Also, the hotel's group room-night catering contribution ($64/room-night) is below that achieved at our other properties in the area. Finally, the local catering makes up a disproportionate amount of total banquet revenue, about 80 percent. A new laundry room ironer next year will enable the hotel to handle outside laundry contracts and grow revenue and profit in the Other Departments line item.
Property Tax Summary -
Appeals handled by Owner Good relationship with the County despite appealing taxes in each of the past three years • Appeal produced a reduction in real estate assessment for those years, which produced a refund Last year’s assessment of $59M was reduced to $42M for this year, due to economic conditions Closely monitoring for appeal positions next year for further reductions in the assessment
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SHA565: Developing an Asset Management Strategy School of Hotel Administration, Cornell University Long-Term Capital Plan The long-term capital plan is to refresh the hotel product so that it remains competitive with the other hotels in the market. The guest rooms have original case goods (13 years old) and soft goods that were last updated six years ago. The new bedding package was installed in the hotel earlier this year. The hotel's ballroom, pre-function space, and breakout rooms were completed last year. The only other area that needs attention in the coming years is the restaurant and lounge. Owner-funded projects in the next two to three years include replacement of the roof ($800K) and the hotel's cooling tower ($200K). The hotel's FF&E reserve, which had been accruing at 4% until late last year, is significantly underfunded. Major Projects Last Rooms Redo Next Rooms Redo
Year Cost ($ 0 0 0) 6 years ago $1,450 in 2 years $4,000
Scope Minimal—Soft Goods Extensive—Case and Soft Goods
Last Meeting Redo Next Meeting Redo
1 year ago in 6 years
Extensive Extensive
Last Public Space Redo Next Public Space Redo
13 years ago not planned
Last F&B Redo Next F&B Redo
13 years ago this year
$1,800 $3,500
Original N/A $500
Original Includes lobby lounge and restaurant
ROI Projects Historical Projects (last 2–3 years) None Future Projects (next 2–3 years) -
-
Plans exist for a potential Branded Coffee to be located in the gift shop. The hotel is developing the business case in the latter part of this year with implementation anticipated for next year. In addition to providing an enhanced experience to the guest, the Branded Coffee is expected to attract area office workers into the hotel and possibly generate more restaurant and lounge sales. Conversion of the hotel's former nightclub, into 3,000 SF of meeting space. The nightclub has been closed for several years and is used by the hotel for convention registration and/or conference dining in select instances. The nightclub has raised floors and four columns in its space, making it difficult to create a junior ballroom. However, the nightclub space would provide additional break-out rooms adjacent to the hotel's ballroom, and allow the hotel to better market its meeting space to a broader segment of customer.
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SHA565: Developing an Asset Management Strategy
School of Hotel Administration, Cornell University
Capital Expenditure Budget Summary 10-Year Forecast Currency Format of Report is: U.S. Dollars
Property Name: # of Rooms: Hotel Age: Ownership: Region: Type: Overall GSS Score:
abc-123 / Midlantic Chain Hotel 400 13 years
Mid-Atlantic Suburban 74
Opening Dates Original: Chain Hotel: Expansion: Rooms: Asset Manager: Escrow Type:
13 years ago 13 years ago John B. Goode Expenditure
This year Sales Growth % Projected Sales Escrow % Escrow Contribution Beginning Escrow Balance Dispo sitions/Proceeds Interest Earned on Escrow Acct Loan Repayments Total Available for CEP Work Category AV/Audio Visual BQ/Banquet/Meeting Space DY/Discretionary/$0–$20K EB/Exterior Building FB/Restaurant/Lounge HS/Laundry/Housekeeping KI/Kitchen MP/Mechanical/P lumbing PS/Lobby/Public Space RC/Recreation/Golf/Spa/Pool RR/Rooms/Related SY/Systems VE/Vehicles Total Budget from Escrow Ending Escrow Owner-Funded Projects
Year+1 4.8% 25,691,085 5.00% 1,284,554 1,264,684 0 44,587 0 2,593,825
24,467,700 5.00% 1,223,385 1,322,000 0 31,934 0 2,577,319
40,000 65,000 196,315 100,000 502,500 35,000 165,000 0 65,000 35,000 0 88,000 20,820 1,312,635 1,264,684 1,036,000
0 0 200,241 0 0 0 25,500 0 0 0 0 0 21,236 246,978 2,346,848 106,590
Year+2 4.8% 26,975,639 5.00% 1,348,782 2,346,848 0 726 0 3,696,356
0 0 204,246 0 0 0 26,010 0 0 0 5,732,453 0 21,661 5,984,370 -2,288,014 21,848
Year+3 4.8% 28,324,421 5.00% 1,416,221 -2,288,014 0 0 0 -871,793
0 0 208,331 0 0 0 0 0 0 0 0 0 22,094 230,425 -1,102,219 0
Year+4 4.8% 29,740,642 5.00% 1,487,032 -1,102,219 0 0 0 384,813
43,297 2,648,787 212,498 0 0 0 0 0 0 0 0 95,254 22,536 3,022,372 -2,637,559 1,082,432
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Year+5 2.0% 30,335,455 5.00% 1,516,773 -2,637,559 0 0 0 -1,120,786
0 20,315 216,748 0 0 110,408 0 165,612 0 0 109,028 0 22,987 645,098 -1,765,884 110,408
Year+6 2.0% 30,942,164 5.00% 1,547,108 -1,765,884 0 0 0 -218,776
0 0 221,083 0 0 0 0 0 0 0 0 0 23,447 244,529 -463,305 0
Year+7 2.0% 31,561,008 5.00% 1,578,050 -463,305 0 0 0 1,114,745
0 0 225,504 0 577,215 0 0 0 0 114,869 0 0 23,916 941,503 173,242 0
Year+8 2.0% 32,192,228 5.00% 1,609,611 173,242 0 19,396 0 1,802,250
46,866 0 230,014 0 0 0 0 0 0 0 0 103,106 24,394 404,381 1,397,869 0
Year+9 2.0% 32,836,072 5.00% 1,641,804 1,397,869 0 13,518 0 3,053,191
0 0 234,615 0 0 179,264 0 0 0 0 2,917,340 0 24,882 3,356,101 -302,910 896,558
SHA565: Developing an Asset Management Strategy School of Hotel Administration, Cornell University S TRATEGIC PLAN 20xx—Operating Overview Financial History:
Year-4
Year-3
Year-2
Year-1
Occ ADR Room RevPAR Yi e ld Index Hote l RevPOR
72.7% $130.01 $94.53 102.1% $226.54
74.0% $137.90 $102.02 112.9% $242.54
73.1% $153.09 $111.91 110.6% $259.51
58.7% $151.38 $88.89 107.2% $273.46
This Year (Estimat ed) 63.5% $126.46 $80.57 N/A $233.81
Sal e s Hous e Profit HP Margin Gross Op Profit Priority Ince ntive Fe e Net Cash Flow EBITDA Invest me nt ROI
$23,682 $13,485 38.1% $6,785 $1,532 $0 $6,785 $7,495 $55,159 12.3%
$25,719 $9,983 38.8% $7,462 $1,554 $0 $7,462 $8,234 $55,532 13.4%
$27,292 $10,728 39.3% $7,856 $1,554 $1,494 $6,362 $7,453 $55,532 11.5%
$23,088 $8,540 37.0% $5,657 $1,554 $576 $5,081 $6,005 $55,532 9.1%
$21,767 $7,440 34.2% $4,597 $1,554 $226 $4,371 $5,459 $55,532 7.9%
Mark et Mix: Transi e nt Group
Year-4 76.2% 23.8%
Year-3 76.1% 23.9%
Year-2 78.3% 21.7%
Year-1 76.0% 24.0%
This yr 79.0% 21.0%
GS S: Brand Standard Overal l Satisfaction S ervice Index Product Index
Year-4 67 80 83 92
Year-3 67 79 83 91
Year-2 67 78 72 91
Year-1 67 74 75 90
This yr -
Chain Hotel Qu ality Assurance Rating: Clear Zone Comments:
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SHA565: Developing an Asset Management Strategy
School of Hotel Administration, Cornell University
S TRATEGIC PLAN Property Facts Manag e me nt Team Omitted Food & B everage
Name Three-Meal Restaurant Hotel Lounge O t h er Ame n iti e s
Type 3-meal Lounge
Type Health Club Retail Parki ng
Size 5000 sq. ft. 1300 sq. ft.
Op erator Manager Manager
Last Redo Original Original
Op erator Manager Manager
Scope
Last Redo
Scope
Val et Spaces Op erator 0 0
Type Parking Deck Surface lot
Total Spaces 500 200
O wn er:
Omitted
Tenant:
None
Grou nd Leas e
None, Fee Simple Land Ownership
Mortgage Debt:
Hotel has a first mortgage of 75% of the market value of the hotel. The mortgage financing is at market rates.
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SHA565: Developing an Asset Management Strategy
School of Hotel Administration, Cornell University
STRATEGIC PLAN Co mpetition Grid
Midlantic Hotel Headly Keepsake Magesterial Suites Arbor Hill Plaza Homestay Inn Mannicott Celebration Inn TO TAL Notes:
400 13,000 32.91 440 40,000 91.53 450 19,000 41.12 225 1,700 7.26 400 13,000 33.33 225 4,000 17.5 160 400 9,500 23.46 310 9,000 28.90 3,00 110,00 36.11 0 0 Keepsake and Headly are noted as a plus because they
C ha ng es i n S upply
Comp
Room
Meeting
Midl a n t i c Adva nta g e/ Di s adva nta g e
Notes:
6 2 1 3 5 4 7 9 8
+ + + = = + = =
+ + -
have more meeting space overall.
Meeting S p ace S F
Meeting SF per Ro o m
Status/ Co m m ents Openin g Date
None Nothing definite as of this year-end but there are several Chain Hotel limited service products (Select Service & Extended Stay) for which there is some early development discussion.
De mand Ge n erators Transient:
Large Oil, Large Tech, Large Defense, Large Telco, Accounting, Regional Bank, Another Large Defense, Consulting, Software, Computer Hardware/Solutions
Group:
Large Oil, Training Company, Large Tech, Regional Bank, Community Health Services, Tour Company One, Fraternal Organization
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+ + + + + + +
Roo m Cou nt
Hotel Na me TO TAL
13 16 15 18 18 2 2 27 32
The Midlantic’s Asset Management Plan SOMEWHERE, MID-ATLANTIC STATES, USA
S TRATEGIC PLAN Executive Summary Asset Manager: John B. Goode Property Summary Rooms: Floors/Bays: Property Type: Location: Address:
400 (6 suites) Me eti ng Space: 10 floors/415 bays Op e n i ng Date: Suburban Expansion: Suburban 1234 Sunderland Park Strategic Scorecard: Somewhere, Mid-Atlantic
Property ID: abc-123 Region: Mid-Atlantic Acquisition Date: 12 years ago Cap Ex Escrow:
5% of Total Sales
14,000 square feet (35 SF per room) 13 years ago N/A Strong Hotel, Strong Market
Disposition Strategy: Short-term hold Property Rights: Fee Simple Manag er (Franchisor): Chain Hotel (Respected Brand Operator) CapEx Escrow Type: Contribution
I. Executive Summary The Midlantic Hotel's operating performance has trended downward over the past two years although the forecast for next year is for a reversal of this recent operating trend. The hotel, which is situated in a secondary location to the more desirable Suburban Metro Center, relied heavily upon overflow from this submarket during more robust times. However, the deflating tech bubble in the Airport/Tech Corridor eliminated any transient demand that may have been pushed out in the past, and as such, Midlantic's transient demand softened, making it more dependent upon the insufficient demand within the office park in which it is located. The hotel's sales efforts to replace its lost transient demand stumbled last year and part of this year as the hotel attempted to “group up.” However, the property appears to be headed in the right direction for next year and beyond based on the current booking pace. The hotel should be considered a short-term hold candidate, with a disposition in a couple of years after the property has had a chance to recover the slippage in income from the past few years. Reasons for selling include the hotel's secondary location and position within the market, the path of growth away from the hotel's submarket, an underfunded escrow reserve that will require funding in [year +2], and the owner's numerous investments in hotels in the region. Still, there are operational and return-on-investment (ROI) opportunities at this property that can be executed over the next two to three years, which should elevate the hotel's overall value. Operationally, the property's sales team has not maximized its meeting space nor has it leveraged the size and equipment of its laundry room. From an ROI perspective, an opportunity exists to convert underutilized F&B space into more efficient meeting space that will allow the hotel to sell more group room-nights as well as further increase its banquet sales.
© 2015 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners.
SHA565: Developing an Asset Management Strategy School of Hotel Administration, Cornell University II. Positioning Statement The Midlantic is positioned to serve those business travelers visiting the Suburban Metro Center in the larger urban market. The hotel sits in an office park of 2.6 MSF (million square feet) and relies upon two demand generators for a significant amount of its overall transient business, Large Tech Company and Large Oil Company. With a recently refurbished ballroom and meeting space in [year 1], the hotel captures more than its fair share of local catering opportunities. Opportunity exists, however, for the hotel to be better positioned to capture more group rooms and catering in the future, and next year's budget reflects the hotel's new direction.
III. SWOT Analysis STRENGTHS
OPPORTUNITIES
ØCondition of property—renovated ballroom; new bedding ØOffice park location; adjacent to demand generators
ØAdditional 2.3MSF approved for office park development ØConversion of dark lounge to more meeting space ØPossib le brand conversion and/or physical expansion
WEAKNESSES
THREATS
ØLocation is a secondary fill area to the more desirable Suburban Metro Center ØSaturation of Chain Hotel product in market
ØLtd. service Chain Hotel product growth in extended area ØContinued rate discounting in market
IV. Plans and Actions The following are asset management's objectives for preserving our investment in the Midlantic Hotel or increasing its value over the next two to three years. Operational Ø Secure $200K to $300K in outside laundry contracts as a result of a recent investment in the hotel's laundry room equipment. Ø Ensure that hotel's sales department is focused on increasing group rooms from just under 20,000 room-nights annually to approximately 30,000 room-nights consistently; replace dependence upon lower-rated Other Discount business with more dependable and higher-rated group demand. Ø Increase hotel's group room-night catering contribution to levels more consistent with the hotel's positioning and product offering. Capital Ø Full guest room renovation in [year +2] ($4.OM); new bedding package installed this year but case goods are original (13 years old) and soft goods date back six years. Ø Freshen up F&B outlets ($500K), which are original to hotel's opening, in two to three years. Ø Replacement, this year or next, of hotel's roof ($800K) and cooling tower ($200K), both of which are owner-funded projects. ROI Ø Branded Coffee within hotel's gift shop. Ø Conversion of hotel's dark nightclub into meeting space. Other Ø The hotel has the potential for additional development on land to the rear of the property. The hotel has considered development of 100 additional rooms and/or creation of a junior ballroom over the past decade but has deemed that market conditions were not appropriate to pursue either. The land on which the hotel sits has a maximum development of 300,000 SF and currently 290,000 SF are developed. Ø Conversion of the hotel to a brand not currently represented in the Suburban Metro Center
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SHA565: Developing an Asset Management Strategy
School of Hotel Administration, Cornell University
market so that our asset can (1) mitigate the impact of existing and future Chain Hotel product in the market, and (2) elevate the pricing position of our asset to reflect its curb appeal and quality relative to the competition.
Disposition Target Date: In three years Ration ale: This asset is a short-term hold given that it does not fit our profile of being the best-located and best-quality hotel in a market with high barriers to entry. The hotel's location is the largest hindrance to this property being the lead hotel in the market, a characteristic that will not be overcome by any amount of capital dollars or flag changes. The property has underperformed its potential over the past two years, but asset management is confident that the property can emerge repositioned as a more competitive and profitable hotel with a greater emphasis on group business over the next two years. A sale prior to that time period based on a recent financial performance may understate the hotel's value. Another reason for selling the hotel is that the direction of growth in the Mid-Atlantic region appears to be concentrated in the Tech/Airport Corridor area rather than in the hotel’s market area. At this point in time, there is no discussion of any new demand generators entering the subject hotel's immediate market, but there is much speculation about potential growth in the stretch from Suburban Metro Center to the Airport. A final reason for disposing of this asset is the aggregate investment that the Owner has in the Mid-Atlantic region. It may be prudent for the company to reduce its exposure to this region, and invest in those hotels in markets that have less volatile swings economically.
Key Performance Indicators—rank out of 30 RevPAR: RevPAR Index: Total Revenue: Roo ms Margin: F&B Margin: HP Margin:
Year -2
GSS Overall Score: Brand Standard:
$111.98 110.6% $27292 79.3% 30.8% 39.3%
Ran k
12 13
13 17 11
Year -1
Ran k
$88.89 107.2% $23,088 78.8% 31.0% 37.0% 74 67
15 17 13 18 13
Pres e nt Ran k (Estimat ed) $80.32 17 NA $21,767 77.4% 13 33.5% 17 34.2% 17 79 67
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SHA565: Developing an Asset Management Strategy
School of Hotel Administration, Cornell University
Market Outlook •
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Through the first three quarters of this year, the metropolitan economy struggled from the weakness in the airline, tourism, and telecom industries. The anticipated gains from the federal spending related to the War on Terrorism have not been enough to offset the regional economy's larger hurdles of excess capacity in the tech sector and weakened consumer confidence. The metropolitan area has a 3.6% unemployment rate as of last month, which is up from 3.2% from the prior year. Still, the metropolitan area has the lowest employment rate nationally, well below the US average of 5.9% in the last month. Within the local market area, the local unemployment rate is only 3.0%. With the prolonged downturn in the high tech industry, office vacancy levels in the Tech/Airport Corridor have mushroomed from the single digits eight years ago to the high teens in the past year. In the local sub market, there are roughly 7.8MSF of office space, of which 18% is available currently, up from the 16% at the beginning of the year. Unemployment in the county has risen modestly during the recent recession but remains below 3.0% as of the beginning of the year. While the telecommunications industry remains depressed, economists predict that the Mid-Atlantic region will benefit disproportionately from the pending government contracts for security, surveillance, and intelligence technology development. The office campus, where the Midlantic Chain Hotel is located, has 2.7 MSF of office space developed and another 1.6 MSF available for development. The park sits on the eastern side of the intersection of Route 98 and Interstate 123. Late last year and early this year two office buildings were completed, including the 250,000 SF headquarters for Large Tool Maker, and a 295,000 SF speculative office building, which is only partially occupied. Located in the office park are major demand generators Large Tech Corporation and Large Defense Contractor. The build-up in defense work as well as the increase in the government per diem has resulted in an increased number of room nights for Large Defense Contractor as well as other defense contractors. Large Tech Corporation has traditionally been one of the top producers although its production has fallen off in the past year. The recent acquisition of locally based Medium Tech Corporation may create some additional demand. Large Oil Company's regional headquarters is located opposite the office park and this demand source is also a major contributor to the hotel, although recent volatility in oil prices has stunted roomnights from this source. Both Large Tech and Large Oil have negotiated down their special corporate rates for the past two years. Currently located in the office park, Regional Bank Company is relocating next year to Suburban Metro Center. This account is responsible for roughly $300K in total revenue and about 1 point in occupancy. Management believes that their hotel will remain the preferred property despite the company moving out of the Mid-Atlantic.
Five-Year Strategic Outlook (Key Events) 20xx 20xx+4
20xx+1
20xx+2
Opening of Convention Center
Presidential Election
World Sporting Championships International Sporting Competition
Strong year for regional activity
20xx+3 Presidential Inauguration
Congressional Elections
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SHA565: Developing an Asset Management Strategy School of Hotel Administration, Cornell University Operational Outlook •
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Fall-off in transient demand in the past year has left the hotel's ADR vulnerable and contributed to a decline in hotel profitability. Although transient demand is up 15 percent, transient ADR has declined by $30 YTD as room-nights have shifted away from the higher-rated Premium and Special Corporate segments and into the lower-rated Other Discount and Wholesaler segments. Not until the hotel shifts its mix of demand to the higher-rated segments will the property be able to return to the profit and profitability levels of the past. Two major demand generators, Large Oil and Large Tech, will continue to provide the bulk of special corporate rates at the hotel, but at slightly lower rates than in this year (and last year), with no guarantee of increased volume. The hotel is heavily dependent upon the special corporate category, which historically has represented 40% or more of this hotel's transient base. Lack of transient overflow from Suburban Metro Center and Downtown will create pressure on the hotel to replace with group demand. In the past two years, the fall-off in corporate transient was replaced with discounted transient segments such as AAA, Priceline, employee rates, and AARP. Ideally, the group room nights next year will be booked at a higher rate than what is achieved from the short-term discount transient and allow a yield at a higher rate among its transient customer base. Booking pace through the current month reflects a 10,000-room-night increase over the current year, or a 140 percent increase year over year. Of those room nights, 4,500 are from a new tour and travel account. Similarly, tentatives are up 66 percent for next year. All of this is indicative that the hotel will be slowly shifting its mix from the historical 80/20 to the more ideal 70/30 transient group orientation. Group booking pace will be supported by the addition of a new sales manager to the team late this year to prospect for new and local business. F&B revenues next year should increase at levels equal to or greater than inflation due to (1) an increase in group room nights, (2) the closure of the local food court, and (3) the opening of an in-house Branded Coffee. The sales department deployment needs to be better understood given the hotel's history in generating group room nights and group banquet volume. Midlantic underperforms other area hotels in regard to the amount of group room-nights generated per square foot of meeting space. Also, the hotel's group room-night catering contribution ($64/room-night) is below that achieved at our other properties in the area. Finally, the local catering makes up a disproportionate amount of total banquet revenue, about 80 percent. A new laundry room ironer next year will enable the hotel to handle outside laundry contracts and grow revenue and profit in the Other Departments line item.
Property Tax Summary -
Appeals handled by Owner Good relationship with the County despite appealing taxes in each of the past three years • Appeal produced a reduction in real estate assessment for those years, which produced a refund Last year’s assessment of $59M was reduced to $42M for this year, due to economic conditions Closely monitoring for appeal positions next year for further reductions in the assessment
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SHA565: Developing an Asset Management Strategy School of Hotel Administration, Cornell University Long-Term Capital Plan The long-term capital plan is to refresh the hotel product so that it remains competitive with the other hotels in the market. The guest rooms have original case goods (13 years old) and soft goods that were last updated six years ago. The new bedding package was installed in the hotel earlier this year. The hotel's ballroom, pre-function space, and breakout rooms were completed last year. The only other area that needs attention in the coming years is the restaurant and lounge. Owner-funded projects in the next two to three years include replacement of the roof ($800K) and the hotel's cooling tower ($200K). The hotel's FF&E reserve, which had been accruing at 4% until late last year, is significantly underfunded. Major Projects Last Rooms Redo Next Rooms Redo
Year Cost ($ 0 0 0) 6 years ago $1,450 in 2 years $4,000
Scope Minimal—Soft Goods Extensive—Case and Soft Goods
Last Meeting Redo Next Meeting Redo
1 year ago in 6 years
Extensive Extensive
Last Public Space Redo Next Public Space Redo
13 years ago not planned
Last F&B Redo Next F&B Redo
13 years ago this year
$1,800 $3,500
Original N/A $500
Original Includes lobby lounge and restaurant
ROI Projects Historical Projects (last 2–3 years) None Future Projects (next 2–3 years) -
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Plans exist for a potential Branded Coffee to be located in the gift shop. The hotel is developing the business case in the latter part of this year with implementation anticipated for next year. In addition to providing an enhanced experience to the guest, the Branded Coffee is expected to attract area office workers into the hotel and possibly generate more restaurant and lounge sales. Conversion of the hotel's former nightclub, into 3,000 SF of meeting space. The nightclub has been closed for several years and is used by the hotel for convention registration and/or conference dining in select instances. The nightclub has raised floors and four columns in its space, making it difficult to create a junior ballroom. However, the nightclub space would provide additional break-out rooms adjacent to the hotel's ballroom, and allow the hotel to better market its meeting space to a broader segment of customer.
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SHA565: Developing an Asset Management Strategy
School of Hotel Administration, Cornell University
Capital Expenditure Budget Summary 10-Year Forecast Currency Format of Report is: U.S. Dollars
Property Name: # of Rooms: Hotel Age: Ownership: Region: Type: Overall GSS Score:
abc-123 / Midlantic Chain Hotel 400 13 years
Mid-Atlantic Suburban 74
Opening Dates Original: Chain Hotel: Expansion: Rooms: Asset Manager: Escrow Type:
13 years ago 13 years ago John B. Goode Expenditure
This year Sales Growth % Projected Sales Escrow % Escrow Contribution Beginning Escrow Balance Dispo sitions/Proceeds Interest Earned on Escrow Acct Loan Repayments Total Available for CEP Work Category AV/Audio Visual BQ/Banquet/Meeting Space DY/Discretionary/$0–$20K EB/Exterior Building FB/Restaurant/Lounge HS/Laundry/Housekeeping KI/Kitchen MP/Mechanical/P lumbing PS/Lobby/Public Space RC/Recreation/Golf/Spa/Pool RR/Rooms/Related SY/Systems VE/Vehicles Total Budget from Escrow Ending Escrow Owner-Funded Projects
Year+1 4.8% 25,691,085 5.00% 1,284,554 1,264,684 0 44,587 0 2,593,825
24,467,700 5.00% 1,223,385 1,322,000 0 31,934 0 2,577,319
40,000 65,000 196,315 100,000 502,500 35,000 165,000 0 65,000 35,000 0 88,000 20,820 1,312,635 1,264,684 1,036,000
0 0 200,241 0 0 0 25,500 0 0 0 0 0 21,236 246,978 2,346,848 106,590
Year+2 4.8% 26,975,639 5.00% 1,348,782 2,346,848 0 726 0 3,696,356
0 0 204,246 0 0 0 26,010 0 0 0 5,732,453 0 21,661 5,984,370 -2,288,014 21,848
Year+3 4.8% 28,324,421 5.00% 1,416,221 -2,288,014 0 0 0 -871,793
0 0 208,331 0 0 0 0 0 0 0 0 0 22,094 230,425 -1,102,219 0
Year+4 4.8% 29,740,642 5.00% 1,487,032 -1,102,219 0 0 0 384,813
43,297 2,648,787 212,498 0 0 0 0 0 0 0 0 95,254 22,536 3,022,372 -2,637,559 1,082,432
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Year+5 2.0% 30,335,455 5.00% 1,516,773 -2,637,559 0 0 0 -1,120,786
0 20,315 216,748 0 0 110,408 0 165,612 0 0 109,028 0 22,987 645,098 -1,765,884 110,408
Year+6 2.0% 30,942,164 5.00% 1,547,108 -1,765,884 0 0 0 -218,776
0 0 221,083 0 0 0 0 0 0 0 0 0 23,447 244,529 -463,305 0
Year+7 2.0% 31,561,008 5.00% 1,578,050 -463,305 0 0 0 1,114,745
0 0 225,504 0 577,215 0 0 0 0 114,869 0 0 23,916 941,503 173,242 0
Year+8 2.0% 32,192,228 5.00% 1,609,611 173,242 0 19,396 0 1,802,250
46,866 0 230,014 0 0 0 0 0 0 0 0 103,106 24,394 404,381 1,397,869 0
Year+9 2.0% 32,836,072 5.00% 1,641,804 1,397,869 0 13,518 0 3,053,191
0 0 234,615 0 0 179,264 0 0 0 0 2,917,340 0 24,882 3,356,101 -302,910 896,558
SHA565: Developing an Asset Management Strategy School of Hotel Administration, Cornell University S TRATEGIC PLAN 20xx—Operating Overview Financial History:
Year-4
Year-3
Year-2
Year-1
Occ ADR Room RevPAR Yi e ld Index Hote l RevPOR
72.7% $130.01 $94.53 102.1% $226.54
74.0% $137.90 $102.02 112.9% $242.54
73.1% $153.09 $111.91 110.6% $259.51
58.7% $151.38 $88.89 107.2% $273.46
This Year (Estimat ed) 63.5% $126.46 $80.57 N/A $233.81
Sal e s Hous e Profit HP Margin Gross Op Profit Priority Ince ntive Fe e Net Cash Flow EBITDA Invest me nt ROI
$23,682 $13,485 38.1% $6,785 $1,532 $0 $6,785 $7,495 $55,159 12.3%
$25,719 $9,983 38.8% $7,462 $1,554 $0 $7,462 $8,234 $55,532 13.4%
$27,292 $10,728 39.3% $7,856 $1,554 $1,494 $6,362 $7,453 $55,532 11.5%
$23,088 $8,540 37.0% $5,657 $1,554 $576 $5,081 $6,005 $55,532 9.1%
$21,767 $7,440 34.2% $4,597 $1,554 $226 $4,371 $5,459 $55,532 7.9%
Mark et Mix: Transi e nt Group
Year-4 76.2% 23.8%
Year-3 76.1% 23.9%
Year-2 78.3% 21.7%
Year-1 76.0% 24.0%
This yr 79.0% 21.0%
GS S: Brand Standard Overal l Satisfaction S ervice Index Product Index
Year-4 67 80 83 92
Year-3 67 79 83 91
Year-2 67 78 72 91
Year-1 67 74 75 90
This yr -
Chain Hotel Qu ality Assurance Rating: Clear Zone Comments:
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SHA565: Developing an Asset Management Strategy
School of Hotel Administration, Cornell University
S TRATEGIC PLAN Property Facts Manag e me nt Team Omitted Food & B everage
Name Three-Meal Restaurant Hotel Lounge O t h er Ame n iti e s
Type 3-meal Lounge
Type Health Club Retail Parki ng
Size 5000 sq. ft. 1300 sq. ft.
Op erator Manager Manager
Last Redo Original Original
Op erator Manager Manager
Scope
Last Redo
Scope
Val et Spaces Op erator 0 0
Type Parking Deck Surface lot
Total Spaces 500 200
O wn er:
Omitted
Tenant:
None
Grou nd Leas e
None, Fee Simple Land Ownership
Mortgage Debt:
Hotel has a first mortgage of 75% of the market value of the hotel. The mortgage financing is at market rates.
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SHA565: Developing an Asset Management Strategy
School of Hotel Administration, Cornell University
STRATEGIC PLAN Co mpetition Grid
Midlantic Hotel Headly Keepsake Magesterial Suites Arbor Hill Plaza Homestay Inn Mannicott Celebration Inn TO TAL Notes:
400 13,000 32.91 440 40,000 91.53 450 19,000 41.12 225 1,700 7.26 400 13,000 33.33 225 4,000 17.5 160 400 9,500 23.46 310 9,000 28.90 3,00 110,00 36.11 0 0 Keepsake and Headly are noted as a plus because they
C ha ng es i n S upply
Comp
Room
Meeting
Midl a n t i c Adva nta g e/ Di s adva nta g e
Notes:
6 2 1 3 5 4 7 9 8
+ + + = = + = =
+ + -
have more meeting space overall.
Meeting S p ace S F
Meeting SF per Ro o m
Status/ Co m m ents Openin g Date
None Nothing definite as of this year-end but there are several Chain Hotel limited service products (Select Service & Extended Stay) for which there is some early development discussion.
De mand Ge n erators Transient:
Large Oil, Large Tech, Large Defense, Large Telco, Accounting, Regional Bank, Another Large Defense, Consulting, Software, Computer Hardware/Solutions
Group:
Large Oil, Training Company, Large Tech, Regional Bank, Community Health Services, Tour Company One, Fraternal Organization
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+ + + + + + +
Roo m Cou nt
Hotel Na me TO TAL
13 16 15 18 18 2 2 27 32
