Equity Yield Rates on the Decline

HVS continually tracks the rates of return on the assets that we consult on.
Rod Clough
HVS continually tracks the rates of return on the assets that we consult on. In our most recent review, we found that equity yield rates, on average, have been declining, due in part to the expectation of slowing EBITDA Less Replacement Reserve growth. The sample size of available data is also a contributing factor.
 
Equity yield rates were notably lower for full-service and luxury hotels, averaging 16.8% for the year-to-date 2018 period (below the 17.7% level recorded for 2017), driven largely by a lower number of total transactions of this asset type, coupled with an increase in full-service sales of iconic assets in highly sought-after coastal markets with high barriers to entry. 
 
Equity yield rates for select-service and upscale, limited-service hotels averaged 18.8% for the year-to-date period ending September 2018, while the average equity rate for lower-tier limited-service hotels was 20.1% for the noted 2018 period. We note that the comparatively greater risk of supply growth within these asset classes contributes to investors’ need for higher hurdle rates on equity investments. 
  
Source: HVS
 
Total property yields (overall discount rate) similarly declined for full-service and luxury hotels, while holding steady in the other categories. Total property yields are averaging 10.0% thus far in 2018 for the full-service and luxury category. Higher levels of 10.9% for select-service and upscale limited-service hotels, and 11.8% for lower-tier limited-service hotels were recorded. This relationship to equity yields also reflects expectations of increased debt costs for hospitality investments.
 
Rates of return are calculated using the actual sale prices of the hotels with forecasted cashflows, and inputting market terms for fixed-rate financing on a ten-year hold.

About Rod Clough

As President of HVS Americas, Rod oversees strategy execution for HVS throughout its 40 Americas locations. Rod’s tenure with HVS spans over 25 years, during which time he has played an important role in growing the company from a few locations across the Americas to 40. In a typical year, Rod’s group consults on over 2,500 existing or proposed hotels and resorts, and in 2021, he oversaw the 568-hotel Extended Stay America appraisal portfolio. In 2003, Rod founded the firm’s sister appraisal division, U.S. Hotel Appraisals, which completes roughly 1,000 hotel appraisals annually. Rod is a founding owner/partner of HVS Mexico-Latin America, and he re-launched the firm’s U.S. Brokerage and Capital Markets division in 2018. Rod is a Designated Member of the Appraisal Institute (MAI) and a licensed real estate broker. Furthermore, Rod is proudly Latino and gay, and his firm is welcoming of all races and colors, sexual orientations, ages, genders, and gender identities. Once associates join HVS, they tend to stay due to the extraordinary culture Rod has inspired, a culture defined by the ideals of balance, connectivity, efficiency, collaboration, honesty, integrity, kindness, and excellence, among others. Rod resides in northern Colorado where he and his husband Jeff are raising their daughter, Rory.

4 Comments

  1. Nice recap of the data!

  2. Thanks you guys, really instructive!

  3. Select-Service & Upscale Limited-Service equity return rates coming down is interesting. There are a few factors here (cost of debt increasing, comfort of outside investors with the segment, a long, and stable run, etc.), but this is a great talking point for brokers. Thanks,Carter!

  4. This is great, exactly the kind of thing we should be putting out there. Excellent job - Thank you!

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