HVS.com HVS | 6th Floor, Building 8-C, DLF Cyber City, Phase – II, Gurgaon 122 002, INDIA HVS HOTEL MANAGEMENT CONTRACT SURVEY Manav Thadani, MRICS Chairman – Asia Pacific Juie S. Mobar Associate Director – Special Projects AUGUST 2014 EXCERPTS USA | EUROPE | APAC
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HVS.com HVS | 6th Floor, Building 8-C, DLF Cyber City, Phase – II, Gurgaon 122 002, INDIA
HVS HOTEL MANAGEMENT CONTRACT SURVEY
Manav Thadani, MRICS
Chairman – Asia Pacific
Juie S. MobarAssociate Director – Special Projects
AUGUST 2014
EXCERPTSUSA | EUROPE | APAC
PAGE 2 | EXCERPTS: USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY
Data Analysis: Primary independent variables(defined as inputs or causes) chosen for the dataanalysis areMarket Positioning, Room Inventory andAgeoftheContract,ashighlightedinFigure2.Here,itisimportanttonotethatthesurveycapturedinformationonadditionalindependentvariables(Figure3),whichhavebeendiscussedinthefullreporttoexplainresults“only”whereapplicable.
ReportPresentation:Thefullsurveyreportconsistsof six major sections, which are recognised to besignificantareasforowner-operatornegotiations.
Survey Methodology
DataCompilation:Datacollectionforthissurveywasimplementedusingacombinationofdifferentways.Welooked at contracts from the HVS global database,dispatchedanonlineself-reportingquestionnaire,andheld discussions with hotels owners as well asoperators.Eventually,theuniversalsurveysamplesetcomprised 236 management contracts (57,055rooms);regionalbreakdownisdepictedinFigure1.
PAGE 4 | USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY
Hotel Companies Represented In This Survey
Totally,38 branded hotel companies have been represented in this survey, in addition to a few independentoperatorsandseveralthird-partymanagementcompanies.
Figure 5: Hotel Companies (Branded) Represented in the Survey
The initial term of a management contract for anew/proposed hotel typically commences from theEffectiveDate (date of executionof themanagementagreement) and continues until the expiration of a“specified”numberofyearsaftertheOpeningDate.Inthecaseofexistinghotels,theinitialtermisgenerallycalculatedfromtheEffectiveDateuntiltheexpirationofa“specified”numberofyears.Theaveragelengthoftheinitialtermfortheuniversalsamplesetis18.3years.
It is common understanding that operators prefer alongercontracttermwithautomaticrenewaloptions(orthoseexcercisablebytheoperator)citingtheneedforstability,toprotecttheirbrandimageaswellastoobtainthedesiredreturnontheirinvestment.Ontheotherhand,ownerspreferashorterinitialtermwithmultiplerenewaloptionsonmutualconsent,seekingflexibility.Inadditiontowhichsideofthetableyouare on, the length of the initial term is alsodependent on the region of operation (Figure 6),hotel’smarketpositioning,roominventoryandtheyearofsigningthecontract,amongothers.
The average length of the initial term for existinghotels(50%oftheuniversalsampleset)isfoundtobe17.7 years vis-a-vis new properties (48% of theuniversalsampleset)thathavealongeraveragetermof19.1years.Thisdata isparticularly importantwhenoneconsidersthesurveyresultsbyregioninFigure6.USA,amaturedhotelmarketwith73%ofthesub-setbeingrepresentedbyexistinghotels,hascontractswitha shorter initial term than those in theAPAC region,which is a developing/emerging hotel market with74%ofthesub-setcorrespondingtonewhotels.
Additionally,ithasbeenobservedthatinrecenttimes,increased competition owing to more number ofplayersindeveloping/emerginghotelmarkets,besidesthe rising awareness amongst hotel owners, haveresultedinmanagementcontractswithashorterinitialterm(safeguardingtheinterestofbothpartiesshoulddisappointingmarketconditionsoccur).
Thefullsurveyreportprovidesdetailsonthelengthoftheinitialtermbyhotelmarketpositioning,roominventoryandyearofsigningthecontract,besideselaboratingonrenewal/extensions and area of protection/restrictedarea/non-competearea.
Figure 6: Length Of The Initial Term
25%
20%
7%
28%
9%9%
2%USA Sub-Set
Less than 10 years
10 years
15 years
20 years
25 years
30 years
More than 30 years
Avg. 15.6 years
Europe Sub-Set
2%
11%
21%
26%
12%
26%
1%1%
Less than 10 years
10 years
15 years
20 years
25 years
30 years
More than 30 years
Not Available
Avg. 21.1 years
4%
24%
20%26%
12%
10%
4%
APAC Sub-Set
Less than 10 years
10 years
15 years
20 years
25 years
30 years
More than 30 years
Avg. 18 .3 years
Region:InUSA,theoperatorsappearmorecomfortablewithashorter initial term,with 25%of the contracts offering lessthan10years.However,incaseofAPAC,relativelyadevelopinghotelmarket,thiscarveisonly4%.Also,aninitialtermof20yearsismostcommonacrossallregions.
Note: 87% of the Europe sub-set comprises contracts forupscale/upper upscale/luxury hotels, which could be thereasonbehindfewercontractsofferingashorterinitialterm.
EXCERPTS: USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY | PAGE 5
Universal Sample Set
10%
18%
16%27%
11%
15%
3%
Less than 10 years
10 years
15 years
20 years
25 years
30 years
More than 30 years
Avg. 18.3 years
PAGE 6 | USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY
Figure 7: Base Management Fee By Room Inventory
RoomInventory:Itisimportanttocorrelatethedatainthisfigurewithhotelmarketpositioning.The<100roomsgroupintheUSAsub-setismostly(90%)representedbybudget/midmarket hotels that tend to have a higher base fee thanupscale/luxuryhotels.ThesituationisreversedinthecaseoftheEuropesub-setwiththisinventorygroupcorrespondingtoonly upscale/upper upscale/luxury hotels. As for the APACcontracts,theytogetherrepresentanearequalmixoflowerandhigherrangesofpositioning.
On the otherhand,95%of the>500 roomsgroup for theuniversalsamplesetrelatestoupscale/luxuryhotels.
2.64% 2.76%2.42% 2.30%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Less than 100 rooms
100 - 299 rooms
300 - 500 rooms
Above 500 rooms
Universal Sample Set
2.20% 2.42%
1.81% 2.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00% APAC Sub-Set
Less than 100 rooms
100 - 299 rooms
300 - 500 rooms
Above 500 rooms
1.71%2.08% 2.20%
1.54%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Less than 100 rooms
100 - 299 rooms
300 - 500 rooms
Above 500 rooms
Europe Sub-Set
4.30%
3.68%3.41%
2.77%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Less than 100 rooms
100 - 299 rooms
300 - 500 rooms
Above 500 rooms
USA Sub-Set
EXCERPT II
Management Fees
Base Fee and Incentive Fee together make up theManagementFeeschargedbytheoperatorinexchangeforperformingthedutiesspecifiedinthecontract.
Base Management Fee: The base fee is usuallycalculated as a percentage of the hotel’s GrossOperatingRevenue.Itcouldeitherbeasinglefee,orasum of licensing/royalty fee and operating fee.Moreover, the base fee is generally chargeablethroughoutthelifeofthecontract;however,itcouldbeeithercomputedasa“constant”percentageacrossallyears,oritcouldriseovertheinitialyears,graduallystabilisingfortheremaindertermofthecontract.Thescaledupaveragebasefeefortheuniversalsamplesetis2.65%(Year6onwards).
Figure7discussesthesurveyresultspertainingtothisfeebyroominventory.Thefollowinginformationmustbeborneinmindwhilereviewingthisfigure–(i)24%oftheEuropeancontractsdonotprovidecompletedetailsonthebasefee,loweringtheaverage,aswedonothavetheLicensing/Royaltyagreementsforthese;(ii)10%oftheAPACcontractsdonotchargebasefeeseparately. They instead charge a higher incentivemanagementfee,whichisinclusiveofthebasefee;and(iii)overall,thebasefeeforexistinghotels(2.86%)isfoundtobehigherthanthatfornewhotels(2.42%).
Thefullsurveyreportfeaturesexhaustiveinformationonthe Base Fee highlighting how it varies by marketpositioning,roominventoryandageofthecontract,inadditiontorelevantdetailsontheotheroperatorfees.
Incentive Management Fee: Inaddition to thebasefee,anoperatorusuallyreceivesanincentivefee,whichislinkedtothehotel’soperatingprofit.Therefore,whiletheformermotivatestheoperatortofocusonthetop-line, the latter ensures that there is an incentivetowardscontrollingexpensesaswell.Mostoperatorsprefer linking this fee to either the Gross OperatingProfit (GOP) or the Adjusted GOP (AGOP, which isinclusive of the base fee and also known as IncomeBeforeFixedCharges).ExpensesbeyondthislevelinaP&L (up to the EBIDTA line item per the UniformSystemofAccountsfortheLodgingIndustry),areFixedCostspertainingtoRent,PropertyInsurance,PropertyTaxandReserveforReplacement,whicharearguablybeyondthecontroloftheOperator.
However,exceptionsto linkingthis fee toGOP/AGOPcan depend on the owner-operator negotiations andasset-specificconsiderations.
In this survey, contracts are seen having differentincentive fee structures. Broadly, these can beidentifiedasunder:
• Incentivefeeis expressedasaFlatFeeStructure: percentageof theannualoperatingprofit (defined differentlyacrosscontracts).Thispercentage could either remain constant or could scale upwards throughthetermofthecontract–lowerintheinitial years and peaking from Year 5 or 6 onwards. For example, Operating Years 1-4 could have an incentivefeeof6%,andfortheremainderoftheterm itcouldequal8%.
• Linked to the GOP/AGOP performance of the Hotel:Incentivefeeisdefinedasapercentageofthe annual operatingprofit (defineddifferently across contracts), with it being dependent on the pre- definedrangesofGOP/AGOPMargin.Forexample, incentive fee could equal 8% of GOP/AGOP, if the hotelachievesaGOP/AGOPMarginbetween35%- 40%; and it could equal 10% of GOP/AGOP for a Margin>40%.
• WhereLinkedtoAvailableCashFlowoftheHotel: applicable,IncentiveFeeistypicallysubordinatedto theOwner’sPriority(mostcontractsinthissurvey offeringthistypeofincentive fee structure also provideforanowner’spriority),with“AvailableCash Flow”beingdefineddifferentlyineachcontract.
• This type isrepresentedbycontracts thatOthers: either have a combination of Flat and Linked Fee structuresorpresentaverycustomisedcalculation oftheincentivefee.Forexample,incentivefeecould equal2%ofGrossRevenuesor20%oftheAvailable CashFlow,whicheveristhelesserofthetwo.
Figure8depicts the typesof incentive feestructuresprevailingintheuniversalandregionalsamplesets.
IncentiveFeeStructure:Notably,theflatfeestructurealongwithlinkingtheincentivefeetoGOP/AGOPMarginaremostprevalentintheAPACregion,whileitismorecustomaryinUSAto link the incentive fee to the hotel's available cash flow.Consideringthattheprovisionforanowner'spriorityisnewtotheAPACregion,itisnotsurprisingthattheonlytwocontractsinthe subjectsub-setofferinganincentivefee linkedtothehotel'savailablecashflowweresignedasrecentlyasin2012.
European contracts, in contrast, have the maximumcustomised calculations for incentive fee among the threeregions.
Flat Fee
Linked to GOP Performance
Linked to AGOP Performance
Linked to Available Cash Flow
Others
No Incen�ve Fee/No Details
45%
17%
13%
3%
16%6%
APAC Sub-Set
10%
56%
8%
26%
USA Sub-Set
Flat Fee
Linked to Available Cash Flow
Others
No Incen�ve Fee/No Details
30%
3%
8%
14%
25%
20%
Europe Sub-Set
Flat Fee
Linked to GOP Performance
Linked to AGOP Performance
Linked to Available Cash Flow
Others
No Incen�ve Fee/No Details
EXCERPTS: USA | EUROPE | APAC – HVS HOTEL MANAGEMENT CONTRACT SURVEY | PAGE 7
28%
7%
7%25%
16%
17%
Universal Sample Set
Flat Fee
Linked to GOP Performance
Linked to AGOP Performance
Linked to Available Cash Flow
Others
No Incen�ve Fee/No Details
HVS.com HVS | 6th Floor, Building 8-C, DLF Cyber City, Phase – II, Gurgaon 122 002, INDIA
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Manav Thadani, MRICS,Chairman,AsiaPacific,HVSfounded the New Delhiofficein1997.Heisactivelyi nvo lved i n op e ra to rs e a r c h /ma n a g eme n tcontract negotiations and
providesstrategicadvicetokeyclients.Headditionally serves as amentor to otherHVSverticalsintheAPACregion,andistheglobal head of HVS Sustainability.Moreover, Manav oversees the planningand implementation of the regionalHVSconferences, including Hotel InvestmentConference–SouthAsia(HICSA);Tourism,Ho te l I nve s tmen t & Ne twork ingConference (THINC) Indonesia; and theChina Hotel Investment Conference(CHIC). On a personal level, Manav co-foundedSAMHIin2011,aleadingIndianhotel investment and development firmwithfocusonownershipofbrandedhotelsin the mid-scale/economy [email protected]
About the Authors
Juie S. Mobar is AssociateDirector - Special ProjectswithHVS'NewDelhioffice.Shehasspentfiveyearswiththe company starting as aConsulting & ValuationAnalyst . In addit ion to
having worked on feasibility studies,v a l u a t i o n s , ma rke t s t u d i e s a ndoperational audits in the past, Juie hasbeenactivelyinvolvedinoperatorsearchand management contract negotiations,research-based assignments and selectwork for HVS Susta inabi l i ty. Shecompleted her Management TraineeProgramwiththeTajGroupin2006,andholds a BA (Hon) in Hotel Managementfrom the Institute of Hotel ManagementAurangabad (University of Huddersfield,UK ) a n d B a c h e l o r s i n B u s i n e s sAdministrat ion from [email protected]
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