Invest in Smart Revenue Management to Protect the Bottom Line and Asset Valuation

Asset Value

As the aftershocks of historically low demand resonate across the industry, hoteliers can expect another year of disruption in 2021. This time changes will be driven by mergers and acquisitions, brand changes, foreclosures, and forced sales.

An Industry in Crisis

In July, almost one in four hotels in the United States were at risk of foreclosure, according to a report from Trepp. Meanwhile, the American Hotel & Lodging Association (AHLA) reported in August that almost two-thirds of U.S. hotels remained at or below 50 percent occupancy—the threshold at which most hotels can break even and pay debt.

“Our industry is in crisis,” said Chip Rogers, AHLA president and CEO. “Thousands of hotels are in jeopardy of closing forever, and that will have a ripple effect throughout our communities for years to come.”

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Long recognized as a vital means of boosting a hotel’s bottom line, revenue management is also playing an instrumental role in protecting, forecasting, and strengthening asset value during a difficult time.

Keeping the Buyers at Bay

One thing holding back mass transactions is a standoff between buyers looking for a fire-sale deal and sellers refusing to lower their price. Whereas buyers emphasize the risks of a protracted downturn, sellers argue the pandemic is only temporary and point to strong historical performance as an indication of future potential.

Caught in between are lenders dealing with an ever-rising number of missed mortgage payments. The longer the pandemic lasts, the more sell-offs will occur.

In the meantime, owners and operators must do everything in their power to protect their property’s cash flow and stave off a forced sale. With smart revenue management strategies and technology, hotels can generate much-needed cash flow, improve financial results, and provide the data and analytics required to navigate the crisis.

Predicting Performance in an Unpredictable Market

Assessing the value of a hotel is challenging at the best of times; uncertainty surrounding the pandemic makes things far more difficult. Valuations require both deep expertise and a much more short-term analytical process than employed in the past, according to a recent article in Hotel News Now.

Furthermore, pandemic-related risks and restrictions are preventing the in-person fieldwork normally conducted by appraisers such as site inspections, interviews, and market research.

While many elements go into a valuation, two key ingredients are 1) future net income—a measure of income minus expenses typically estimated over a 10-year period—and 2) the anticipated proceeds from a future sale.

This requires access to market projections as well as the hotel’s performance data. But reliable projections are proving elusive in today’s unpredictable market. Further complicating matters are temporary hotel closures, scaled-back room inventory, staffing and services, and the added costs of maintaining a clean and safe environment.

Flexing the Revenue Management Advantage

Under these conditions, hotels that have invested wisely in revenue management systems and know-how are at a distinct advantage. A seasoned revenue manager can draw on deep analytical skills, familiarity with internal and external data sources, and the data-modeling capabilities of an advanced revenue management system to produce timely, detailed, and frequent forecasts—and reforecasts.

Accuracy, speed, and agility are critical because forecasts guide sales and marketing strategies, as well as pricing and inventory decisions. Forecasts are used by operations to manage expenditures, staffing, and resources, and by the chief financial officer, management company, and owners to project future expenses and net income.

All these functions help drive incremental revenue and reduce costs, thereby contributing directly to the bottom line and increasing asset value. On the other hand, errors and inefficiencies in forecasting can lead to bad decisions and missed targets, which could ultimately result in a forced sale at a below-market valuation.

Making Every Dollar Earned and Saved Count

In recent years, revenue management has expanded beyond tactical rate and room inventory management to become more strategic, more focused on total revenue, and more profit-orientated. This holistic approach is particularly relevant at a time when every dollar earned generates cash flow to keep the lights on and every dollar saved strengthens the bottom line.

With demand for rooms, food and beverage, and meetings and events at all-time lows, hotels must redefine target markets and find new sources of revenue. By applying revenue science to optimize all revenue streams, operators can find incremental revenue and savings in untapped areas. By factoring total revenue and costs into decisions, they can reduce losses and increase profitability. As demand returns, the returns on these models will gain momentum, helping to expedite recovery.

Making It a Coordinated Effort

In many respects, revenue managers have been training all their careers for this moment. And yet it comes at a time when many are on furlough, others are laid off, and those who are working are stretched to the limit covering multiple properties.

Which begs the question: Who will talk desperate owners out of slashing rates and postponing needed property upgrades by providing the hard data to demonstrate the negative impact on future performance and property value?

Fortunately, revenue management is a team effort, and general managers, directors of sales and marketing, and others are stepping in to provide support. At some properties, plans to consolidate sales, marketing, and revenue management under one leadership role have been fast-tracked to ensure a coordinated approach to today’s challenges.

Finding Your Way Back to Prosperity

For many hotels, the crisis has also exposed the risks of scrimping on revenue technology. Right now, the keys to survival are smart data analysis, doing more with less through intelligent automation, and identifying new revenue opportunities before competitors do. There is simply too much at stake to rely on manual processes and outdated systems.

Exactly how 2021 will play out remains uncertain, but one thing is clear: Whether you’re an owner, buyer, management company, or brand, investing in smart revenue strategies, staffing, and systems will help ensure your property is still around to reap the benefits when the industry returns to prosperity.

 


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