Deja vu again

Deja vu again

Fewer hotel sales have pulled down transaction

revenue at The Plasencia Group, but its advisory business, helping hotels run more efficiently, is booming.

Hotel broker Lou Plasencia has seen this before: Fewer and fewer clients are buying and selling hotels. More clients are looking for ways to trim costs and run hotels more efficiently to make debt payments.

Either way, Plasencia, founder, chairman and chief executive officer of The Plasencia Group, a 15-year-old Tampa hotel brokerage with eight offices nationwide, builds his business. "To borrow from Yogi Bera, 'This is dejà vu all over again,'" he says.

While transaction revenue has fallen about 50% this year, advisory service revenue is up about 200%. Banks, life insurance companies, private equity funds, pension funds, other investors and hotels themselves are calling Plasencia to help distressed properties trim costs and gain efficiencies.

Sometimes that means serving two meals in the employee cafeteria and not three. Or cross-training employees to do different tasks. Or changing the hours of restaurants.

Sometimes it means that owners need to take a hard look at their assets. The economic slowdown has brought some hotel property values down 10% to 30%.

The hotel industry went through a similar slowdown in 1987, 1992 and 2001. The industry is complex because it crosses into different businesses. Property owners are often operating restaurants, parking garages and hotel rooms.

Plasencia develops a strategy working with owners and operators. Refinancing a loan, in today's financial climate, is often not possible. "We've been doing it all along, providing strategic advice," he says.

For investors, Plasencia conducts a confidential review of portfolio assets. It identifies problem areas by operator or the market that it's in. Lenders have been cooperative. They acknowledge the economic issues, Plasencia says.

Plasencia does whatever it can to maximize cash flow. Hoteliers were not prepared for the falloff in business and the impact on many industries.

"No one anticipated the fall we've had as fast as we've had," he says. "It's pretty scary."

Plasencia is doing a tremendous amount of work with luxury hotels. No major CEO wants to be seen coming out of a Ritz Carlton or a Four Seasons. It is not politically correct today, Plasencia says. So business is canceling.

In light of that, sometimes hotels make two major mistakes when faced with a cash crunch: They cut marketing and lower room rates. Not good, Plasencia says.

Lower rates may attract some business, but in the long run, revenue and profit will suffer and it will take the hotel years to get back to where its rates need to be. Instead, hotels should look at how to mitigate losses and drive savings to the bottom line, Plasencia says.

Looking ahead, Plasencia sees transaction revenue continuing to trend down for about the next six to12 months, but advisory work to build for the next year. It has built its business on transactions, growing from more than $100 million in annual sales to about $1 billion.

While advisory business is welcome, transaction fees are more lucrative. Brokerages can earn $200,000 in flat advisory fees for a few months work based on the amount and complexity of the work. That compares to $400,000 from one perfomance-based fee for a hotel sale.

-Dave Szymanski