How to Evaluate a Hotel Operator Before Investing

You buy the unit. The operator determines what it earns. In most hotel suite structures you have no say over the room rate, the distribution channels, the staffing or the cost base. Assessing the operator is therefore not a secondary check after the property decision. For many schemes it is the property decision.

First, establish who is actually running the building

A logo on a hoarding can mean several quite different things, and the differences matter to your income. Sort them out before anything else.

The track record questions

1. How many hotels does this operator run in Malaysia, and for how long? A first Malaysian property is not disqualifying, but it is a different proposition from a tenth.
2. Have they run this segment before? Midscale operators and luxury operators are not interchangeable, and neither is city-centre and resort.
3. Have they ever been removed from a property, or walked away from one? Ask directly. The answer, and the manner of the answer, both inform.
4. What are the review scores and rate positioning of their existing properties? Public booking platforms are free and reveal a great deal about consistency.
5. Can you speak to owners at an existing property they run? A reluctance to arrange that is itself information.

Reading the management agreement

The agreement is where the operator's incentives are set. Read for these clauses specifically, and ask for the ones that are missing.

• Fee basis — gross revenue or profit. An operator paid a percentage of gross is paid regardless of whether owners are.
• Term and renewal — how long is the operator locked in, and can owners remove them for underperformance? Many agreements have no performance test at all.
• Performance test — is there a RevPAR-index or profit hurdle, and what is the consequence of failing it?
• Budget approval — who signs off the annual operating budget and capital spend? If the operator approves its own budget, cost discipline is a matter of trust.
• Reporting — what will you receive, how often, and at what level of detail? Monthly statements with a single 'net distribution' line are not reporting.
• Pooling and allocation — how is income allocated between units? Is it by area, by entitlement, or by actual nights sold in your specific room?
• Related-party dealings — is the operator connected to the developer, and are laundry, F&B or maintenance contracts placed with affiliates?

What good reporting looks like

The industry has a standard for this — the Uniform System of Accounts for the Lodging Industry — and operators who intend to be measured tend to report against it. Ask whether they do. Ask for a sample owner statement from an existing property, with the numbers redacted if necessary. You want to see the shape of the disclosure, not the figures.

• Monthly occupancy, ADR and RevPAR for the building.
• The same three figures for the competitive set, so you can see relative performance rather than just absolute.
• A full profit and loss for the hotel, not a one-line net distribution.
• Departmental detail — rooms, F&B, other — rather than a single revenue number.
• The reserve balances, and what was spent from them.

Independent benchmarking

Professional benchmarking of occupancy, ADR and RevPAR against a defined competitive set is standard in the industry (src-str). It is subscription data, so you are unlikely to hold it yourself, but you can ask whether the operator subscribes and whether they will share their index position with owners. An operator confident in its performance usually will. One that will not has told you something. The aim of all this is not to find a perfect operator. It is to know, before committing, whether the person who controls your income is measured by anyone, answerable to anyone, and paid in a way that connects to your outcome.