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Are 5-Star Luxury Properties Profitable?

Are 5-Star Luxury Properties Profitable?

Old Sep 13, 20, 6:18 pm
  #1  
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Are 5-Star Luxury Properties Profitable?

Do the FS, MO, RC, Rosewood, Park Hyatt, ect. hotels and resorts make money and profitable?

How long does it take to return their money on a renovation (big like the MO and FS shutting down the London properties for two years or so to a still open renovation of the rooms,lobby, ect.)?
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Old Sep 13, 20, 7:26 pm
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Profit generating events for 5 star hotels include, taking unaffiliated often historical properties and branding them and then selling them (FS GV), building residences on top of or around 5 star properties which themselves don’t make money but which have amenities which attract wealthy potential buyers (FS properties on Lanai), buyers purchasing an entire property or properties and then selling pieces of the investment to private equity groups.

Its difficult to make money as the owner of 5 star hotels even in good financial times, however the management companies often do and are publicly traded.

Its a delicate relationship between owner and managing company. The management companies are brought in early on projects to provide revenue stream and profit projections and they promise a defined return based upon their proprietary knowledge. They want the revenue from the contract, but if the management company is wrong or over promises, the owners can deflag or make work life unpleasant for the management.

Large individual investors often engage two luxury brands and have properties operating near each other to compare performance of the management companies.

I know of owners in Hong Kong who have their meetings with a 5 star management company in a room which looks out at another property owned by the same person but operated by a different management company.
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Old Sep 14, 20, 2:22 am
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I often ask this question myself. But ás always in business-life (with exemption of money laundering shops or prestige projects) you do it to earn money.
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Old Sep 14, 20, 7:28 am
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Originally Posted by Goodmorning2U View Post
Profit generating events for 5 star hotels include, taking unaffiliated often historical properties and branding them and then selling them (FS GV), building residences on top of or around 5 star properties which themselves don’t make money but which have amenities which attract wealthy potential buyers (FS properties on Lanai), buyers purchasing an entire property or properties and then selling pieces of the investment to private equity groups.

Its difficult to make money as the owner of 5 star hotels even in good financial times, however the management companies often do and are publicly traded.

Its a delicate relationship between owner and managing company. The management companies are brought in early on projects to provide revenue stream and profit projections and they promise a defined return based upon their proprietary knowledge. They want the revenue from the contract, but if the management company is wrong or over promises, the owners can deflag or make work life unpleasant for the management.

Large individual investors often engage two luxury brands and have properties operating near each other to compare performance of the management companies.

I know of owners in Hong Kong who have their meetings with a 5 star management company in a room which looks out at another property owned by the same person but operated by a different management company.
Totally agree. Hotels are actually great long-term real estate investments, if you have the patience and financial power to do it.

FSGV is in a way a special situation as this property entered at exactly the right time with the right owner and gave a 100% return within 7 years -- don't think this success is easy to replicate!
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Old Sep 14, 20, 11:41 am
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Originally Posted by scented View Post

FSGV is in a way a special situation as this property entered at exactly the right time with the right owner and gave a 100% return within 7 years -- don't think this success is easy to replicate!
That's interesting to know! I was the under the impression that most of the Parisian palace hotels were perpetually loss making. I got that impression after reading this recent article about Parisian palace hotels (unfortunately there's a paywall):
https://www.lefigaro.fr/societes/les...tival-20200821

Here's a quote:
«La santé financière des palaces est très préoccupante, reconnaît Christophe Laure, président du syndicat Umih (Union des métiers et des industries de l’hôtellerie) Prestige. Ils survivent uniquement grâce au soutien de leurs propriétaires, qui injectent du cash pour les maintenir à flot, et aux aides du gouvernement.»

rough translation: the hotels survive only with financial support from owners and government aid
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Old Sep 14, 20, 3:14 pm
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Work is required in numerous parts of lodging the executives, from front-of-house exercises, for example, front work area, attendant and related exercises, to all back-of-house exercises, including general administration, bookkeeping, showcasing, room cleaning and overhauling the kitchens, bars and eateries.
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Old Sep 14, 20, 5:32 pm
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I would say most are profitable in normal times. I could see some being solely “trophy assets” that don’t make money. But I think that’s a pretty small group.
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Old Sep 14, 20, 6:58 pm
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They are, if, the owner has patience and makes the necessary investments as it ages.
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Old Sep 15, 20, 12:58 pm
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Interesting question.

To push the question a bit further... for those that might know, what % of operating costs go to covering the mortgage in luxury properties? How has this changed over the decades?

Last edited by schriste; Sep 15, 20 at 3:59 pm
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Old Sep 15, 20, 1:28 pm
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Originally Posted by schriste View Post
Interesting question... for those that might know what % of operating costs go to covering the mortgage in luxury properties? How has this changed over the decades?
I haven’t had a chance to dig in, but for those interested, Hongkong and Shanghai Hotels is a public company (owner of Peninsula hotels) their annual report would be a good read.

On first glance, the overall company is profitable (in 2019). The results also includes some office space and retail.
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Old Sep 15, 20, 11:28 pm
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Originally Posted by schriste View Post
Interesting question.

To push the question a bit further... for those that might know, what % of operating costs go to covering the mortgage in luxury properties? How has this changed over the decades?
In my experience, this cost will not always be reflected on the hotel financial statements. This will usually appear on the property owner's books depending on the system of accounts used.

Luxury hotels, like most businesses, if well run and costs kept in line, are generally profitable. There are many variables that affect profitability, from location (e.g. remote destinations have higher operating and infrastructure costs, hence the higher rates that may impact demand) through to the age of the property and the relationship to labor cost (e.g. an older hotel with a high number of long service employees will have a much higher labor cost than a new hotel).
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Old Sep 16, 20, 1:28 am
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Just out of curiosity, when the owner (or their families/guests) stay at one of the luxury trophy properties they own, do they typically get assigned the "top suite" (eg. Penthouse, Royal/Presidential Suites) of the hotel?
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Old Sep 16, 20, 4:42 am
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Originally Posted by daniellam View Post
Just out of curiosity, when the owner (or their families/guests) stay at one of the luxury trophy properties they own, do they typically get assigned the "top suite" (eg. Penthouse, Royal/Presidential Suites) of the hotel?
I think they get the smallest single room At some hotels their are even special rooms for owner which are not bookable for the public.

Originally Posted by schriste View Post
those that might know, what % of operating costs go to covering the mortgage in luxury properties?
Would be interesting how many properties are leveraged. If they belong to investment funds or (often questionable) Investors like the Sultan of Brunai I believe it´s 100% own capital.

Last edited by RichardInSF; Sep 16, 20 at 6:10 am Reason: Consecutive posts by same member
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Old Sep 16, 20, 11:31 am
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Thanks for all of the responses!

There was a 3-part show from 2017 that took you behind the scenes of the Mandarin Oriental in London, "A Very British Show."

Interesting enough, do the luxury hotels (or even properties like JW Marriott, Fairmont) that bring in the big name chefs, either with new concepts or outposts of existing restaurants (for example, the MO Hyde Park has an outpost of New York-based chef Daniel Boulud's Bar Boulud and Heston Blumenthal launching his Dinner restaurant, which I believe has one or two other outposts now) lease the space to these chefs? Or do they cover the expenses of the buildout and bring them in as a management contract? Are they profitable outlets for the hotels and resorts (you see it big time with the Vegas resorts) or loss leaders? I've always wonder how these high-end restaurants cover the big expenses of the buildout, lease, and operating expenses to survive, without slumping on quality or having too many seats (especially if you're shooting for Michelin Stars)? The buildouts can run in the millions alone.

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Old Sep 16, 20, 3:30 pm
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I think it's well known that most starred restaurants in hotels are not profitable and more prestige objects. For example I prefer hotels with starred restaurants as I can have at least one (hopefully) nice dinner inhouse. Sometimes I also book hotels only because of the restaurant. There are enough examples of restaurants which were closed and replaced by more casual concept as the hotels was no longer ready to burden the costs. Often a sign of slipping standards if you ask me. Also I know first hand from a starred chef that his starred restaurant is not that profitable and the only purpose is to use the star to get in TV-shows and to make the casual restaurants under his flag more profitable. Ss far as I know many hotels pay chefs for their outlets franchise fees.
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