How to fill in the new-normal due diligence blanksBy Mary Scoviak | April 11, 2023Share A trio of hotel asset managers reveal best practices for assessing when to play and when to pass as assets come to the block in a market in flux. NATIONAL -- The basic checklist for due diligence hasn’t changed, even in this macro/micro-economic climate. It’s just gotten longer. Without a bumper crop of low-hanging fruit, hotel owners, investors and developers need to adjust their asset hunt to look for opportunity in the details.Hotel Investment Today asked three Hospitality Asset Managers Association (HAMA) members to share their insights on the new deal-making/deal-breaking factors to weigh before making a buying decision.Here’s the how-to from Paul Breslin, managing director, Horwath HTL-Atlanta; Jon Peck, president, Peck Hotel Consulting, Chicago; and Tyler Ward, vice president of hospitality management, Stockdale Capital Partners, Los Angeles.Tyler WardHotel Investment Today (HIT): What is one key update or change to due diligence to find the opportunities competitors might miss?Tyler Ward: You have to have a crystal-clear business plan that's not lofty but tangible in terms of how you can drive results in the short, medium and long term. Our assets in leisure markets are exceeding expectations and recovering faster than expected. Then we have hotels in markets such as San Francisco which are lagging behind. We don't anticipate that market will fully recover until 2025.In the post-COVID era we have a two-pronged strategy. How do we make immediate performance improvements? We tend to break it down into people, product and profit. Now, the focus is to reduce costs, operate the best that we can with what we have and spend capital dollars that will come later into 2024 so that we’re ready for real recovery in 2025.Typical of most downturns, everyone is doing more with less following the pandemic. Management companies have been complexing management across multiple assets for years. We’ve found many operators are spread too thin and struggling to attract quality talent. We tend to look for opportunistic assets that require hands-on attention from senior level leaders. We’ve found consolidating operators and building our regional teams solely focused on our portfolio in each discipline to be integral in attracting and retaining talent and reducing cost. Most of our assets require repositioning and renovation to achieve our objectives. We focus on revenue per square foot. Hotels often have large swaths of lobby and public areas, that's where there’s definitely the challenge/opportunity to ask, “Is there a better use for this?” And, if there is, how much will it cost to monetize that?Paul BreslinPaul Breslin: I always believed fundamentals are the focus, but they have to be fundamental to the individual owner/investor/developer’s positioning. So, if your fundamentals are corporate, transient downtown hotels, one of the best practices today is looking at the asset’s potential to diversify its segmentation. Can it go after high-quality business and tap into the government, association and international travel markets as they come back?In this market, it’s not about occupancy; it’s about smart revenue growth. If that asset can’t hold rate, you’re going to have trouble. Delivering a strong value proposition to the customer that supports that kind of rate growth also involves a detailed look at every cost in that asset, right down to the soap and amenities. All of these costs are escalating. So, the challenge is to determine whether an innovative operations team can get over these hurdles and drive more revenue.Walk the property, and walk it again. Can you add a rooftop bar? Is there an application for a food truck? Can you stage pop-ups? Done right, they can make five- to six-figure annual contributions to the revenue stream. Is there a way to put executives in smaller offices in less desirable areas to free up space for retail? At one property, we found a 5-foot closet that was elevated to retail space. Not only does it contribute to the top and bottom line, its location helps draw guests and visitors to what was an a hard-to-find signature restaurant.Jon PeckJon Peck: Buyers I speak with are looking for a potential value play. It’s not easy in such a mature industry but the idea is to find a well-located property with good bones that needs something that it does not have. This could be an up-branding opportunity, a missing amenity, modification to the capital structure, etc. The potential buyer is generally targeting a spread of 150-200 basis points between their entry and exit yield.If the asset needs renovation, don’t lose sight of the fact that the owner controls the redesign and cost by identifying someone with renovation experience who will manage the renovation/repositioning of the public space. This could be the owner, asset manager, an outside consultant or other. The designated person would coordinate the analysis to determine optimum scope, coordinate with the brand (if applicable), develop a budget and select and manage the design team through project completion to operation.The old adage applies: measure twice, cut once.