Hotel Valuation
David G. Pope, MAI, SRA, SGA
Hotel and Club Associates, Inc.
3717-D West Market Street
Greensboro, NC 27403
336-379-1400
[email protected]
Hotel and Club Associates, Inc.
Types of Lodging
• Full service – restaurant, lounge, large meeting spaces
• Select service – small restaurant or bistro, less meeting
• Limited service – limited food/beverage, meeting
• Extended stay – longer guest stays, small kitchens
• Boutique – unique, usually upscale
• Bed and breakfast – owners quarters/lifestyle for innkeeper
Hotel and Club Associates, Inc.
Hotel
Hotel and Club Associates, Inc.
Motel
Hotel and Club Associates, Inc.
Hotel
Hotel and Club Associates, Inc.
Bed and Breakfast
B&B
Hotel and Club Associates, Inc.
?????
Hotel and Club Associates, Inc.
Major Franchises
• Hilton Worldwide
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Hilton – full service
Embassy Suites – full service
DoubleTree – full service
Hilton Garden Inn – select service
Hampton Inn – limited/select service
Homewood Suites – upscale extended Stay
Home2 Suites – midscale extended stay
Hotel and Club Associates, Inc.
Major Franchises
• Marriott Hotels
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Marriott – full service
Ritz Carlton – full service luxury
Renaissance Hotel – full service
Courtyard by Marriott – select service
Springhill Suites – limited/select service
Fairfield Inn and Suites – limited/select service
Residence Inn – upscale extended stay
TownePlace Suites – midscale extended stay
Hotel and Club Associates, Inc.
Major Franchises
• Intercontinental Hotels Group – IHG
Holiday Inn – select/full service
Crown Plaza – full service
Hotel Indigo – full service
Holiday Inn Express – limited/select service
Staybridge Suites – upscale extended stay
Candlewood Suites – midscale extended stay
Hotel and Club Associates, Inc.
Major Franchise
• Choice Hotels
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Clarion Hotel – full service, midscale
Comfort Suites/Comfort Inn – limited service
Sleep Inn – limited service
Quality Inn – limited/full service – typically reflagged
EconoLodge – limited service
Mainstay Suites – extended stay
Hotel and Club Associates, Inc.
Other Franchises
• Hyatt Hotels – Hyatt Place, Hyatt House
• Wyndham Hotels – Days Inn, Microtel, Ramada, etc.
• Starwood Hotels – aloft, Four Points, Sheraton, Westin
• LaQuinta
• Best Western
• Carlson Redizor Group – Country Inn & Suites
• Value Place
Hotel and Club Associates, Inc.
Hotels vs. Other
Investment Real Estate
• Length of tenancy - hotels tenancy nightly contracts
• Hotels have varying sources of revenues
• Hotels more labor intensive
• Operating expense ratios higher for hotels
• PIP – Property Improvement Plans – Frequent Renovations
• Risk levels – hotel vs. other real estate
• How are risk levels priced in the market? – capitalization rates,
discount rates, multiples of income
Hotel and Club Associates, Inc.
Measures of
Performance
• Occupancy = Occupied Rooms ÷ Rooms Available
• ADR - Average Daily Rate; Nightly Avg Rate for Rooms
Sold
• Rack Rate – Advertised Rate
• ADR Typically Lower than Rack Rate
• RevPar – Revenue per Available Room
•
Hotel and Club Associates, Inc.
Sources of Market
Information
• Smith Travel Research
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STAR Reports
Custom Trends Reports
Market Forecasts
Revenue and Expense Reports
www.str.com
• PKF Hospitality
• Investor Surveys
• Income and Expense Benchmarking
• www.pkfc.com
• Hotel Broker Specialists Websites
Hotel and Club Associates, Inc.
Valuation
Considerations
• Franchise Affiliation
• Not all brands are equal
• Is property eligible for re-licensing
• Example: Exterior Corridor Hampton Inn
• Age/Condition
• PIPs – Property Improvement Plan
• Market Segment
• Interior or Exterior Corridors
Hotel and Club Associates, Inc.
Valuation
Approaches
• Income Capitalization Approach
• Sales Comparison Approach
• Cost Approach
Hotel and Club Associates, Inc.
Income Capitalization
Approach
• Projection of Revenues and Expenses
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Room Revenues net of sales and occupancy taxes
Smith Travel Reports – STAR Reports
Historical Operating Statements from Owners
Uniform System of Accounts for Hotels
• Capitalization of Net Income
• Direct Capitalization – Overall Capitalization Rate
• Common method especially for upper midscale and higher
• Market for Hotel Investments – Regional
• Analyze Sales and Subject Using Market Expenses
Hotel and Club Associates, Inc.
Year 1 Operating Projection
Sample Limited Service Hotel
Number of Rooms
Available Room Nights
Occupancy Rate
Occupied Room Nights
Average Daily Rate {ADR}
% Revenue
POR
101
36,865
70.2%
25,897
$93.00
PAR
$2,408,421
$19,423
99.2%
0.8%
$93.00
0.75
$23,846
192
$2,427,844
100.0%
$93.75
$24,038
Department Expenses
Rooms
Rentals & Other Expenses
$569,734
$38,846
23.7%
200.0%
$22.00
1.50
$5,641
385
Total Department Expenses
$608,580
25.1%
$23.50
$6,026
$1,819,265
74.9%
$70.25
$18,013
Undistributed Operating Expenses
Administrative & General
Sales & Marketing
Property Operation & Maintenance
Utilities
$218,506
$326,011
$121,392
$121,716
9.0%
13.4%
5.0%
5.0%
$8.44
12.59
4.69
4.70
$2,163
3,228
1,202
1,205
Total Undistributed Expenses
$787,625
32.4%
$30.41
$7,798
$1,031,640
42.5%
$39.84
$10,214
Management Fee
$121,392
5.0%
4.69
1,202
Income Before Fixed Expenses
$910,247
37.5%
35.15
9,012
Fixed Expenses
Property & Other Taxes
Property Insurance
$61,000
$22,220
2.5%
0.9%
2.36
0.86
604
220
Total Fixed Expenses
$83,220
3.4%
$3.21
$824
Replacement Reserve
$97,114
4.0%
$3.75
$962
$1,697,930
69.9%
$65.56
$16,811
$729,914
30.1%
$28.19
$7,227
Total $
Revenues
Rooms
Rentals & Other Income
Total Revenues
Total Department Income
Gross Operating Profit
Total Expenses
Hotel and Club Associates, Inc.
Net Operating Income
Capitalization of
Income
• Develop Appropriate Overall Capitalization Rate
• Sources of Capitalization Rates
• Analysis of Sales of Similar Properties
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Brand similarities
Date of Sale
Age/Condition
Many times necessary to include sales from other areas
• Investor Surveys
• PriceWaterhouseCoopers
• PKF Hospitality
• Major Brokerage Firms – Research Reports
Hotel and Club Associates, Inc.
Sample
Capitalization
Value Indication - Direct Capitalization
Year 1 NOI Estimate
Overall Capitalization Rate
Indicated Value
Rounded to
Hotel and Club Associates, Inc.
$729,914
9.50%
$7,683,301
$7,700,000
How are You Feeling
at this Point??
Hotel and Club Associates, Inc.
Room Revenue
Multiplier
• Room Revenue Multiplier – RRM
• RRM = Sale Price/Value ÷ Room Revenue*
• *exclude occupancy taxes and sales taxes
• Value = Room Revenue x RRM
• RRM - Income or Sales Comparison Approach?
• Frequently Used in Market – Especially for Mid Tier and Under
Properties, Mom-and-pops, B&Bs
• Develop RRMs from Sales and Conversations with Market
Participants
• Simple but Effective Valuation Tool
Hotel and Club Associates, Inc.
Example RRM
Value Indication - RRM Analysis
Projected Room Revenue for Subject
x RRM
Indicated Value
Round to
Implied Value Per Room
Hotel and Club Associates, Inc.
$2,408,421
3.25
$7,827,368
$7,800,000
$77,228
Sales Comparison
Approach
• Comparison of Subject with Sales/Listings of Similar
Properties
• Comparability
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Franchise Affiliation
Exterior vs. Interior Corridors
Age/Condition
Market Segment
Date of Sale
Location
RevPar
Hotel and Club Associates, Inc.
Sales Comp – Units of
Comparison
• Price Per Room
• Room Revenue Multiplier - RRM
• Gross Income Multiplier – GIM
• Observation – properties with higher revenue/income per
room tend to sell at higher prices per room – assuming all
other things reasonably similar
• Observation - Price per room comparisons based on
physical features and adjustments based on physical features
can be difficult and potentially misleading.
Hotel and Club Associates, Inc.
Hampton Inn
st
1 Generation
Hotel and Club Associates, Inc.
Hampton Inn
2nd Generation
Hotel and Club Associates, Inc.
Hampton Inn
Newest Generation
Hotel and Club Associates, Inc.
Hampton Inn
2nd Generation – Requires Exterior
Renovation
Hotel and Club Associates, Inc.
Hampton Inn
Forever Young Renovation Underway
Hotel and Club Associates, Inc.
Hampton Inn
Forever Young Renovation Underway
Hotel and Club Associates, Inc.
Hampton Inn
Forever Young Renovation
Hotel and Club Associates, Inc.
Sales Comparison
cont.
• Advice – In using price per room comparison with
comparable sales, try to select sales that have similar
franchise affiliations with similar RevPar potential
• If using traditional adjustment grid, be mindful of
RevPar differences
• Don’t compare an “apple” and an “orange” and try to
compensate for differences with adjustments
• Other Issues to consider
• PIP – Property Improvement Plans
Hotel and Club Associates, Inc.
Sales Comparison
Cont.
• Sources of Sales Data
• Hotel broker specialists
• Published Research Reports
Hotel and Club Associates, Inc.
Cost Approach
• Land Valuation
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Hotels developers frequently buy the “rear” sites
Hotels are destination commercial properties
Don’t typically buy the prime retail/frontage sites
Units of comparison
• Price per Square Foot
• Price per Room
Hotel and Club Associates, Inc.
Replacement Cost
• Replacement/Reproduction Cost
• Cost Manuals can be challenging
• Actual Cost Comparables better
Hotel and Club Associates, Inc.
Depreciation
• Types of Depreciation – Physical Depreciation Functional
Obsolescence, External Obsolescence
• How to Measure Depreciation?
• Franchised hotels – major renovations/PIP every 5-7 years
• Many hotels block and plank construction – buildings
potentially have very long physical lives – BUT…..
• Consumer taste change frequently – exterior corridor hotels
Hotel and Club Associates, Inc.
Reconciliation
• Market Typically Prices Hotels Based on
Revenue/Income Considerations
• Most Meaningful Methods (most cases)
• Overall Capitalization – Income Approach
• RRM – Sales Comparison – Income Approach
• Cost Approach Least Reliable in Most Situations
• These Approaches Reflect Value of Total Going
Concern
Hotel and Club Associates, Inc.
Allocation of Value
• Total Going Concern Components
• Real Property (land and buildings)
• Tangible Business Personal Property – FF&E
• Intangible Business Value
• Necessary to Allocate for Taxation Purposes
• Start Allocation with Total Going Concern
• Total Going Concern generally what is bought/sold in market
• Building value based on individual components would be subjective
• Tangible Business Personal Property Set by Property Tax Filings
Hotel and Club Associates, Inc.
Intangible BEV
• Intangible Business Enterprise Value
• Much controversy within appraisal community as to
how to measure it
• Discussion as time permits
Hotel and Club Associates, Inc.
Sample Allocation
Allocation of Value Estimate
Value Opinion for Total Going Concern
Less FF&E Allocation
Less Business Enterprise
Allocation to Real Property
Hotel and Club Associates, Inc.
$7,700,000
$575,000
$0
$7,125,000
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Pope - Hotel Valuation