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Hotel Valuation

Hotel Valuation. David G. Pope, MAI, SRA, SGA Hotel and Club Associates, Inc. 3717-D West Market Street Greensboro, NC 27403 336-379-1400 dpope@hotelandclub.com. Types of Lodging. Full service – restaurant, lounge, large meeting spaces

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Hotel Valuation

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  1. Hotel Valuation David G. Pope, MAI, SRA, SGA Hotel and Club Associates, Inc. 3717-D West Market Street Greensboro, NC 27403 336-379-1400 dpope@hotelandclub.com Hotel and Club Associates, Inc.

  2. 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.

  3. Hotel Hotel and Club Associates, Inc.

  4. Motel Hotel and Club Associates, Inc.

  5. Hotel Hotel and Club Associates, Inc.

  6. Bed and BreakfastB&B Hotel and Club Associates, Inc.

  7. ????? Hotel and Club Associates, Inc.

  8. Major Franchises • Hilton Worldwide • 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.

  9. Major Franchises • Marriott Hotels • 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.

  10. 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.

  11. Major Franchise • Choice Hotels • 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.

  12. 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.

  13. 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.

  14. 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.

  15. Sources of Market Information • Smith Travel Research • 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.

  16. 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.

  17. Valuation Approaches • Income Capitalization Approach • Sales Comparison Approach • Cost Approach Hotel and Club Associates, Inc.

  18. Income Capitalization Approach • Projection of Revenues and Expenses • 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.

  19. Hotel and Club Associates, Inc.

  20. Capitalization of Income • Develop Appropriate Overall Capitalization Rate • Sources of Capitalization Rates • Analysis of Sales of Similar Properties • 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.

  21. Sample Capitalization Hotel and Club Associates, Inc.

  22. How are You Feeling at this Point?? Hotel and Club Associates, Inc.

  23. 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.

  24. Example RRM Hotel and Club Associates, Inc.

  25. Sales Comparison Approach • Comparison of Subject with Sales/Listings of Similar Properties • Comparability • Franchise Affiliation • Exterior vs. Interior Corridors • Age/Condition • Market Segment • Date of Sale • Location • RevPar Hotel and Club Associates, Inc.

  26. 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.

  27. Hampton Inn 1st Generation Hotel and Club Associates, Inc.

  28. Hampton Inn2nd Generation Hotel and Club Associates, Inc.

  29. Hampton Inn Newest Generation Hotel and Club Associates, Inc.

  30. Hampton Inn 2nd Generation – Requires Exterior Renovation Hotel and Club Associates, Inc.

  31. Hampton InnForever Young Renovation Underway Hotel and Club Associates, Inc.

  32. Hampton InnForever Young Renovation Underway Hotel and Club Associates, Inc.

  33. Hampton Inn Forever Young Renovation Hotel and Club Associates, Inc.

  34. 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.

  35. Sales Comparison Cont. • Sources of Sales Data • Hotel broker specialists • Published Research Reports Hotel and Club Associates, Inc.

  36. Cost Approach • Land Valuation • 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.

  37. Replacement Cost • Replacement/Reproduction Cost • Cost Manuals can be challenging • Actual Cost Comparables better Hotel and Club Associates, Inc.

  38. 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.

  39. 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.

  40. 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.

  41. 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.

  42. Sample Allocation Hotel and Club Associates, Inc.

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