In the lead up to the 2019 Arabian Hotel Investment Conference (AHIC), we asked a number of industry partners how they synchronise for success.
Assisted by their hotel consultants, legal counsel and technical support teams, most owners today are quite savvy with an HMA transaction. All major operators are quite transparent with their suggested contracts by identifying each party’s responsibility hence laying the foundation for a successful long-term relationship. It would be an exaggeration to say that all owners are fully aware of every fee and expense item owed to the Operator’s Central Services, however, there is generally a decent understanding by all parties of the costs involved. The problem arises when an operator continues to charge these fees while the hotel performs below expectations due to internal or external reasons. This is the tipping point where owners start seeing several of these pre-agreed fees being charged as unfair, especially during a negative GOP environment. Using another analogy, the operator was brought in to guide this ship, not tax it during rough seas. We believe that a well-balanced HMA attempts to address this by utilizing:
- fixed revenue ratios encompassing all central fees;
- a well justified base or license fee; and
- incentive fee slabs based on GOP percentages achievement.
Another frequent flashpoint for conflict during a down market cycle is focus by an owner on the operator’s ability to maintain a property’s fair market share while holding a tight grip on operating costs. A two-pronged performance measurement test built into an HMA attempts to address this complex problem. The first test benchmarks an achieved RevPAR against a pre-approved set of 5 or 6 comparable hotels, while the second test examines if a minimum threshold of the budgeted GOP has been achieved. The operator must fail both tests in order to fail the overall performance test. An initial failure normally results in an official warning from the owner and does not result in a default. Subsequent negative results may have varying repercussions that would have been negotiated prior to the execution of the HMA.
This method is now widely used since the advent of third-party data collection enterprises such as STR Global which provide reliable data and are generally accepted across the industry. However, the successful implementation of a fair and executable RevPAR benchmarking lies in accurate selection of a competitive set by consensus of both parties and updating of the comp-set on an annual basis to maintain its relevance.
The GOP test, however, is not the best measure to assess an operator’s performance as it assumes that all operating costs are variable. A well thought-out formula agreed by both parties for a flow-through analysis examines the operator’s performance fairly. Of course, the formula should be reviewed every year and adjusted in accordance with changing market dynamics of costs and revenues. The approach is already being used by some operators internally to assess the effectiveness of their management teams at property levels. We believe a flow-through analysis can replace the traditional GOP test as it measures an operator’s performance more accurately in both up-market and down-market scenarios.