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 Suppose you are part of an asset management team charged with making capital expenditure recommendations designed to improve the performance of the fictional WaterSide Hotel in Sydney, Australia, which is struggling to improve its performance. The hotel is considering seven different projects to increase profitability and customer satisfaction. After reviewing the information on each project and considering the benchmarking data, you will recommend the projects that you think will add the most value to the hotel.  

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SHA614: Achieving Hotel Asset Management Objectives

School of Hotel Administration, Cornell University

Project: Evaluate Capital Expenditures and Benchmark Hotel Performance for the WaterSide Hotel

Instructions:

First, read the description of the case and the additional resources contained in this document. After reviewing these materials, go to the section entitled “Your Assignment” at the end of this document and answer the questions.

To submit this assignment, please refer to the instructions in the course.

Table of Contents

1 The WaterSide Hotel

2 Additional Resources

A – WaterSide Hotel Fact Sheet

B – Profit and Loss Account

C – Sydney Hotels Operating Statistics

D – Redevelopment Options

3 Your Assignment

1. The WaterSide Hotel

The WaterSide Hotel is a 340-room, 4-star hotel situated on Sydney’s harbor with views of the world-famous bridge and Opera House. The hotel was built 23 years ago, and from the time of its opening until three years ago, it was operated by SoSo, an American hotel chain, under the terms of a 20-year operating and management contract. The hotel was completely refurbished 10 years ago.

Three years ago the contract with SoSo was terminated by the hotel’s owners, Land Containers Incorporated, and responsibility for the management of the hotel reverted to the owning company. Land Containers Incorporated, believing that it could operate the hotel more successfully and profitably than SoSo, but having no hotel management expertise within the company, decided to headhunt a management team to take over the operation of the hotel. Upon termination of SoSo, the new Land Containers Incorporated management team took over the WaterSide Hotel.

Since the termination of the SoSo contract and the appointment of the Land Containers management team, however, the hotel’s performance has continued to decline, despite the buoyancy of the Sydney hotel market as a whole. This fact has caused the Land Containers board of directors great concern. At a hastily convened board meeting held last month, the directors decided to give the hotel’s management team an ultimatum.

They would be required to demonstrate, through the preparation of a “survival action plan” how they propose to restore the hotel to its former level of profitability or better, or the hotel would be sold.

The directors accepted that the hotel could not be turned around overnight. They also acknowledged that the revitalization of the hotel would inevitably involve some additional capital expenditure. They resolved to make AUS$8,500,000 available, provided that the need for such additional funds could be justified. The maximum time allowed in which to turn the hotel around would be two years from submission of the action plan.

So, the hotel’s management team had an ultimatum. If they failed to demonstrate how they would turn the property around in the next two years, the board unanimously agreed that the hotel would be sold. There was no alternative.

2. Additional Resources

A number of documents are available to assist you in your work, including:

· WaterSide Hotel fact sheet

· Profit and loss statements for the past two years and most current 6 months

· Summary of Sydney Hotel operating statistics for the past three years

· Redevelopment Projects

· Project 1 – Conference Center (AUS$2.5 million)

· Project 2 – Marketing/Reservations Tie-up (AUS$0.5 million)

· Project 3 – Rooms Extension (AUS$4 million)

· Project 4 – Room Refurbishment (AUS$3.4 million)

· Project 5 – Health and Leisure Facilities (AUS$3 million)

· Project 6 – Redesign of the Food and Beverage Outlets (AUS$3.5 million)

A – WaterSide Hotel Fact Sheet

Location

Situated on Sydney’s beautiful harbor, the hotel commands fine views of the Sydney Harbour Bridge and the Opera House. The hotel is well placed to take advantage of Sydney’s extensive cultural and leisure facilities, including many of the city’s finest museums, art galleries, theaters, shops, and parks—all within easy walking distance. Circular Key and The Rocks are only minutes away.

Accommodation

Guest rooms are spacious (320 sf, 30 m2) and are furnished and decorated in a contemporary European style. All are soundproofed and have private bathrooms, radio, color TV, and wired Internet access.

The room configuration is as follows:

• Rooms: 340

• Single Queen Bedded: 40

• Double-Double Bedded: 300

• Number of Room Floors: 16

Reservations

Reservations can be made directly with the WaterSide sales office, via the hotel’s website, or via a travel agent.

Dining

· Coffee shop on the ground level, adjacent to the lobby, seating 125, is open for breakfast and lunch daily.

· À la carte restaurant, seating 200 and located on the second level, is open for lunch and dinner and closed on Sundays and Mondays.

· Rooftop carvery restaurant, seating 150, is open for dinner only and closed on Fridays; rooftop piano bar, adjacent to the carvery, seating 75, is closed on Saturdays and Sundays.

· Cocktail bar, adjacent to the à la carte restaurant on the second level, seating 45, is open 24 hours a day, seven days a week.

· Room service is available from 6am–11pm daily.

Recreation

A modern health club complex is located near the hotel only eight minutes’ walk away. Details of opening times, charges, and the facilities available may be obtained from the concierge.

Amenities

There is a bank branch located in the hotel lobby. Theatre/travel/sightseeing and car hire arrangements can be made through the concierge. There are numerous shops within easy walking distance of the hotel. There is a covered parking garage for up to 500 cars in a nearby (4 minutes’ walk) public parking lot.

Banqueting

The hotel has a 4,400 sf / 400 m2 ballroom; this space will seat 600 people theatre style or 520 for banquets. The ballroom has its own cloakrooms and toilet facilities and an extensive reception/foyer area. Access to the banquet area is off the main hotel lobby via an escalator.

Hotel Layout
Podium

· Basement: Maintenance department, staff changing and dining facilities, stores and laundry

· Ground Floor: Hotel entrance, lobby, front desk, administration offices, bank, staff entrance and security office, personnel department, goods receiving bay and stores office, coffee shop

· Mezzanine: Banqueting area, male and female cloakrooms, food and beverage administration offices and public telephones

· Second Floor: À la carte restaurant, cocktail bar, and main kitchens

Tower

· Floors 3 to 18: 22 guest rooms per floor, plus 1 room service pantry and 1 maid’s room per floor

· Floor 19: Carvery restaurant, carvery kitchen, and rooftop piano bar

There are two public elevators serving the ground to 19th floors inclusive and one service elevator serving the basement to 19th floors inclusive. There is also a goods elevator operating between the basement and first floor.

Condition

The hotel is considered to be in average condition for its age. The only exception to this is the many roofing membranes on the property, which have reached the end of their useful lives. All life-safety systems meet code and are well maintained. All major equipment and building systems (kitchen, laundry, HVAC) are in average condition.

B- Profit and Loss Account



Two Years Ago

Last Year

This Year

Last 6 Mo

Department

Full Year

Full Year

Full Year

6 Months

AUS$

%

AUS$

%

AUS$

%

AUS$

%

Rooms Department

Room Sales

13,315

100.0%

14,108

100.0%

14,008

100.0%

7,383

100.0%

Payroll & Related Expenses

1,198

9.0%

1,270

9.0%

1,400

10.0%

813

11.0%

Other Expenses

1,465

11.0%

1,553

11.0%

1,540

11.0%

738

10.0%

Total Expenses

2,663

20.0%

2,823

20.0%

2,940

21.0%

1,551

21.0%

Rooms Departmental Profit

10,652

80%

11,285

80%

11,068

79%

5,832

79%

Food & Beverage Department

Food Sales

4,613

63.0%

4,458

62.0%

4,260

62.0%

1,770

64.0%

Beverage Sales

1,758

24.0%

2,013

28.0%

2,060

30.0%

803

29.0%

Other Income

953

13.0%

720

10.0%

550

8.0%

193

7.0%

Total Sales

7,324

100.0%

7,191

100.0%

6,870

100.0%

2,766

100.0%

Food Cost

1,615

35.0%

1,560

35.0%

1,533

36.0%

620

35.0%

Beverage Cost

510

29.0%

605

30.1%

618

30.0%

240

29.9%

Total Cost

2,125

29.0%

2,165

30.1%

2,151

31.3%

860

31.1%

Payroll & Related Expenses

3,075

42.0%

3,308

46.0%

3,915

57.0%

1,908

69.0%

Other Expenses

585

8.0%

648

9.0%

688

10.0%

333

12.0%

Total Expenses

3,660

50.0%

3,956

55.0%

4,603

67.0%

2,241

81.0%

Food & Beverage Department Profit

1,539

21.0%

1,070

14.9%

116

1.7%

-335

-12.1%

Telephone Profit

300

30.0%

300

30.0%

300

30.0%

150

30.0%

Minor Operating Departments Profit

98

50.0%

98

50.0%

98

50.0%

49

50.0%

Rentals & Other Income

115

100.0%

115

100.0%

115

100.0%

58

100.0%

Gross Operating Income

12,704

56.0%

12,868

54.5%

11,697

50.7%

5,754

51.6%

Administration & General

Payroll & Related Expenses

908

4.0%

945

4.0%

1,153

5.0%

558

5.0%

Systems Fees

228

1.0%

0

0.0%

0

0.0%

0

0.0%

Other Expenses

680

3.0%

710

3.0%

693

3.0%

445

4.0%

Total A&G Expenses

1,816

8.0%

1,655

7.0%

1,845

8.0%

1,003

9.0%

Sales & Marketing

908

4.0%

945

4.0%

460

2.0%

335

3.0%

Utilities

1,135

5.0%

1,418

6.0%

1,383

6.0%

670

6.0%

Repairs & Maintenance

1,360

6.0%

1,655

7.0%

923

4.0%

558

5.0%

Total Deductions

5,219

23.0%

5,673

24.0%

4,611

20.0%

2,566

23.0%

B- Profit and Loss Account

Two Years Ago

Last Year

This Year

Last 6 Mo

Department

Full Year

Full Year

Full Year

6 Months

AUS$

%

AUS$

%

AUS$

%

AUS$

%

Gross Operating Profit

7,485

33.0%

7,195

30.5%

7,086

30.7%

3,188

28.6%

Management Fees

908

4.0%

0

0.0%

0

0.0%

0

0.0%

Rates & Insurance

1,360

6.0%

1,535

6.5%

1,615

7.0%

1,450

13.0%

Interest Charges

2,268

10.0%

2,363

10.0%

2,305

10.0%

1,115

10.0%

FF&E Reserve

680

3.0%

710

3.0%

785

3.4%

380

3.4%

Net Operating Profit

2,269

10.0%

2,587

11.0%

2,381

10.3%

243

2.2%

Statistics

Number of Available Rooms

340

340

340

340

Room Occupancy

69.0%

69.8%

68.0%

71.0%

Average Daily Rate

155.50

162.87

166.00

167.58

Total Revenue

22,678

100.0%

23,625

100.0%

23,055

100.0%

11,155

100.0%

Rooms Revs

13,315

58.7%

14,108

59.7%

14,008

60.8%

7,383

66.2%

F&B Revs

7,324

32.3%

7,191

30.4%

6,870

29.8%

2,766

24.8%

Other Revs

2,039

9.0%

2,326

9.8%

2,177

9.4%

1,006

9.0%

Occ Penetration

91.3%

87.1%

N/A

N/A

ADR Penetration

97.0%

96.7%

N/A

N/A

RevPAR Penetration

88.6%

84.3%

N/A

N/A


C- Sydney Hotels Operating Statistics

4 Years Ago

3 Years Ago

2 Years Ago

Last Year

Average Number of Rooms

316

315

303

305

Percentage Occupancy

82.5%

75.6%

80.1%

76.7%

Average Daily Rate Per Room (AUS$)

145.23

160.25

168.43

179.58

Yield per Available Room (AUS$)

119.81

121.15

134.91

137.74

Revenue Per Guest (AUS$)

97.60

111.83

113.65

125.15

Percentage Double Occupancy

48.8%

43.3%

48.2%

43.5%

Revenues

Percent of Total Revenues

Rooms

61.9%

62.6%

62.1%

60.7%

Food

20.2%

21.2%

20.1%

21.3%

Beverage

9.2%

8.1%

8.2%

8.4%

Telephone

4.4%

4.6%

5.2%

5.2%

Other Revenues

4.4%

3.5%

4.5%

4.4%

Total Revenues

100.0%

100.0%

100.0%

100.0%

Departmental Costs & Expenses

Percent of Departmental Revenues

Rooms

22.0%

22.5%

22.9%

23.4%

Food & Beverage

81.3%

85.0%

82.3%

79.5%

Telephone

65.9%

65.2%

55.8%

53.8%

Other Departmental Costs

22.7%

34.3%

35.6%

38.6%

Total Departmental Costs & Expenses

41.4%

43.0%

42.0%

42.2%

Total Operated Department Income

58.6%

57.0%

58.0%

57.8%

Undistributed Operating Expenses

Percent of Total Revenues

Administration & General

8.8%

8.6%

8.4%

8.2%

Management/Franchise Fees

1.7%

0.7%

2.0%

1.9%

Sales & Marketing

2.9%

3.1%

3.2%

3.3%

Property Operations & Maintenance

4.5%

4.8%

4.3%

4.3%

Energy Costs

2.6%

2.7%

2.2%

2.2%

Total Undistributed Expenses

20.5%

19.9%

20.2%

19.7%

Income Before Fixed Charges

38.0%

37.1%

37.9%

38.0%


D – Redevelopment Projects

Project 1: Addition of a Conference Center

The Project

To convert the existing banquet area on the mezzanine floor into a purpose-built conference center with seminar rooms and full support facilities.

Background

The hotel does not have any purpose-built conference or meeting facilities. The 4,400 sf (400 m2) banquet room has been used for conferences from time to time, but this has not proved entirely successful. In particular, there are no breakout or seminar rooms, and a number of criticisms have been made about the room’s decor, seating, and lighting, all of which noted that the room is inappropriate for conference/meeting purposes.

Of note, a number of potentially lucrative residential conference and meeting bookings have been missed in recent months as a result of the hotel’s limited facilities. A number of the new hotels in the area have extensive purpose-built conference/meeting facilities and secure significant levels of weekend and low season business as a result, at the expense of the better located WaterSide Hotel.

The Plan

Pure banqueting business has declined significantly since the SoSo termination, and it is felt that the hotel would be better off converting the banqueting facilities into a modern purpose-built conference suite with breakout rooms and all the necessary support facilities.

If this project is not pursued, it will be necessary to refurbish the banqueting facilities this year, in which case consideration will have to be given to replacing the banqueting chairs and tables.

Cost/Revenue Implications

Preliminary cost estimates suggest that the creation of a conference center, as envisaged, will cost approximately AUS$2.5 million, but that the hotel will be able to improve room occupancy and average room rate by attracting residential conference business, which is currently going to competitor hotels. The NPV on a 10-year analysis is AUS$300,000 and the IRR is 14%, above the hurdle rate of 12%.


Project 2: Marketing/Reservations Tie-up

The Project

To subscribe to the Southern Comfort hotel marketing co-operative and reservations system as a means of boosting occupancy and improving market awareness of the hotel.

Background

The hotel has a sales/reservations office in a small building adjacent to LCI headquarters, 200 miles (300 km) from Sydney. The office is run by Mr. Goodbody, the hotel’s former personnel manager, who took on the hotel’s sales and marketing function two years ago. The sales/reservations office has an annual rental of AUS$200,000.

Notwithstanding the well-intentioned efforts of Mr. Goodbody and his conscientious staff, it is readily agreed within the hotel’s management team that the WaterSide Hotel’s marketing function is limited in scope and amateurish in execution at a time when competition is extremely strong. Furthermore, it is recognized that the hotel’s sales and reservations function is complicated by the remoteness of the office from the hotel.

In view of the fact that the WaterSide Hotel’s competitor hotels are devoting a great deal (and increasing) amount of time and resources to the marketing effort, it is generally accepted that the sales and marketing function must be strengthened and/or re-thought if the hotel is to improve its performance through enhanced occupancy levels and higher average room rates.

The Plan

Membership of the prestigiously based Southern Comfort Hotel market co-operative and reservations systems has been offered to the WaterSide Hotel. It is maintained that this would significantly improve the hotel’s viability and would virtually guarantee a core level of occupancy, although that core level has not been quantified.

Although membership of Southern Comfort would not do away with the need for a sales and marketing function within the hotel, it would relieve that department of much of the routine sales effort, thereby leaving it more time to concentrate on attracting the lucrative corporate business that has become increasingly neglected recently.

Cost/Revenue Implications

The benefits of the Southern Comfort system are not cheap. Membership would involve one-time costs of AUS$500,000 to meet Southern Comfort standards, a flat annual subscription of AUS$100,000, and for every reservation placed through Southern Comfort, a booking fee of AUS$15 would be payable. The NPV on a 10-year analysis is AUS$150,000 and the IRR is 20%, above the hurdle rate of 12%.


Project 3: Rooms Extension

The Project

To build an additional 50 rooms on the existing podium, with the possibility that these rooms could serve as a self-contained executive floor.

Background

As far as room occupancy is concerned, the WaterSide Hotel, like most Sydney hotels, is busiest (in the rooms department) on Monday to Thursday nights inclusive. Indeed, during a number of weeks in the spring and autumn, the hotel is overbooked and business has to be turned away.

For this reason, it has been suggested on a number of occasions that the hotel should consider a rooms extension to provide additional rooms to overcome the problem.

The Plan

Space exists on the podium to the rear of the hotel to build a rooms extension. The Land Containers architect has indicated that an extension of approximately 50 rooms could be accommodated on the podium and that such a project could be undertaken with the minimum of disruption to the rest of the hotel. It is not anticipated that there would be any difficulty in obtaining the necessary planning permission, etc.

Consideration has already been given to the possibility of using the rooms extension to create an exclusive floor or floors, which would bring the WaterSide Hotel in line with what many of its competitor hotels have been doing recently.

Cost/Revenue Implications

Preliminary estimates suggest that the total (turnkey) costs of providing the rooms extension would be AUS$10.5 million, of which AUS$6.5 million could be borrowed, leaving AUS$4.0 million to come from LCI as equity. If executive rooms are provided, it is thought that they could be marketed at a premium price and that an average room rate premium of 25% could be achieved. The equity NPV on a 10-year analysis is AUS$500,000 and the IRR is 13%, above the hurdle rate of 12%.

The room count after the proposed extension would be:

• Rooms 390

• Executive Double-Double Bedded 50

• Double Bedded 300

• Single Queen Bedded 40

Project 4: Rooms Refurbishment

The Project

To refurbish and upgrade all the hotel’s bedrooms and bedroom corridors and to create a number of small (two-room) suites between certain existing double-double rooms.

Background

Guest comment forms repeatedly refer to the tired appearance of the WaterSide Hotel’s bedrooms. In many cases, guest comments have been extremely strongly worded, and it is probably not unreasonable to assume that the hotel is losing business, particularly valuable repeat business, as a result.

The rooms have not been updated since a major refurbishment program was completed eight years ago, which means that the WaterSide’s rooms are among the oldest of all the hotels in the area.

Not only are the rooms in need of upgrading, but recent developments in hotel design and attitudes toward the form and fitting out of hotel bedrooms suggest that a major rethink is required concerning the bedroom/bathroom layout and the standard and extent of the fitting and furnishings to be provided. Furthermore, the hotel is seriously disadvantaged by not having any suites.

The Plan

Room occupancy at the WaterSide has grown by two percentage points in the past two years, while the competition has achieved significantly higher occupancies (see Attachment C). The WaterSide’s only modest increase in occupancy has not been offset by any significant improvement in the average room rate achieved. It is believed, however, that both occupancy and average rate could be significantly improved and the WaterSide’s performance brought in line with the competition if the WaterSide’s rooms could be upgraded, the bed mix changed to many more single queen bedded rooms, and a small number of two room suites provided.

Cost/Revenue Implications

Preliminary estimates suggest that the cost of the rooms’ refurbishment program would be AUS$3.4 million. Failure to upgrade the rooms and provide some suites would likely result in a widening of the gap between the WaterSide’s achieved occupancy and room rates and those of competitor establishments. The NPV on a 10-year analysis is AUS$450,000 and the IRR is 15%, above the hurdle rate of 12%.

The room count after the proposed refurbishment program would be:

• Rooms 330

• Double-Double Bedded 40

• Single Queen Bedded 280

• Suites (two rooms) 10

Project 5: Addition of Health and Leisure Facilities

The Project

To convert the existing banqueting area into a self-contained health and leisure club to be operated by the hotel or possibly offered to an independent health club operator on a concession basis.

Background

Most of the WaterSide’s competitor hotels in the area have in-house leisure facilities comprising mainly swimming pools, gymnasia, and saunas. Those that do not are known to be considering the addition of such facilities.

Although the WaterSide’s guests can make use of the gymnasium and health club facilities near the hotel (see Attachment A) at certain times of day, and quite a number of guests do, those facilities are independently owned and operated and are expensive to use.

Clearly the WaterSide Hotel is at a marketing disadvantage in not having its own leisure facilities.

The Plan

The plan is to convert the existing banqueting area into a leisure complex comprising a swimming pool, gymnasium, two saunas, and two Jacuzzis, changing rooms and toilets, together with a small informal snack bar area. Once completed, the facilities would be operated as a club. In this way, non-residents could take out membership and hotel guests would enjoy free use of the facilities. It is thought likely that the club would be operated by a specialist concessionaire.

Cost/Revenue Implications

It is estimated that the cost of converting the banqueting area into a leisure complex, as outlined above, would be of the order of AUS$3 million. Once established, it is thought that the facility would probably break even, but this will depend on the ability of the concessionaire to establish a nucleus of members. The NPV on a 10-year analysis is AUS$400,000 and the IRR is 14%, above the hurdle rate of 12%.


Project 6: Redesign of the Food and Beverage Outlets

The Project

To redesign and refurbish all the existing food and beverage outlets (excluding the banqueting area) with a view to increasing the food and beverage department’s turnover and improving profitability.

Background

The hotel’s various food and beverage outlets (see Attachment A) have not been refurbished in eight years and are looking outdated and worn. This fact has had a significant impact on the WaterSide’s food and beverage trade, which has been declining significantly in the past two years, both in terms of volume and average spend per head.

Although there is a wide selection of excellent restaurants near the hotel, it is felt that the hotel could attract much more food and beverage trade if only the various outlets could be upgraded and made more inviting. When the WaterSide’s food and beverage performance is compared with that of the Sydney market as a whole (see Attachment C), it is clear that something must be done to reverse the decline in food and beverage performance at the WaterSide.

The Plan

It is proposed to redesign and refurbish all the restaurants and bars and bring their opening hours in line. Preliminary sketches have been prepared and a number of different themes have been put forward. The end result is not likely to alter the number of outlets or the seating capacity but should greatly enhance the appeal of each outlet.

Cost/Revenue Implications

It is anticipated that completely refurbishing the bars and restaurants will cost approximately AUS$3.5 million. This could be done one outlet at a time so there is no significant disruption to the hotel’s food and beverage service.

It is generally thought that major increases in volume and average spend per cover would be achieved if this plan were to be carried through. The NPV on a 10-year analysis is AUS$300,000 and the IRR is 13%, above the hurdle rate of 12%.

3. Your Assignment

A working party has been established and has identified the projects open to it to restore the hotel to its former level of profitability and fulfill the director’s directive. Six key projects have been identified, but not all the projects can be pursued due to the restricted additional funds available.

You are required to:

1. Review the information provided and critique the hotel’s operation using the historical results and the Sydney market benchmark data. Provide a list of five questions you have about benchmarking or hotel operations. For example, “Why is the rooftop piano bar closed on Saturdays and the roof top Restaurant closed on Fridays? This makes little sense.”

2. Provide recommendations for what project(s) you think should be pursued in order to improve the hotel’s profitability and justify your advice. Write a 250-word summary of your recommendations and reasoning below.


WaterSide Hotel

Cost

NPV

IRR

PI

Project 1 – Conference Center

2,500,000

300,000

14%

1.12

Project 2 – Marketing Tie-up

500,000

150,000

20%

1.30

Project 3 – Rooms Addition

4,000,000

500,000

13%

1.13

Project 4 – Room Refurbishment

3,400,000

450,000

15%

1.13

Project 5 – Health Facility

3,000,000

400,000

14%

1.13

Project 6 – Redesign of F&B

3,500,000

300,000

13%

1.09

List of Benchmarking Questions:

Project Recommendation(s):

6

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