Mr. Boyar

Finance & Investment

Propco versus Opco: Should Private Hotel Operating Companies Acquire Assets to Enhance Shareholder V

By Bill Boyar, Chairman, Boyar and Miller

This is a pretty typical conundrum that operating companies face at some stage in the growth of the company. What's often missing is an understanding of the important distinctions between a pure operating company (opco) and an operating company that incorporates the ownership of real estate (propco) into the structure and design of the company. What's also often missing is the experience to fully evaluate and understand the important issues that need to be addressed.

Let's look at these two fundamental strategic options and how they affect your current circumstances and future opportunities.

The "Opco" Option

Many private hotel companies start out as pure third-party managers. The focus of management is on operations; asset management and investment management are left to the asset manager or owner. The management team is typically from an operations background. Possessing hands-on, on-site experience is critical. The strength of this structure is the P&L; the weakness is the Balance Sheet. Pure operating companies can be run profitably, but they do not build strong balance sheets.

The value of an operating company is typically measured in terms of a multiple of pre-tax earnings or cash flow. The length and quality of the portfolio of management contracts is also an important factor in valuation. Quality is measured in terms of the fee structure, contract terms and the assets in the portfolio. If the portfolio consists of short-term contracts with easy termination and no substantial termination fees, the value of the company will be discounted. On the other hand, if the portfolio consists of contracts with longer terms, where the ability of the owner to terminate without cause is limited, and where the owners in such circumstances will be obligated for substantial termination fees, there will be a premium placed on the value of the contracts, and therefore, the value of the company.

This model can work. With a disciplined focus on operations and a commitment to profitability, value can be realized through cash flow distributions. And, ultimately, value can be recognized for the shareholders through a sale to a larger hotel opco.

The "Propco" Option

The decision to raise capital and acquire hotels inside your operating company structure is complex. For one thing, acquisition and investment require different skills than operations. To make good investment decisions and attract capital, you need an understanding of capital markets, investment structures, and tax and legal capability. Although these are helpful in the operating context, they are not imperative to operating success. And, adding these skills to your team will cost money. If you determine to pursue an acquisition strategy, there is risk that you will have to fund the incremental costs, if the margins from your third party management fee income are insufficient to fund your acquisition team.

When you pursue an acquisition strategy, you will change the character of your company. Whether or not you acquire the assets directly inside the operating company structure or in affiliate partnerships, your focus will shift from the P&L to the Balance Sheet. The company valuation will be based on a combination of two elements - the valuation of your third-party management business as discussed above, plus the valuation of the real estate assets. In relative terms, the contribution to the enterprise value from the assets will dwarf the value contributed by the third-party management business. This reality will change the focus of your business. It will impact how you hire and train your people and how you allocate resources.

An important factor to consider is that you will most likely have third-party investors. This raises all kinds of new cultural and governance issues. The issues and concerns of your investors will be different from the issues and concerns of your third-party owners. How you allocate time, money and talent will become a central concern.

If you pursue this strategic direction, your operating team will need to be trained to think like investors. They will need to achieve a deeper understanding of how you make money on the asset side - how you build value in the asset and not just by creating fee income tied to gross revenues. Decisions on capital expenditures will take on a different perspective. How long will the assets be in the portfolio? Is this a long-term investment strategy or a short-term strategy? What return on investment can we expect on capital expenditures through the intended holding period? These are just some of the questions that you will address. There are many more.

Bill Boyar is Chairman of Boyar & Miller. He has been a presence in the Houston business community since founding his first law firm in 1980. With a focus on corporate finance, mergers and acquisitions, real estate, and hospitality, Bill has worked with leading regional, national and international organizations. With client relationships that span decades, and deep national and international networks of colleagues and business partners, his career and emphasis on service has stood in contrast to today’s often short-sighted marketplace. Mr. Boyar can be contacted at bboyar@boyarmiller.com Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.

Receive our daily newsletter with the latest breaking news and hotel management best practices.
Hotel Business Review on Facebook
RESOURCE CENTER - SEARCH ARCHIVES
General Search:

JULY: Hotel Spa: Measuring the Results

Bryan Green

A tremendous opportunity exists today for hotels and resorts to once again raise the bar and incorporate experiences crafted around trends that are presently driving the fitness industry. Today’s best operators know that the lines between the commercial health club offering and the hospitality based fitness center are becoming increasingly blurred. In the world of fitness, two significant trends are driving the landscape by which new facilities are born, and existing spaces re-imagined: Functional Training & Technology. Together, these two factors are powering the emergence of socially driven exercise and virtually guided training sessions that are shaking the landscape of nearly every aspect of the fitness industry. READ MORE

Martin Kipping

At Viceroy Zihuatanejo, in 2015, I began forming a new vision for our resort spa to help guests achieve true wellness. I knew we needed to offer much more than just providing traditional spa treatments and services because achieving true wellness would require a resilient attitude and rejuvenating lifestyle to help balance our guests’ physical, mental and spiritual energy. In other words, true wellness encompasses an on-going vibrant, stress-reducing way of living that leads to happiness and contentment. I also realized that just dispensing healthy facts would not necessarily lead guests to adopt healthier, wellness-oriented lifestyles. Instead, guests seeking wellness would need to feel inspired and empowered as well as being educated. READ MORE

David  Stoup

Properly operated hotel spas provide an owner the opportunity to boost property profits while driving additional value through the implementation of robust Social Media and Public Relations programming, and the sale of incremental, attractive room packages. The question is: are you providing your spa with the support and experience necessary to achieve these objectives? Unfortunately, it is all too common for Hotel Spas to be under-performing in some, if not all, the above categories. If that is the case, a spa asset manager may be a worthwhile investment for your property. READ MORE

Mia Kyricos

Travel and tourism remains one of the world’s largest industries, representing over 10% of global GDP and forecasted to grow 3.7% in 20179.(1) Wellness Tourism, or travel associated with the pursuit of maintaining or enhancing one’s personal wellbeing, is growing twice as fast as the overall sector, and exists at nearly a $600 billion global enterprise.(2) In her annual contribution to the Hotel Business Review, Mia Kyricos, an expert in wellness-driven hospitality, gives us the status of the wellness tourism industry as we know it today, as well as a glimpse of what new opportunities exist on the horizon. READ MORE

Coming Up In The August Online Hotel Business Review




{300x250.media}
Feature Focus
Food & Beverage: Multiplicity and Diversity are Key
The challenge for hotel food and beverage operations is to serve the personal tastes and needs of an increasingly diverse population and, at the same time, to keep up with ever-evolving industry trends. In order to accomplish this, restaurateurs and hoteliers have to flex their creative muscles and pull out all the stops to satisfy their various audiences. One way to achieve this is to utilize existing food spaces in multiple ways at different times of the day. Lunch can be casual and fast, while dinnertime can be more formal and slower paced. The same restaurant can offer counter service by day but provide table service by night, with a completely different menu and atmosphere. Changes in music, lighting, uniforms and tabletop design contribute to its transformation. This multi- purpose approach seeks to meet the dining needs of guests as they change throughout the day. Today’s restaurants also have to go to great lengths to fulfill all the diverse dietary preferences of their guests. The popularity of plant-based, paleo, vegan, and gluten and allergen-free diets means that traditional menus must evolve from protein-heavy, carb-loaded offerings to those featuring more vegetables and legumes. Chefs are doing creative things with vegetables, such as experimenting with global cuisines or incorporating new vegetable hybrids into their dishes. Another trend is an emphasis on bold and creative flavors. From chili oil to sriracha to spicy maple syrup, entrees, desserts and beverages are all being enhanced with spice and heat. The August issue of the Hotel Business Review will document the trends and challenges in the food and beverage sector, and report on what some leading hotels are doing to enhance this area of their business.