|
Introduction
With the downturn in the U.S. economy and the resulting cutbacks in all types of travel, hotels are experiencing rapidly declining occupancies, room rates, and profits. Coupled with a total lack of debt capital, hotel transactions have come to a complete halt, and many hotel owners are under extreme stress because their property’s cash flow is insufficient to cover debt service. These are challenging times for hotel appraisers, who must thoroughly understand the current hotel economic environment and apply the correct valuation techniques in order to develop a realistic estimate of value. This seminar provides hotel owners, operators, and appraisers with the tools, software, and knowledge needed to evaluate the dynamically changing local supply and demand trends; quantify the relative competitiveness of nearby hotels; forecast occupancy, room rate, and RevPAR; project a detailed income and expense statement; and utilize the appropriate appraisal techniques to estimate market and liquidation values. In addition to hotel appraisals, this seminar also illustrates how hotel market and feasibility studies are performed. Seminar participants will work with Hotel Valuation Software, three state-of-the-art programs developed by HVS that forecast hotel occupancy, room rate, income and expense, and value. The HVS software programs and user manual – along with a demonstration hotel market study and valuation, a handbook on hotel investments, and numerous research studies and articles – will be included in each participant’s take-home package.
Seminar’s Objective
To understand the current dynamics of the hotel industry and the various procedures for gathering, analyzing, and processing data into a comprehensive market study and estimate of value for all types of hotels.
Seminar Topics
Introduction and Overview of the U.S. Hotel Industry
A pictorial presentation of the evolution of the hotel industry, starting from colonial country inns and continuing to today’s huge convention hotels. Learn the role hotels play in the growth and development of travel and commerce throughout the world. View some of the most famous hotels along with unique properties, such as a hotel constructed in a grain silo, one built entirely out of ice, another occupying an old prison, and one constructed at a cost of more than $13,000,000 per room!
Hotel Risks
Hotels are considered high-risk investments requiring huge amounts of capital to develop and unique expertise to operate. They are highly impacted by external economic conditions and quickly suffer from physical and functional obsolescence. Through a series of pictures, you will visually see how physical and functional changes in hotel design impact a property’s economic life and investment risk.
Types of Hotel Facilities
Hotels and motels are designed to attract specific types of market demand. Because hotel designs, facilities, amenities, and locations differ and directly impact financial operating results, it is important to define and accurately classify the various types and characteristics of lodging facilities. Hotels and motels can be classified by the types of facilities offered, the class or quality of facilities and services, and the location. The many types of hotel facilities, quality levels, and locations will be illustrated via photographic examples. In addition, the financial operating performance of the different types of hotels will be discussed.
New Hotel Products and Services
Over the years, hoteliers have developed new hotel concepts, including the motel, motor hotel, all-suite hotel, the Microtel, and the extended-stay property; recent additions have been the boutique hotel and the lifestyle hotel. These concepts are designed for specific market segments, and it is important to understand the types of travelers they attract along with their financial operating characteristics. In addition to new hotel concepts, the economics of new hotel services – such as health spas, outsourced restaurants, Internet booking engines, travel websites, and in-room technologies – will be investigated.
Historical Trends and Hotel Cycles
The hotel industry is highly cyclical, rising and falling based on changes in supply and demand. By understanding the historical reasons why there were periods when hotel supply escalated rapidly or demand plummeted quickly, you will be better equipped to project a hotel’s future operating performance. The U.S. hotel industry has excellent macro historical data that illustrate the various cycles over the past 40 years and their impact on hotel occupancy, room rate, and financial performance.
Current Hotel Economic Environment and Outlook for
the Future
The current economic recession is having a massive impact on hotels and motels throughout the world. The decline in travel has led to a significant reduction in hotel occupancies, room rates, and profits. Many hotel owners who refinanced their properties over the last five years face cash-flow deficits and the inability to refinance their maturing mortgages. A rising number of hotels have defaulted on their mortgages, and lenders are preparing for foreclosures and bankruptcies. Hotel values have fallen, and the transaction market has dried up. Most of the hotels currently on the market are being sold at distressed prices. Notwithstanding the current dire situation, there are economic indicators and historical trends that can be utilized to predict a point in time when the recovery will commence and to project an economic outlook for the future.
Franchise and Management Contracts
Most hotels in the U.S. are owned by individuals who either operate the properties themselves using a hotel brand affiliation (franchise) or utilize a hotel management company to provide operating expertise. The cost and structure of hotel franchise and management contracts can be significant, and it is important to understand how these structures impact the overall economics of a hotel property.
Product Segmentation and Consolidation
Over the years, hotel companies began recognizing that the hotel industry caters to many different types of travelers who seek a wide variety of accommodations and pricing. Through acquisitions, consolidation, and new product development, most of the major hotel chains now offer various hotel brands at differing price points. Because a hotel’s competitiveness can be impacted by its chain affiliation, it is important to understand the evolution of product segmentation and consolidation.
Hotel Valuation – Cost, Sales Comparison, Income
Capitalization
Appraisers rely on three approaches to estimate market value. The income capitalization approach is often given the greatest weight for valuing income properties such as hotels and motels. The cost and sales comparison approaches are generally employed to verify the value indicated by the income capitalization approach. The overriding objective of selecting a particular approach is to reflect the actions of the typical hotel buyer in the market. With the current economic downturn and the total lack of financing, it becomes increasingly important to understand the acquisition and financing structures currently employed by hotel market participants.
Hotel Valuation – Data Sources
The accuracy of hotel market studies and valuations is dependent on good-quality data. One of the best hotel data sources is Smith Travel Research (STR). STR produces numerous research publications that provide market and operating performance information. In addition, STR sells customized market research that contains information on historical supply, demand, rate, occupancy, and RevPAR for a user-defined group of hotels. The company will also customize a financial operating statement based on a user-defined group of hotels. Examples of STR data will be shown and discussed. Other data sources for information on capitalization rates, market sales, construction costs, and so forth will be included.
Hotel Valuation Software and Case Study
Hotel Valuation Software is the only non-proprietary computer software designed specifically to assist in the preparation of market studies, forecasts of income and expense, and valuations for hotels and motels. Using state-of-the-art methodology, the software provides sophisticated models for hospitality and appraisal professionals to forecast a hotel’s occupancy, revenues, and expenses and to perform hotel valuations. The software comprises three models that will be described and then demonstrated with a case study. The three models are as follows:
- Supply and Demand Room Night Analysis Model and
Case Study
- Enables the appraiser to evaluate the various competitive factors – such as occupancy, average room rate, and market segmentation – of all hotels in a local market.
- Calculates the area-wide occupancy as well as the
competitive market mix.
- Using a sophisticated penetration algorithm, the relative competitiveness of each existing and proposed hotel is measured to determine the overall market dynamics. Based on this data, a forecast of occupancy can be developed for each existing and proposed hotel in the local market. The program incorporates such factors as competitive occupancies, market segmentation, unaccommodated demand, induced demand, growth of demand, and the relative competitiveness of each property in the local market. The program output is a ten-year projection of occupancy.
- Income and Expense Forecasting Model and Case
Study
- Enables the appraiser to input comparable financial operating data and forecast a complete 11-year income and expense statement by defining a small set of inputs:
- The expected future occupancy levels for the subject
hotel
- Base-year operating data for the subject hotel
- Expected inflation rates for revenues and expenses
- The model works for both existing and proposed
hotels and incorporates a highly accurate fixed and
variable forecasting routine that is easily adapted to
any type of lodging facility. The program can also be
used to develop annual operating budgets.
- Hotel Valuation Model and Case Study
- A discounted cash flow valuation model utilizing the
mortgage-equity technique forms the basis for this
program. Values are produced using either a
loan-to-value ratio, in which the size of the mortgage
is based on property value, or a debt coverage ratio, in
which the size of the mortgage is based on
property-level cash flow.
- By entering the terms of typical lodging financing
into the program, along with the ten-year forecast of
revenue and expense, you can determine the value that
provides the stated returns to the mortgage and equity
components.
- The output proves the value by showing the
calculation of the unleveraged property yield, the
leveraged equity yield, the mortgage yield, and the
projected cash flow to equity. This cutting-edge
valuation program is highly accurate because it utilizes
real world investor input rather than appraiser-divined
capitalization and discount rates.
- Hotel Business and Personal Property Components
Over the years, one of the greatest controversies among appraisers has been the issue of how to separate a hotel’s business and personal property components in order to isolate the real property component. This highly theoretical exercise is required for valuations involving real property tax assessments and condemnations. The tried and proven approach known by a number of tax court decisions as the "Rushmore Approach" will be illustrated and compared to some of the other approaches utilized by other appraisers.
|
