Operations & Turnaround Management
CASE STUDY 2
As real estate projects mature, often what worked in the past is no longer reflective of current market demands. New competition erodes market share, and a property’s historic markets begin to look elsewhere as new trends emerge. A fresh set of eyes is often required to diagnose what factors might be at work to limit a property’s growth and appeal in the marketplace. Often declining revenue and stalled real estate sales are functions of several factors converging silently in the background, remaining unnoticed by current management that is busily engaged in day-today operations.
Often the existing management structure has developed a strong sense of personal identity associated with a property and is resistant to necessary changes. Development Management Group brings an objective, clear-eyed perspective to this management bottle-neck, and can, not only refresh and redirect products and programs, but it can also implement these plans, using existing management personnel. While Turnaround is often associated with clearing out previous management, we recognize that most employees want to do a good job, and are motivated to improve with the proper management and mentoring. Often talented employees are simply in the wrong position, and their skills are being underutilized. Development Management Group uses this less draconian approach in its Turnaround process and, as a result, produces better results for owners and significantly improved employee performance.
This company was developing a high-end resort community on an island in a well-recognized resort area. In addition to residential development, the company had a luxury resort hotel, two golf courses, a tennis center, five restaurants and a shopping center.
The ambiance of the community itself was one of understated elegance. In contrast to some of its competitors, it offered a peaceful, somewhat muted environment while surrounding the visitor with spectacular scenery and exceptional service. Its privacy and security already attracted Hollywood celebrities, professional athletes, and wealthy international guests seeking a low-key, sophisticated vacation and second-home retreat.
However, prior to engaging DMG, INC. to assess its financial problems and to effect a turnaround, the company had experienced a loss of $7 million and had been losing $5 million to $7 million per year for several years.
The real estate market in its area had just entered a severe recession. Currently, there was essentially no market for second homes or resort/investment units. Fortunately, the company had a very small number of residential units remaining in inventory at the time.
The resort was disadvantaged due to its remote location. It was the furthest destination resort from the airport, making it a longer trip and less convenient for already travel-weary guests to reach. And, it was located in an area of higher winds and more rainfall than its competition. This made its weather pattern more unpredictable and less desirable to visitors who had traveled to this island for its fabled climate.
Resort operations were generating significant negative cash flows and operating losses. These, combined with the carry on the large amount of debt which had been incurred to create the destination resort community, were absorbing all the profits and cash throw-off from the parent company’s other operations.
Under the then existing market conditions there was no opportunity to mitigate these losses through real estate development and sales.
Approximately $4 million of the loss came from hotel operations, and the remainder from golf, tennis and other operations. These other operations, however, were revenue dependent on resort occupancy.
The initial objective, upon engagement of Development Management Group, was to reduce, and hopefully eliminate the cash drain on the company. Retaining the high-end, exclusive image of the resort was a highly important objective. This was considered necessary to support the market value of the real estate which the company intended to develop when market conditions improved.
Subsequently, these goals were modified to include disposition of the hotel in order to reduce the outstanding debt level.
The resort product being offered was of extremely high quality, equal to any of its competitors and better than most. However, hotel occupancy was in the 50% – 55% range on an annual basis despite a rate structure below that of its competitors.
Increasing resort guest volume was critical. However, it was also clear that increasing occupancy alone would not be sufficient to solve the cash flow problems. Thus, room-rates would need to be increased simultaneously with occupancy.
The hotel management company that was in place had done a good job in developing product quality, but this was being achieved at considerable cost. In addition, it had not been able to solve the occupancy/rate equation. Its proposed solution was to continue with the strategy which they had been following for three years in the belief that it would ultimately succeed.
The hotel management company’s contract contained time/performance criteria which permitted the triggering of an option to terminate the contract. This option was exercised, and DMG took direct control of hotel operations.
Expenses were brought under control through new policies and procedures.
An entirely new marketing strategy was developed to increase national and international market awareness and to position the community as the premier destination resort in its area, and one of the top destinations in the world. Various international markets were targeted and developed, while U.S. mainland market share was also increased.
New advertising and promotional programs were designed and implemented including: logo identity, product merchandising, and public relations.
Two major annual events were created to generate both national and international television coverage. These events were entirely produced and controlled by the company, under DMG’s management, to assure maximum promotional value. One of these was an internationally televised golf tournament that included top PGA pros and was aired in 13 countries and in prime-time on the US mainland. DMG also produced an international wine symposium, where world renowned winemakers participated in several judging events. This event was aired on public television and was broadcast internationally. Additionally, DMG produced a highly regarded annual classical musical festival and an international tennis event, in cooperation with International Marketing Group, that included top international tennis pros.
New real estate product was designed and developed to take advantage of the new market position and awareness that had been created, and fee simple ownership of new real estate was offered for the first time in the history of the company.
Within 18 months, hotel occupancy was increased almost 50% while average room rates were increased almost 60%. Hotel operations were improved to the break-even point, and other resort operations were also brought to break-even or profitability.
The resort was selected by numerous publications as one of the “top five” resorts in the world, and by one television program focused on luxury travel, it was named the best resort in the world.
The hotel was then sold in a transaction which provided both a sufficient front-end payment to achieve the desired overall debt reduction and a continuing flow of cash to the company from a land lease which was retained.
The community was extremely well-positioned to take advantage of new demand for its real estate which was generated by the new market awareness. Market acceptance of the new product offering was excellent despite the depressed real estate market conditions which existed at that time throughout the state.