Navigating the end of the Hotel Management Agreement: A guide for hotel owners nearing the end of management agreements

The end of a management agreement is a critical point that presents both challenges and opportunities. Whether hotel owners are contemplating renewing their contract, transitioning to a new management company, or taking on management responsibilities themselves, careful planning and strategic decision-making are essential. 

At Axsia HTL we understand the complexities of this process and can offer guidance to help hotel owners make informed decisions.

David Simpson, Managing Director of Axsia HTL, advises to start reviewing earlier than you think: “Pay close attention to the termination clauses, notice period for termination, renewal or non-renewal terms, and any financial obligations or penalties associated with ending the hotel management contract,” says Simpson.

“Hotel owners often leave it too late to review their options and while taking a different approach could bring major financial reward, they have no option but to renew the contract, often for another 10 years, as they didn’t prepare early enough.”

Here are Axsia HTL’s top four tips for hotel owners to consider in 2024.

1. Evaluate performance and future goals 

Assess the performance of the current management company. Consider both quantitative metrics (e.g., occupancy rates, room rates, revenue per available room, market share, profitability) and qualitative factors (e.g., management expertise, guest satisfaction, staff morale, hotel and brand reputation). 

Align this evaluation with the future goals for the property. Are the goals to reposition the hotel in the market, enhance guest experiences, or improve operational efficiency? What is your plan in terms of sell versus hold? These goals will influence the decision to choose to renew, switch management companies, or self-manage.

2. Explore alternative options

When making the choice of whether to renew your current agreement, there are multiple options:

Renew with the current management company

• Negotiate better terms or conditions.
• Address any performance issues or areas of improvement.

Switch to a new Brand

• Alternative brands may be a better fit to deliver desired outcomes

Capital expenditure requirements and business impact

Switch to a new management company

• Conduct a thorough search and thorough due diligence on potential companies. This is essential for a successful partnership.
• Things to consider are the company’s track record, expertise, contract terms, operational processes, cultural fit and alignment with the property’s vision.
  

Switch to a franchise agreement

• Franchise agreements can be a powerful alternative for hotel owners looking for more control over their properties while benefiting from the support and brand recognition of established hotel brands. 
• Review the potential for increased control with operational autonomy and customisation flexibility. Access to systems and support, with brand power, training resources and marketing campaigns. 
• Review the potential for improved profitability with revenue management strategies and cost efficiencies established by the existing franchiser. 
• Make use of support during the initial transition period and ongoing support addressing any challenges, with assistance from franchisers
  

Self-management

• Assess the capability of managing the property in-house.
• Plan for the necessary resources, systems, and personnel to ensure smooth operations.
• Taking on the management responsibilities in-house can be an attractive option, but it requires a thorough assessment of capabilities and resources. There are lots of things to consider. Including operational expertise, are the team familiar with industry standards and best practices? Can they plan for managing risks and ensuring safety? Does the team have skills to motivate and manage staff effectively?

3. Engage in strategic negotiations

Whether renewing or transitioning, effective negotiation is key. Aim to secure terms that align with the property’s needs and long-term strategy. Focus on areas such as management fees, performance incentives, contract duration, and exit clauses.

Negotiation tips

• Leverage performance data and market benchmarks.
• Have an alternative strategy if negotiations are not going well.
• Be clear about expectations and goals.
• Seek advice from industry experts (consultants and lawyers) to ensure a fair and balanced agreement.

4. Plan for a smooth transition and long-term success

A seamless transition is crucial to maintaining operational stability and guest satisfaction. Develop a comprehensive transition plan that covers all aspects of the handover process including technology systems, accounting and financial records, supplier contracts, employee training, guest relations and regulatory compliance.

Be sure to keep focus on the long-term success of the property hotel. Regularly review and adjust management strategies to adapt to changing market conditions and guest expectations. Continuously invest in staff training, property improvements, and guest experience enhancements.

The end of a hotel management agreement is a pivotal moment that requires careful consideration and strategic planning. By thoroughly reviewing options, engaging in informed negotiations, and planning a smooth transition, the stage can be set for continued success and growth.

This case study demonstrates how success can be achieved when owners, brands (HMCs) and employees collaborate with a strong strategic asset management team. Results are successfully driven which lead to financial benefits for the owner, increased fees, and brand recognition for the brand (HMC) and enormous pride and sense of achievement for employees. Employee satisfaction translates to greater guest engagement which translates to improved market positioning and subsequently financial benefits to all.

AXSIA HTL has been engaged as the Asset Manager for a period of 5 years at this particular property, when we saw great opportunity to turbo charge the results for the owners.

COVID-19 severely impacted any growth or strategic improvement in years 3 and 4, as it did the entire tourism and hospitality sector around the country.

However, 5 years ago (2017) the hotel had just completed a near full refurbishment of rooms, public spaces and restaurants and bars. The hotel was managed under contract to a major brand and was being promoted by the owners and the HMC as a successful turnaround following the refurbishment.  They boasted that the hotel was achieving a revenue market share index (RGI) of 25% over 100 (a standard benchmark) and had returned to profitable business operation.

Once the refurbishment was nearing a conclusion, AXSIA HTL performed a full review of the hotel and its competitor set of hotels. It became clear that there was a lot more potential to drive performance at the property.

When compared with the competitor set AXSIA HTL estimated the hotel should be trading at a minimum premium of 40%, possibly 50% above natural RGI (100). In achieving this additional premium, added market share profits would also increase.

When undertaking such an extensive refurbishment investment, after years of nothing, it is important to revisit your Vision, Positioning, Target Markets and most importantly correlating service offerings to match the new product.  Over years of underinvestment your customer base changes with your declining room rates and declining service offerings and it is important to overhaul this to ensure you are capturing a more premium customer to match the new offerings.

The Management team and HMC had not undertaken these activities and were continuing to drive many of the original strategies prior to renovation and obtain better results by simply marketing a refurbished product, thereby increasing occupancies, and lifting RGI.

AXSIA HTL set out a plan (Vision) to challenge the above. The plan had to be all inclusive and required the owners, HMC and the Management Team to “buy-in”. All three stakeholders needed to be participants in the delivery of the plan.

The plan required:

• The owners provide capital and accept some short-term operating expense adjustments.
• The HMC accepted that some of the current hotel executives were not necessarily capable of the change needed to deliver the plan. And its corporate support could be upgraded.
• The hotel management team had to “really” focus on service standards, guest engagement, luxury operational standards and most importantly new positioning was needed to target a new set of customers and implement strategic marketing to match this.

The plan was implemented prior to COVID-19 and had really started to achieve results in 2019.  With market share achieving a 90% (RGI 1.90) premium to market and importantly the EBITDA grew by 26%.  This was achieved predominately through a RevPAR increase of 20%, by room rate growth, the most profitable revenue growth opportunity.

The estimated capital growth/valuation for the owner, at a 6.5% cap rate, increased by over $12million in that 3-year period.

Now as we enter 2023, the hotel is achieving a market share premium of 95% (RGI 1.95).  Again, by driving RevPAR through average room rates rather than major occupancy gains. As stated above occupancy experienced minor uplift however the demographic of the consumer/guests was elevated and resulted in the room rate uplift.

This premium has resulted in an improvement of EBITDA of 70% or capital value growth, estimated at over $30million.   This collaborative approach required the owners to invest another $3million in capital expenditure, the HMC to invest additional time focused on the resort with the management team to develop the positioning and marketing plans to achieve the vision set out, however the value gained well exceeds the investment of all parties.

“Sales are down, but it’s a difficult market”. “Our sales team isn’t performing”. “The opposition are too cheap”….

There’s usually a lot more to it, but it does sound like you need some help.

A number of studies over the last 20 years, particularly an ongoing study by the Corporate Executive Board (“CEB”)1have shown that B2B buyer behaviour has changed. Business customers are now more unsure, more risk averse and less able to discern the differences in offerings of suppliers, particularly complex offerings.

Yet high functioning salespeople and teams have identified the opportunity and adapted their sales and marketing techniques and methodologies so that their businesses continue to enjoy success in all types of economic conditions. In fact, the tougher itgets the more the gap between sales success and failure widens.

Research highlighted in “The Challenger Sale”2concludes that this style of salesperson is more successful in complex sales environments than all other types of salesperson. Notably, they state, that “in these types of environments, the Relationship Builder style of salesperson is the least effective of all styles”. This is not to say that relationship building is not important in sales, because it is. However, it is simply not enough anymore.

Importantly, developing and embedding a more successful style of sales and marketing behaviour is far more than changing the corporate attire of the sales team. It requires training, changes and development of behaviours, techniques and methodologies of the sales and marketing team in a manner that is supported and adopted by the organisation.

CEB’s research also highlights for your salespeople to be effective, “it is assumed that your products are well branded, differentiated and supported by high service standards”.

Critically, these factors have “less than 40% influence over customer loyalty and price has less than 10% influence over customer loyalty”.

Less than 50% is about price and product. Essentially these attributes simply get you in the game.

If you or your business is asking itself questions like those posed above, is it worth considering that it is time for change. Time to help your sales team be successful.

Axsia Advisory has specialist advisors that can assist your journey. It’s worth a call.

¹ Corporate Executive BoardCompany(USA)
² CEB. Dixon and Adamson. 2011. The Challenger Sale. Penguin Group (USA)

The progressive lifting of intrastate and interstate border restrictions, combined with the desire of many metropolitan residents to “get out of the city”, is expected to generate considerable growth in domestic drive tourism through the balance of spring and throughout the upcoming summer.

To find out more, download the full article below.

Download our informative research paper that covers topics such as typical hotel management relationships and the hotel market in Australia and New Zealand.

There are few industries that have been impacted more than the hospitality and tourism sector. Apart from a few hotels that serviced returning quarantined travellers many have had zero revenue for 3-6 months depending on which state they are located and are still operating below historical levels with most state borders remaining closed.

With depleted cash reserves, reduced asset values and international borders 10+ months away from opening who will make the distance to get to cashflow positive and eventually restoring asset values.

Owners and operators will have to navigate a bumpy road with most likely pockets of outbreaks of Covid continuing for some time. Also, the extent of assistance from Brands will be constrained with so many of their portfolio hotels seeking assistance and with many of the Brands having significantly reduced staff over the last 6 months.

Hotels will also need to devise new strategies to meet the evolving demand, in many cases they will need to be appealing to a different market than they previously have attracted. Be it hotels that historically attracted international guests needing to refocus on the domestic market, or regional accommodation that will be experiencing unprecedented high levels of demand from guests used to international service levels, or many other challenges of operating outside the norm.

The decisions of Owners and Financiers are critical in determining the ability to trade through the next couple of years and to fund the underperformance as businesses recover. But do they have the right strategy, who will be the winners, and therefore who are worthy of continued financial support notwithstanding breached covenants.

Should you require an assessment of your strategy or if you are seeking additional capital either from your bank or other sources, Axsia is able to assist in completing a strategic review for internal use or for 3^rd parties such as lenders or investors. Furthermore, through our extensive domestic and offshore client base we can also access additional equity to bridge you through to full recovery.

As Australia starts to open borders, we expect to see increased business travel along with increased holidaying particularly as the weather improves and Christmas holidays beckon.

But is the Hotel, Tourism & Leisure industry ready for this influx – have they reassembled a suitable team? are they marketing to previous guests? are they leveraging off government and Brand promotional campaigns? do they have property specific campaigns? are they ‘on-market’ with their offering? have they developed Covid safe cleaning and hygiene protocols? These are just a few of the questions that need to be considered with clear implementation strategies developed to deal with the re-opening.

What will be the new ‘norm’? This is very hard to predict. With the potential of further outbreaks of Covid altering the potential market on a daily basis, this means that operators will need to be nimble. Furthermore, with many Brands having substantially reduced their teams, the level of assistance and mentoring available to GMs will be somewhat reduced. As such, owners need to be aware of this raised isolation and work with GMs to establish mentoring networks or bring in specialist asset managers to assist them through the transition.

Whilst it is always an easy strategy to reduce rates to win business, this simple approach can often lead to long term revenue pressure when you try to return to historical rates. As such it is important to have a clear strategy as to how and to whom this is delivered and what the offer includes as this is not just a simple chase for immediate revenue. Decisions need to also consider the impact on the underlying asset value.

As the international borders are opened, the rush to travel is likely to be slow with many travellers wanting to see sustained low levels of Covid before they are willing to pursue international travel, notwithstanding the strong performance (overall) that Australia has achieved in the battle against Covid. This will mean that accommodation usually focussed on international guests may take longer to recover and therefore need to refocus their attention in the shorter term to domestic markets.

In summary, the road to recovery is likely to have many potholes and bumps. It will be those that have a strong strategy and can communicate that to key stakeholders in a clear and concise manner that will get to the end of the road. Those that struggle to adapt may fall by the wayside.

Coming out of COVID, banks will categorise Hotels as those that can fully recover and those whose recovery is less certain. They’ll continue to support those who can and move to reduce exposure where they need to.

If you believe in your ability to recover you will be required to demonstrate that with a well-articulated and robust recovery plan. Who is your target market customer, what do they want and how can you deliver the experience better than your competitors. Strong cost management is a given, however, recovery in a more competitive market will depend on your ability to align guest expectations.

Are your hotel clients breaching bank covenants? Are they going to be one of the survivors? Can they get back to pre COVID-19 performance? If so when?

Axsia is a specialist Hotel, Tourism & Leisure advisory company. Our team has deep operational experience in the hotel and hospitality sector combined with legal, accounting, property, debt and equity financing capability. We also hold an AFSL and a Real Estate Licence.

Axsia has curated specific expertise to support hotels through their full lifecycle, including:

• investment and market evaluation
• acquisition and development
• operator selection
• pre-opening strategies and implementation
• ongoing asset management
• asset optimisation – operational and overall asset value

Axsia can at your direction provide a tailored evaluation report on an existing hotel (see sample report), support the implementation of recommended corrective action, manage day-to-day operations, mentor staff and provide asset management services.

For more information contact David Simpson or Ian Knight on 03 9013 6991 or email contact@axsiaorg.com

The hotel, tourism and leisure sectors have endured considerable hardship over the last 6 months. Having experienced a devastating summer bushfire season on a national level, the sector then became the first significant casualty of the COVID-19 pandemic.

The impact of current lockdowns and travel restrictions over the last six weeks has been disastrous for everyone involved in hotels, tourism and leisure.