With tourists pouring into the casinos of Biloxi, Miss., a local mid-price hotel faced a strange problem. Competitors in the market enjoyed 65% occupancy compared with 40% for the troubled property. When the hotel sank into receivership, the lender placed a call to hotel doctor Morris Lasky, CEO of Chicago-based Lodging Unlimited, a well-traveled consulting firm that occasionally buys hotels.
For three days, Lasky walked around the hotel's halls, studying the 217 rooms and cycling through his checklist of potential problems. But nothing seemed amiss. The hotel looked clean and up-to-date. The staff seemed polite to the customers, who included many families with children.
Then Lasky — who has advised more than 200 hotels in a career that spans four decades — studied a report showing the number of reservations that had been rejected. Every time an Internet customer requested a room with two double beds, the request was automatically declined. In January, the hotel had been full one night, and a clerk set the system to decline requests for rooms with two double beds. Then the manager forgot to change the order.
By August, the system had declined 27,000 requests. “I saw the problem and almost fell off my chair,” recalls Lasky, who fixed the mess with one phone call. “Within two weeks, the occupancy had climbed to 65%.” The Mississippi hotel's unusual problem was resolved, and the manager was soon replaced.
Lucrative opportunities exist for the consultants and investors that specialize in turning around troubled units. Often the doctors are called in by inexperienced owners — wealthy lawyers or office developers who have decided to snap up a hotel or two. The problems created by unskilled managers quickly become apparent on balance sheets.
PKF Consulting analyzes the financial statements of 4,500 hotels annually. Currently 10% of the properties could have trouble servicing their debt, says Scott Smith, a PKF vice president in Atlanta. “Those hotels need to consider bringing in new management or changing their marketing campaigns.”
Problems on the horizon
With the hotel industry enjoying a sustained recovery, the occupancy rate nationally has climbed from 59% in 2002 to 63.8% in 2006, reports accounting firm PriceWaterhouseCoopers. After languishing in 2002 and 2003, profits per available room jumped 30% in 2004. Since then, profits have continued climbing at double-digit rates, reaching $5,660 per room in 2006, according to PriceWaterhouseCoopers.
In today's strong market, bankruptcies are rare, and the number of troubled hotels is only half of what it was during the downturn that bottomed in 2002 and 2003, according to PKF.
But hotel doctors caution that the number of troubled properties is likely to rise soon. With lenders eager to finance hotels, properties are being built in marginal locations, says Sanjeev Misra, vice president of NAI Global Hotels, an advisory company in Chicago.
Overbuilding could be particularly severe in weak markets, including Philadelphia and Norfolk, Va., where supply is growing at an annual rate of around 8%, according to PriceWaterhouseCoopers. Some deals include 90% debt, up from the more typical levels of 75%. “When the industry starts to decline in two or three years, the owners will discover that many of these new hotels shouldn't have been built,” says Misra.
To keep a property looking spiffy, owners must set aside about 4% of revenues for basic renovations, says Misra. Carpets and wall coverings should be changed every five to seven years. Hotel doctors often find that the sick properties appear shabby because the owner ran out of cash or lacked professional management.
When Lasky recently acquired an underperformer near Williamsburg, Va., he found a catalog of problems. The roof leaked, and light bulbs needed to be changed. The staff worked in their street clothes, a mistake for a hotel that aspired to serve a high-end market. “Within weeks we got the desk clerks in uniforms, and we got them trained,” Lasky says. “We planted new shrubs and improved the curb appeal by 1,000%.”
Renovations can bring quick results. When Gencom Group recently purchased the Sheraton Raleigh in North Carolina, the company began spending $4 million to update the 355-room property. While the renovation is still under way, the financial results for the hotel are already improving, says Greg Denton, executive vice president of Gencom, a hotel owner and developer in Miami. Denton says that business groups can make reservations up to three years in advance.
Assured that they will be checking into a brand-new hotel, corporate groups are willing to make advance reservations at a turnaround property. “As soon as they heard our story, groups began making advance bookings,” says Denton. “The renovations have also helped us keep groups that were at risk of canceling.”
As renovations progress, hotel management must be careful to not disturb guests. To limit noise, some hotels work on one floor at a time, keeping the floors above and below vacant. The aim is to hide all signs of construction from guests. As a final resort, some owners completely close the hotel. “If you antagonize guests, many of them will never come back again,” says Randall Carroll, president of Lazer Lodging, a consultant and asset manager in Washington, D.C.
The right sales pitch
While consultants work on renovations, they also begin saturation marketing campaigns. Lasky instructs salespeople to visit referral sources, ranging from funeral homes to bridal consultants. The hotel doctor also sends out direct-mail pieces and runs ads in local media. “You have to be honest with people,” says Lasky. “You admit that the hotel used to be a disaster, but now things are being changed. For big employers, you offer to cut prices and do whatever it takes to win back business.”
A thorough marketing campaign led to dramatic results when Tecton Hospitality began working with The Water Club, an 80-room boutique hotel in Puerto Rico. Located on the beach in San Juan, the property had been cited by Conde Nast Traveller magazine for its architecture and beautiful location.
But the occupancy rate was only 50% when Tecton began advising the owner in 2002. After studying the problem, Tecton concluded that the marketing was all wrong. “The hotel was focusing on business travelers, but the natural market was for leisure travelers,” says Raul Leal, president of Tecton.
To ensure that its Web site popped up on Yahoo and Google, Tecton researched the key words that leisure travelers used when they were searching for boutique hotels in Puerto Rico. Sales staff contacted travel agents. Within 120 days after the marketing effort began, the occupancy rate climbed from 50% to 80%. Today the rate is often above 90%.
Checking the data
To spot problems early, most hotel operators analyze data from Smith Travel Research, a respected research firm in Hendersonville, Tenn. Smith Travel not only tracks occupancy and revenue per available room, but it can also show owners how their properties stack up against the competition. Subscribers can quickly learn if they have lost a percentage point of market share.
Consultants caution that hotels must use data on market share carefully, only comparing like-kind properties. “If you are a limited-service hotel like Hampton Inn, you want to compare yourself to a Holiday Inn Express, not to a luxury name like Ritz Carlton,” points out Misra of NAI Global Hotels.
Misra says owners must supplement market data with their own research to be clear about business conditions. If a major corporation leaves a community, the average hotel could lose 10% of its revenues, and there may be little that the management can do to improve fundamentals.
In a thriving market, rising sales could obscure future problems. Misra recently served as a consultant for a Chicago hotel where the owner felt satisfied that revenues had increased 12% in the past year. The consultant pointed out that the overall market was up 18%, according to Smith Travel. “We told the owner that the manager was not doing a good job,” says Misra.
Data from Smith Travel can also be crucial for what is called yield management, picking the highest price possible for each room. Like airlines, franchised hotels rely on complex software packages that analyze vacancy rates every day and suggest the optimum price. If the hotel is empty, the software may suggest lowering prices; when rooms are scarce, the system leans toward raising rates. But owners must supplement the data with practical ideas.
When Lasky bought a 500-room airport hotel in St. Louis, he found that the average room rate was too low. To attract business, the previous owner made an agreement with the airport to provide discounts for stranded passengers. Lasky dropped the airport deal. “Who needs the airport?” Lasky asks. “I can fill the hotel in bad weather without any deals.”
In another deal at Lasky's airport hotel, the former owner had cut room prices and provided a free breakfast for guests from a major corporation. Lasky told the corporate customer that it would have to pay more and do without the free meal. The customer agreed. By making such adjustments, Lasky was able to raise the average room rate by $20.
Not all of Lasky's patients are seriously sick. Sometimes owners hire an outsider to improve a business that is already profitable. For a fee of approximately $10,000, Lasky or another consultant will spend a few days searching for ways to raise room rates by a few dollars or increase occupancy by a percentage point or two. Such improvements boost revenues and keep the staff from slipping into lethargy.
Where to build
While a consultant can fix worn carpets, it is impossible to change a hotel's location. If a highway exit closes, the hotel can become obsolete. But often hotels can adjust to new circumstances. When Denver International Airport opened in 1995, it replaced Stapleton International, which closed. That left 10 airport hotels stranded. After struggling for several years, the old hotels eventually found a prosperous niche. “These hotels reinvented themselves by focusing on more group business,” says Alan Tantleff, executive vice president of Jones Lang LaSalle Hotels, a broker and adviser.
In some cases, hotels can be converted to offices or residences to extract maximum value. Taking advantage of red-hot markets in Florida and New York City, some older hotels have been converted to condos. In 2005, Jones Lang LaSalle sold part of New York's Stanhope Hotel for conversion to 27 co-op apartment units. Located at Fifth Avenue and 81st Street across from the Metropolitan Museum, some of the units sold for more than $10 million.
One of the most important decisions a hotel doctor can make is selecting the right brand. Joining a franchise is not cheap. Major chains charge up to 9% of a property's revenue in exchange for the right to use the company's name and reservation system. Still, the steep price can be worthwhile.
Misra of NAI Global Hotels cites Residence Inn by Marriott as a strong brand. A typical unit gets 50% of its reservations through Marriott's system, and most guests are extremely loyal to Residence Inns because they provide large rooms for extended stays. “If you get the wrong brand, it may not generate any reservations,” says Misra.
Lasky was once called in to evaluate a beautiful property in North Carolina with low occupancy rates. He determined that the property bore an economy brand, the wrong choice for a mid-price hotel.
“People who were used to staying in economy hotels would pass by because they thought the hotel looked too expensive,” recalls Lasky. Conversely, mid-price customers wouldn't stop because they never stayed at economy brands. “For a hotel to succeed,” concludes Lasky, “it must have the right brand and deliver the experience that people expect.”
Stan Luxenberg is a New York-based writer.
SIGNS OF A SICK HOTEL PROPERTY AND REMEDIES
Shabby carpets and out-of-style curtains — To avoid going stale, the operator should change curtains and carpets every five to seven years.
A dip in market share — If a hotel loses even a bit of ground to competitors, the owner should begin asking tough questions. Is the hotel being properly marketed and at the right price point?
Weak profits — The hotel may be mismanaged. The owner should consider calling an outside consultant and firing current management.