Managers Need Rating, Too
What is the measure of a manager? How does management add to or decrease the value of a hospitality asset? How do we rate managers?
Our industry has long had standards for measuring property operations and value. Land costs, improvements and ff&e are compared to projected performance and test feasibility. As business operators, we look at occupancy and ADR; several years ago, RevPAR became a standard. Other measures include position in the competitive set, EBIDTA and equity yield to the investor; the ultimate test may be what the property brings in an open-market transaction at the end of a chosen investment period. An investor looks at all these criteria relative to a major investment with its inherent business risks.
But what of the manager entrusted to operate that business? How do we measure the contribution of the manager to any or all of these indices? How do we rank managers in a consistent and quantifiable way? The contribution toward or impact on value of a manager is universally acknowledged. Appraisals are typically based on assumption of competent and professional management.
I took this question to leaders in various disciplines — appraisers, management companies and property owners. Among those I interviewed, the range of impact discussed was from seven percent to 25 percent, with most between 15 and 20 percent. Too often, managers get little or no credit for their accomplishments by owners and asset managers; by contrast, as an initial response, Mike Patel, president of Diplomat Hotel Company, suggested 90 percent. David Buddemeyer, principal and president of Driftwood Hospitality Management, LLC provided actual, anecdotal evidence that indicated even greater impact than Patel's humorous response.
Buddemeyer's example involved a 250-room, full-service hotel in a corporate market. When Driftwood took over management from another national management company, the hotel's NOI was $750,000. During its tenure — attributable, at least in part, to the manager — the hotel's RevPAR increased by 22 percent to 24 percent while the market's RevPAR increased only by two to three percent annually. Given the Year 1 $550,000 NOI improvement and a hypothetical nine-percent cap rate, the yield represents an additional $6.1 million value to the hotel.
“There is no doubt GMs are under-valued,” Buddemeyer says. Often, owners undervalue them inexplicably, though Driftwood doesn't. Driftwood recognizes the impact of managers on asset value to the extent that when properties are sold, the managers share in the proceeds. At one former company, which went bankrupt, top-performing managers were given bonuses nevertheless. Buddemeyer has had owners complain about bonus/ incentive programs to managers. As to a rating system, he says he doesn't know how to prepare one.
Peggy Berg, founder of The Highland Group, which is known for evaluating hotel markets and hotel financial performance, suggested an analysis using a series of points; indices included GOP, yield/ revenue ratio, QA score and factoring in brand affiliation compared to market standards to yield a manager's contribution to value. Scott Brush of hospitality consulting firm Brush & Company suggested it be based on an income approach. RevPAR and ADR compared to competition are benchmarks because occupancy is too related to the specific market, he says, adding QA scores should be a part of the equation.
Diplomat chief Patel says a manager is just that, though the role of managers has changed significantly. “Given the technology today, I want him outside, working the property. It's very localized. Different properties have different needs. Generally, Diplomat's expectations are 1) to retain and add value to the asset and 2) to increase revenues.” Provided managers have the proper tools, Patel estimates their impact at 25 percent. “Take away a good manager and see what happens,” he warns.
Are managers underrated by our own industry? “At times I've seen owners view management as ‘the enemy’,” says Richard Millard, resident of Tecton Hospitality. He cites Starwood's search for a new CEO — from outside the industry. “Can't we find someone from the hotel business?”
One owner commented on the impact of both poor and good managers in a small market, full-service property. The restaurant/lounge operation had consistently operated with an approximate 80-percent expense ratio and in the mid-2000s was delivering $200,000 to $250,000 to the bottom line. In 2006, expenses skyrocketed, leading to a loss of about $70,000. The GM cited higher food prices following hurricanes, more expensive labor related to the hurricanes and a promise to get expenses under control in working with the restaurant manager. Within 30 days of taking the post, a successor GM said the loss stemmed from theft within the f&b staff. A $300,000 hit to the bottom line, applying the nine-percent cap rate cited in the box, would translate to $3.3 million in value.
Steve Rushmore, president and founder of HVS International, says that in a market value appraisal, management shouldn't be considered at all. Appraisals for other purposes, as for tax appeal, may isolate or separate management as an expense item. Rushmore refers to superior, competent and inferior managers. Rushmore cited a major hotel management company that “consistently drives to the bottom line more than many other management companies; that's superior management.” Managers are measured by budgets, employee surveys and guest surveys, but where is the standardization?
Millard of Tecton addressed some of the hidden costs within a GM's purview - he suggests, and I agree, that many are quantifiable contributions as well as means of measurement/rating. Among them: staff turnover; workmen's compensation costs; EEOC claims that can cost $10,000-plus each. Millard believes a GM can affect all these by creating the right environment; given two properties, one spotless, one not, a clean hotel performs better. Some methods Tecton uses to analyze managers include employee opinion and shopping surveys, customer focus groups, top- and bottom-line performance and flow-through. Millard's assessment of management impact is in the 20-percent to bottom-line range; he believes poor management can influence a property for five years.
Rushmore notes that our industry is one of the few with a standardized system of accounting (Uniform System of Accounts for the Lodging Industry). The intent at its inception in 1925 (by Horwath International) was to standardize and systematize financial data with as little variation as possible. Multiple users could review such data creating ease of comparison to like properties. Such forward thinking and standardization can be brought to quantifying management.
A manager rating system of necessity must exclude items out of the manager's control. Capital improvements are typically the owner's decision alone, for example. Buddemeyer suggests that to quantify a manager's impact via a rating system, “our budgeting has to improve because every year there are unforseen conditions” such as energy- or insurance-cost spikes. Berg suggests GOP as the bottom-line comparison unit because of its consistency.
The National Football League uses quarterback ratings; can we develop a manager rating? A standardized system would be beneficial when trying to explain why a proven manager is worth the extra money required to hire that person. The prospect of a standardized rating is a win-win situation for ownership and quality managers. If a manager has an excellent rating coming in and does not score as well with your property, what are the differences? Are capital improvements needed? Does he or she have the right tools, budget, etc? The only people in our industry who would not welcome such standards are the bad managers.
Stephen Taylor, CHA, is managing director for the Horwath HTL West Palm Beach office offering brokerage and consulting. He has written on real estate, branding, operations and technology. Reach him at email@example.com or 561-575-6590 or visit his website at www.taylorhorwath.com.
Want to use this article? Click here for options!
© 2014 Penton Media Inc.
Acceptable Use Policy blog comments powered by Disqus
Enter a City:
Select a State:
Select a Category: