Dear Bankers of America: Welcome to the Hotel Business

When America’s bankers open the mail these days, they’re often finding “hotel jingle mail,” the proverbial keys to hotels that owners have walked on. Combine these forfeited hotels with foreclosed hotels and bankers are  now among  America’s biggest hotel owners.  What do bankers need to know in order to be successful hoteliers...for as short a period of time as possible?

Welcome to the hotel business, America’s bankers. Or for those of who’ve seen this movie before, welcome back! 

 

According to the Wall Street Journal (and other sources), “’Jingle mail’ isn't just for homeowners anymore. From San Diego to Dearborn, Mich., an increasing number of hotel owners in the U.S. market are simply walking away from money-losing properties and forfeiting them to lenders.”

 

When you add these forfeited hotels to those that banks have or are foreclosing on, the aggregated hotel portfolio controlled by America’s banks has to rival America’s biggest hotel REITs in portfolio size, diversity and market presence.

Recent recipients of forfeited or foreclosed hotels include Barclays, Wells Fargo, Corus (itself now more or less foreclosed on),  the Federal Government (via its inheritance of hotel mortgage assets from Bear Stearns and Lehman) and the list goes on.

 

Clearly, America’s banks don’t want to “own” these hotels for long and when it comes time to find new owners for these hotels, bankers want to receive as much value as possible for them.

 

Is there much bankers can do to accelerate sales velocity and sales proceeds for these hotels, or must they simply wait out these current down cycles in hotel operating and investment environments?

 

Waiting will have to be part of any work-out game plan, but how long and fruitful the wait turns out to be can be managed.

 

It’s simple: The healthier a hotel stays (or gets) during this period of receivership, the faster it’s likely to sell and the higher the sale price it’s likely to receive.   (In part because it’s more likely to be the kind of hotel your banking brethren or yourself are willing to loan against!)

 

Bankers know of course that there’s no shortage of expert agents willing and ready to assist them in managing the hotel during this time. There’s also rafts of agents who don’t necessarily want to help the bank, but they certainly want to impose their needs and wishes on the property the bank now owns.

 

Indeed, the hotel business may have more agents running around than any other business I know. Every single constituency in the hotel business has agents, directly and indirectly.

 

Hotel staff in many hotels have unions as their agents, directly (in hotels that have been fully and formally unionized) or indirectly (in those hotels where they may be a threat of unionization).

 

Hotel guests can have hotel brands and hotel consumer media as their agents. Hotel brands are most focused on keeping hotel guests happy, so that that guest will be a loyal guest of the brand throughout that brand’s network.   Channels like TripAdvisor are now, effectively, an agency for representing guest needs and demand.

 

Hotel owners, of course, have their agents in the form of operating and asset managers.

 

All of these agents take their fees, directly or indirectly, off the hotel’s top line. In this market cycle, only one of these agents—the asset manager—has much of their compensation tied to the health of the hotel owner’s bottom line.  And even the asset manager still gets paid something, even if the owner doesn’t. (Some operating managers, branded or unbranded, may dispute that point, but incentive fees tied to the bottom line probably aren’t producing much income for operating managers right now.)

 

Bankers who now effectively own and control hotels are in possession of a business that has great tension built into it: the tension of competing needs, interests and aims, chiefly the competing needs, interests and aims of staff, guests and owners. 

 

Most all operating businesses have this kind of tension, but in hotels the tension plays out 365 days a year, 24 hours a day, and through countless service interactions and experiences. The front door and the front desk, the restaurant table and the employee cafeteria, the guest room desk and the guest bathroom, the receiving dock and the accounting office, all of these are times and places in which guests, staff and owners have their expectations met or denied, find satisfaction or dissatisfaction, and what they find determines the longer-term profitability and value of the hotel.

 

The best-run hotels aren’t hotels in which this tension has been eradicated. The only way to eradicate the tension is to let one or two of the constituencies win in a rout. The best-run hotels are those hotels in which this tension is being managed with constant vigor and constant re-balancing. All constituencies are reasonably content; no constituency feels it’s getting screwed at the expense of one or both of the other constituencies.

 

As a banker, you could be thinking “How much difference can management make in the short period I control this damn hotel?” Well, it can make a big difference because hotels can go to hell in a hand basket within months if not weeks. Negative staff morale can have an immediate negative effect on guest satisfaction, and negative guest satisfaction can begin to effect bookings within days. Lost bookings mean lost revenues and profits. And if you, as a banker, are now in control of a hotel, chances are good that staff morale and guest satisfaction are already tenuous.

 

If your hotel is branded, your brand contract could also be on shaky ground if brand standards have been disregarded.

 

The answer, again, isn’t to walk in and give staff, brand and guests everything they want. Doing so will likely ruin whatever bottom line this troubled hotel still has.   The answer is managing the tension by balancing the tension.

 

If you’re a banker now in possession of a hotel, again, you’ll have no shortage of firms approaching you with what they swear is the magic formula for preserving value and driving the best and soonest possible sale of your hotel. 

 

Ask any firm pitching you how they think about the tension in a hotel operating model. If they say they don’t think about that tension much, they probably don’t manage it very well. Thank them and ask the next group to come in.