A Simple Approach to Measure Management Skill
Do different hotel management companies produce significantly different profit results for their owners? After accounting for differences in branding, location, property age and condition, market size, and property type, do different management companies still produce significantly different results? This article shows that the answer is: YES.
A really good hotel management company can deliver more profit per dollar of revenue generated by a hotel than a below-average management company. Hotel valuation depends substantially on the proven and potential net income a hotel property can produce. A really good management company helps to maximize net income and value for the owner. One of the most important ways they can do this is by controlling operating expenses at the hotel. Therefore, selecting a below-average management company versus a really good management company can mean millions of dollars of difference in value for an owner.
The authors have reviewed several thousand financial statements of hotels operated by different management companies and the results show a wide range in abilities to control expenses. To illustrate the importance of selecting a good management company, this article focuses on profit results from more than 400 Hampton Inn and Hampton Inn & Suites hotels around the United States. By focusing on one of the most standardized brands in the world, the authors argue that profitability differences due to branding, service level, chain scale, and amenities are already partially accounted for simply by focusing on a single brand. To account for differences in profitability resulting from location, market size, property age, and building condition, the authors have tracked each property’s Revenue Per Available Room (RevPAR) and compared it to each property’s Gross Operating Profit Per Available Room (ProPAR).
HVS has conducted research to evaluate the extent to which a strong management company can bolster profitability over a weak management company. To this end, we have evaluated hundreds of profit and loss statements from Hampton Inns across the United States. Hampton Inn was chosen for our study because it is one of the most standardized brands in the world. After normalizing for RevPAR, the difference from one Hampton Inn to the next is relatively minimal due to the brand’s high degree of standardization. However, some Hampton Inn properties are showing considerably higher profit levels than others at the same RevPAR level. Due to the standardized brand, one likely explanation for the variance is the performance of the management companies and their ability to control expenses.
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