By Charlotte Kang, MAI, FRICS, Executive Vice President, JLL Hotels & Hospitality Group
What do gardens and hotel real estate portfolios have in common? Well, as it turns out, they have lots in common.
Both should grow and bloom. Fundamentally, regardless of whether you own a hotel portfolio or a beautifully landscaped garden, your goal is to see it grow. Whether you want it to grow faster, bigger, longer or all of the above, its success depends on your objectives, your assets, capital availability and allocation, and influences from the external environment. Being intentional about desired growth will produce outcomes that align more closely with your vision than the one without.
Both need clear objectives and thoughtful planning to flourish. A leisure gardener and the owner of a botanical garden have completely different objectives. These differences ultimately affect what plants will stay, be added or be removed from the gardens (the types of assets to hold, acquire or dispose), where they will be planted (asset geographical distribution), how long the owners want to own the garden (holding period), and how they need to be cared for (deployment of capital and resources).
Ownership comes in various forms and often has major influences on its investment objectives, return requirements and exit strategies. For example, a REIT where most of its income must be distributed to investors would have a different capital allocation approach from a private owner with full discretion on the capital. Understanding the ownership’s objectives is key in identifying the core assets that should stay in the portfolio and/or be acquired to add to the portfolio. The core assets are properties that will provide the highest returns during the holding period and, for hotels in particular, can provide for superior operational efficiency, higher cross-sell opportunities, and/or corporate branding identification. Knowing what and where the core assets are will form the basis of an effective capital deployment strategy during the holding period.
The more geographically diverse a portfolio is, the better the risk can be reasonably spread across the portfolio. However, a regional operator with sole expertise and high concentration of assets in the Southeast is not going to be most comfortable with assets in the Mountains region; and an institutional owner targeting only major gateway cities is not going to get excited about a property located in a tertiary market. Again, the ownership’s objectives play an important role in the decision.
Both need frequent monitoring and occasional pruning. Both plants and hotels are susceptible to changes in the external environments. A garden with wilting plants is unlikely to attract viewers, and a portfolio with poor performing assets is not going to meet financial return expectations.
To maximize a portfolio’s returns, it is essential to continually evaluate the assets (e.g. age, design, benchmark operating performance, and for hotels in particular: brand affiliation, brand expiration, guest satisfaction score), the market conditions (e.g. competition, new supply, economy, demand generators) and the investment climate (e.g. transaction volume, capital market movements, capital liquidity) to make decisions on renovation, refinancing, recapitalization of the investment structure or disposition. Assets that are no longer consistent with the overall investment strategy or whose returns on invested capital appear to have reached maximum value should be considered for potential disposition.
Assets that have strong upside potential should be identified for capital injection, rebranding, expansion, or redevelopment. As a market’s environment changes, so will the asset performance. It is critical that you continually evaluate the assets in your portfolio to formulate a focused and disciplined approach in meeting the ownership’s objectives.
Both can be seasonal. Much like our garden, hotel real estate performances can vary by season. Leisure-driven destinations are heavily influenced by vacation schedules and climate, and usually have more distinct peak and valley periods. On the other hand, hotels in a suburban corporate market supported mostly by business travelers experience less distinct seasonal fluctuations throughout the year, but weekday and weekend performances generally differ. Additionally, unlike other commercial real estate where cash flows are secured by long term leases, the tenants’ commitments at hotels are essentially daily.
As such, it is imperative to understand the seasonality of demand, be aware of the costs and benefits of all the distribution channels available, and the impact of attracting guests on other profit centers to maximize profits. At a portfolio level, it is also prudent to build a portfolio with steadier cash flows throughout the year to counter the effects of the ebb and flow of seasonality on individual assets.
Whether you are growing a garden or hotel portfolio, understanding the assets, maximizing your resources and having thoughtful strategies are essential elements for success. If you don’t have a green thumb, find someone who does!
At Jones Lang LaSalle, Charlotte Kang provides strategy advisory and asset management services in the United States. During her 20 years of valuation and consulting practice, Charlotte has provided international and domestic hospitality, commercial and mixed-use real estate advisory services in the United States, Caribbean Basin, Central America and Asia. Her area of expertise includes, but not limited to, strategic planning, acquisition services, due diligence services, valuation, market studies, feasibility studies, financial analysis, impact studies, purchase price allocation, property tax appeals, and highest and best use analysis.
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