Hotel Valuation

Hotel ValuationHotel ValuationDavid G. Pope, MAI, SRA, SGADavid G. Pope, MAI, SRA, SGA

Hotel and Club Associates, Inc.Hotel and Club Associates, Inc.

3717-D West Market Street3717-D West Market Street

Greensboro, NC 27403Greensboro, NC 27403

336-379-1400336-379-1400

[email protected]


mailto:[email protected]

Types of LodgingTypes of Lodging

• Full service – restaurant, lounge, large meeting Full service – restaurant, lounge, large meeting spacesspaces

• Select service – small restaurant or bistro, less Select service – small restaurant or bistro, less meetingmeeting

• Limited service – limited food/beverage, meetingLimited service – limited food/beverage, meeting

• Extended stay – longer guest stays, small kitchensExtended stay – longer guest stays, small kitchens

• Boutique – unique, usually upscaleBoutique – unique, usually upscale

• Bed and breakfast – owners quarters/lifestyle for Bed and breakfast – owners quarters/lifestyle for innkeeperinnkeeper


HotelHotel


MotelMotel


HotelHotel


Bed and BreakfastBed and BreakfastB&BB&B


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Major FranchisesMajor Franchises

• Hilton Worldwide Hilton Worldwide • Hilton – full serviceHilton – full service• Embassy Suites – full serviceEmbassy Suites – full service• DoubleTree – full serviceDoubleTree – full service• Hilton Garden Inn – select serviceHilton Garden Inn – select service• Hampton Inn – limited/select serviceHampton Inn – limited/select service• Homewood Suites – upscale extended StayHomewood Suites – upscale extended Stay• Home2 Suites – midscale extended stay Home2 Suites – midscale extended stay



• Marriott HotelsMarriott Hotels• Marriott – full serviceMarriott – full service• Ritz Carlton – full service luxuryRitz Carlton – full service luxury• Renaissance Hotel – full serviceRenaissance Hotel – full service• Courtyard by Marriott – select serviceCourtyard by Marriott – select service• Springhill Suites – limited/select serviceSpringhill Suites – limited/select service• Fairfield Inn and Suites – limited/select serviceFairfield Inn and Suites – limited/select service• Residence Inn – upscale extended stayResidence Inn – upscale extended stay• TownePlace Suites – midscale extended stayTownePlace Suites – midscale extended stay



• Intercontinental Hotels Group – IHGIntercontinental Hotels Group – IHG

Holiday Inn – select/full serviceHoliday Inn – select/full service

Crown Plaza – full serviceCrown Plaza – full service

Hotel Indigo – full serviceHotel Indigo – full service

Holiday Inn Express – limited/select serviceHoliday Inn Express – limited/select service

Staybridge Suites – upscale extended stayStaybridge Suites – upscale extended stay

Candlewood Suites – midscale extended stayCandlewood Suites – midscale extended stay


Major FranchiseMajor Franchise

• Choice HotelsChoice Hotels• Clarion Hotel – full service, midscaleClarion Hotel – full service, midscale• Comfort Suites/Comfort Inn – limited serviceComfort Suites/Comfort Inn – limited service• Sleep Inn – limited serviceSleep Inn – limited service• Quality Inn – limited/full service – typically reflaggedQuality Inn – limited/full service – typically reflagged• EconoLodge – limited serviceEconoLodge – limited service• Mainstay Suites – extended stayMainstay Suites – extended stay


Other FranchisesOther Franchises

• Hyatt Hotels – Hyatt Place, Hyatt HouseHyatt Hotels – Hyatt Place, Hyatt House

• Wyndham Hotels – Days Inn, Microtel, Ramada, Wyndham Hotels – Days Inn, Microtel, Ramada, etc.etc.

• Starwood Hotels – aloft, Four Points, Sheraton, Starwood Hotels – aloft, Four Points, Sheraton, WestinWestin

• LaQuintaLaQuinta

• Best WesternBest Western

• Carlson Redizor Group – Country Inn & SuitesCarlson Redizor Group – Country Inn & Suites

• Value PlaceValue Place


Hotels vs. Other Investment Hotels vs. Other Investment Real EstateReal Estate

• Length of tenancy - hotels tenancy nightly contractsLength of tenancy - hotels tenancy nightly contracts

• Hotels have varying sources of revenuesHotels have varying sources of revenues

• Hotels more labor intensiveHotels more labor intensive

• Operating expense ratios higher for hotels Operating expense ratios higher for hotels

• PIP – Property Improvement Plans – Frequent PIP – Property Improvement Plans – Frequent RenovationsRenovations

• Risk levels – hotel vs. other real estateRisk levels – hotel vs. other real estate

• How are risk levels priced in the market? – How are risk levels priced in the market? – capitalization rates, discount rates, multiples of incomecapitalization rates, discount rates, multiples of income


Measures of Measures of PerformancePerformance

• OccupancyOccupancy = Occupied Rooms ÷ Rooms Available = Occupied Rooms ÷ Rooms Available

• ADR ADR - Average Daily Rate; Nightly Avg Rate for - Average Daily Rate; Nightly Avg Rate for Rooms SoldRooms Sold

• Rack Rate Rack Rate – Advertised Rate – Advertised Rate • ADR Typically Lower than Rack RateADR Typically Lower than Rack Rate

• RevParRevPar – Revenue per Available Room – Revenue per Available Room

•


Sources of Market Sources of Market InformationInformation

• Smith Travel ResearchSmith Travel Research• STAR ReportsSTAR Reports• Custom Trends Reports Custom Trends Reports • Market ForecastsMarket Forecasts• Revenue and Expense ReportsRevenue and Expense Reports• www.str.com

• PKF HospitalityPKF Hospitality• Investor SurveysInvestor Surveys• Income and Expense BenchmarkingIncome and Expense Benchmarking• www.pkfc.com

• Hotel Broker Specialists Websites Hotel Broker Specialists Websites


http://www.str.com/

http://www.pkfc.com/

Valuation Valuation ConsiderationsConsiderations

• Franchise Affiliation Franchise Affiliation • Not all brands are equalNot all brands are equal• Is property eligible for re-licensingIs property eligible for re-licensing• Example: Exterior Corridor Hampton InnExample: Exterior Corridor Hampton Inn

• Age/Condition Age/Condition

• PIPs – Property Improvement PlanPIPs – Property Improvement Plan

• Market SegmentMarket Segment

• Interior or Exterior CorridorsInterior or Exterior Corridors


Valuation ApproachesValuation Approaches

• Income Capitalization ApproachIncome Capitalization Approach

• Sales Comparison ApproachSales Comparison Approach

• Cost ApproachCost Approach


Income Capitalization Income Capitalization ApproachApproach

• Projection of Revenues and ExpensesProjection of Revenues and Expenses• Room Revenues net of sales and occupancy taxesRoom Revenues net of sales and occupancy taxes• Smith Travel Reports – STAR ReportsSmith Travel Reports – STAR Reports• Historical Operating Statements from OwnersHistorical Operating Statements from Owners• Uniform System of Accounts for HotelsUniform System of Accounts for Hotels

• Capitalization of Net IncomeCapitalization of Net Income• Direct Capitalization – Overall Capitalization RateDirect Capitalization – Overall Capitalization Rate

• Common method especially for upper midscale and Common method especially for upper midscale and higherhigher

• Market for Hotel Investments – Regional Market for Hotel Investments – Regional • Analyze Sales and Subject Using Market ExpensesAnalyze Sales and Subject Using Market Expenses


Number of Rooms 101Available Room Nights 36,865Occupancy Rate 70.2%Occupied Room Nights 25,897Average Daily Rate {ADR} $93.00

Total $ % Revenue POR PARRevenues

Rooms $2,408,421 99.2% $93.00 $23,846Rentals & Other Income $19,423 0.8% 0.75 192

Total Revenues $2,427,844 100.0% $93.75 $24,038

Department Expenses

Rooms $569,734 23.7% $22.00 $5,641Rentals & Other Expenses $38,846 200.0% 1.50 385

Total Department Expenses $608,580 25.1% $23.50 $6,026

Total Department Income $1,819,265 74.9% $70.25 $18,013

Undistributed Operating Expenses

Administrative & General $218,506 9.0% $8.44 $2,163Sales & Marketing $326,011 13.4% 12.59 3,228Property Operation & Maintenance $121,392 5.0% 4.69 1,202Utilities $121,716 5.0% 4.70 1,205

Total Undistributed Expenses $787,625 32.4% $30.41 $7,798

Gross Operating Profit $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 $61,000 2.5% 2.36 604Property Insurance $22,220 0.9% 0.86 220

Total Fixed Expenses $83,220 3.4% $3.21 $824

Replacement Reserve $97,114 4.0% $3.75 $962

Total Expenses $1,697,930 69.9% $65.56 $16,811

Net Operating Income $729,914 30.1% $28.19 $7,227

Year 1 Operating ProjectionSample Limited Service Hotel


Capitalization of IncomeCapitalization of Income

• Develop Appropriate Overall Capitalization RateDevelop Appropriate Overall Capitalization Rate

• Sources of Capitalization RatesSources of Capitalization Rates• Analysis of Sales of Similar PropertiesAnalysis of Sales of Similar Properties

• Brand similaritiesBrand similarities• Date of SaleDate of Sale• Age/ConditionAge/Condition• Many times necessary to include sales from other areasMany times necessary to include sales from other areas

• Investor Surveys Investor Surveys • PriceWaterhouseCoopersPriceWaterhouseCoopers• PKF HospitalityPKF Hospitality• Major Brokerage Firms – Research ReportsMajor Brokerage Firms – Research Reports


Sample CapitalizationSample Capitalization

Year 1 NOI Estimate $729,914Overall Capitalization Rate 9.50%Indicated Value $7,683,301Rounded to $7,700,000

Value Indication - Direct Capitalization


How are You Feeling at How are You Feeling at this Point??this Point??


Room Revenue Room Revenue MultiplierMultiplier

• Room Revenue Multiplier – RRMRoom Revenue Multiplier – RRM

• RRM = Sale Price/Value ÷ Room Revenue*RRM = Sale Price/Value ÷ Room Revenue*• *exclude occupancy taxes and sales taxes*exclude occupancy taxes and sales taxes

• Value = Room Revenue x RRMValue = Room Revenue x RRM

• RRM - Income or Sales Comparison Approach?RRM - Income or Sales Comparison Approach?

• Frequently Used in Market – Especially for Mid Tier and Frequently Used in Market – Especially for Mid Tier and Under Properties, Mom-and-pops, B&BsUnder Properties, Mom-and-pops, B&Bs

• Develop RRMs from Sales and Conversations with Develop RRMs from Sales and Conversations with Market ParticipantsMarket Participants

• Simple but Effective Valuation ToolSimple but Effective Valuation Tool


Example RRMExample RRM

Projected Room Revenue for Subject $2,408,421x RRM 3.25Indicated Value $7,827,368Round to $7,800,000Implied Value Per Room $77,228

Value Indication - RRM Analysis


Sales Comparison Sales Comparison ApproachApproach

• Comparison of Subject with Sales/Listings of Comparison of Subject with Sales/Listings of Similar Properties Similar Properties

• ComparabilityComparability• Franchise AffiliationFranchise Affiliation• Exterior vs. Interior CorridorsExterior vs. Interior Corridors• Age/ConditionAge/Condition• Market SegmentMarket Segment• Date of SaleDate of Sale• LocationLocation• RevParRevPar


Sales Comp – Units of Sales Comp – Units of ComparisonComparison

• Price Per RoomPrice Per Room

• Room Revenue Multiplier - RRMRoom Revenue Multiplier - RRM

• Gross Income Multiplier – GIMGross Income Multiplier – GIM

• Observation – properties with higher revenue/income Observation – properties with higher revenue/income per room tend to sell at higher prices per room – per room tend to sell at higher prices per room – assuming all other things reasonably similarassuming all other things reasonably similar

• Observation - Price per room comparisons based on Observation - Price per room comparisons based on physical features and adjustments based on physical physical features and adjustments based on physical features can be difficult and potentially misleading. features can be difficult and potentially misleading.


Hampton Inn Hampton Inn 11stst Generation Generation


Hampton InnHampton Inn22ndnd Generation Generation


Hampton Inn Hampton Inn Newest GenerationNewest Generation


Hampton Inn Hampton Inn 22ndnd Generation – Requires Exterior Renovation Generation – Requires Exterior Renovation


Hampton InnHampton InnForever Young Renovation UnderwayForever Young Renovation Underway


Hampton InnHampton InnForever Young Renovation UnderwayForever Young Renovation Underway


Hampton Inn Hampton Inn Forever Young RenovationForever Young Renovation


Sales Comparison cont.Sales Comparison cont.

• Advice – In using price per room comparison Advice – In using price per room comparison with comparable sales, try to select sales that with comparable sales, try to select sales that have similar franchise affiliations with similar have similar franchise affiliations with similar RevPar potentialRevPar potential

• If using traditional adjustment grid, be mindful If using traditional adjustment grid, be mindful of RevPar differencesof RevPar differences

• Don’t compare an “apple” and an “orange” and Don’t compare an “apple” and an “orange” and try to compensate for differences with try to compensate for differences with adjustmentsadjustments

• Other Issues to considerOther Issues to consider• PIP – Property Improvement PlansPIP – Property Improvement Plans


Sales Comparison Cont.Sales Comparison Cont.

• Sources of Sales DataSources of Sales Data

• Hotel broker specialistsHotel broker specialists

• Published Research ReportsPublished Research Reports


Cost ApproachCost Approach

• Land ValuationLand Valuation• Hotels developers frequently buy the “rear” Hotels developers frequently buy the “rear”

sites sites • Hotels are destination commercial propertiesHotels are destination commercial properties• Don’t typically buy the prime retail/frontage Don’t typically buy the prime retail/frontage

sitessites• Units of comparisonUnits of comparison

• Price per Square FootPrice per Square Foot

• Price per RoomPrice per Room


Replacement CostReplacement Cost

• Replacement/Reproduction CostReplacement/Reproduction Cost

• Cost Manuals can be challenging Cost Manuals can be challenging

• Actual Cost Comparables better Actual Cost Comparables better


DepreciationDepreciation

• Types of Depreciation – Physical Depreciation Types of Depreciation – Physical Depreciation Functional Obsolescence, External ObsolescenceFunctional Obsolescence, External Obsolescence

• How to Measure Depreciation?How to Measure Depreciation?

• Franchised hotels – major renovations/PIP every 5-Franchised hotels – major renovations/PIP every 5-7 years7 years

• Many hotels block and plank construction – Many hotels block and plank construction – buildings potentially have very long physical lives buildings potentially have very long physical lives – BUT…..– BUT…..

• Consumer taste change frequently – exterior Consumer taste change frequently – exterior corridor hotelscorridor hotels


ReconciliationReconciliation

• Market Typically Prices Hotels Based on Market Typically Prices Hotels Based on Revenue/Income ConsiderationsRevenue/Income Considerations

• Most Meaningful Methods (most cases)Most Meaningful Methods (most cases)

• Overall Capitalization – Income ApproachOverall Capitalization – Income Approach

• RRM – Sales Comparison – Income ApproachRRM – Sales Comparison – Income Approach

• Cost Approach Least Reliable in Most SituationsCost Approach Least Reliable in Most Situations

• These Approaches Reflect Value of Total Going These Approaches Reflect Value of Total Going ConcernConcern


Allocation of ValueAllocation of Value

• Total Going Concern ComponentsTotal Going Concern Components• Real Property (land and buildings)Real Property (land and buildings)• Tangible Business Personal Property – FF&ETangible Business Personal Property – FF&E• Intangible Business ValueIntangible Business Value

• Necessary to Allocate for Taxation PurposesNecessary to Allocate for Taxation Purposes• Start Allocation with Total Going ConcernStart Allocation with Total Going Concern

• Total Going Concern generally what is bought/sold in marketTotal Going Concern generally what is bought/sold in market

• Building value based on individual components would be Building value based on individual components would be subjectivesubjective

• Tangible Business Personal Property Set by Property Tax Tangible Business Personal Property Set by Property Tax FilingsFilings


Intangible BEVIntangible BEV

• Intangible Business Enterprise Value Intangible Business Enterprise Value

• Much controversy within appraisal community Much controversy within appraisal community as to how to measure itas to how to measure it

• Discussion as time permitsDiscussion as time permits


Sample AllocationSample Allocation

Value Opinion for Total Going Concern $7,700,000Less FF&E Allocation $575,000Less Business Enterprise $0Allocation to Real Property $7,125,000

Allocation of Value Estimate


Documents

Hotel Valuation