Even as the hotel transactions environment becomes more unpredictable, owners and would-be buyers must follow their own pre-determined guidelines to ensure successful deals.
PHOENIX—Stability and predictability are an owner’s best friends when it comes to the hotel transactions landscape, according to several speakers at last month’s Lodging Conference.
During the “What is your hotel really worth?” breakout roundtable session, panelists agreed that hotel owners must stay true to a mission when dealing with buyers and sellers, as values are peaking—or perhaps even starting to decline.
- Click here to read what the panelists had to say about six key factors that help determine hotel worth.
Paul Breslin, managing director for Horwath HTL, said the guidelines are pretty clear.
“Write a plan and know what you’re good at so that if it’s value add or getting low cost to capital, whatever those things you do best … execute that well,” he said.
Peter Nichols, first VP and national director, national hospitality group at Marcus & Millichap, said the fundamental rules for selling a hotel asset in this environment are no different than what airplane pilots follow.
“When I was learning how to fly, my flight instructor told me to plan my flight and fly my plan,” he said. “If you have a plan that you were going to buy this hotel and you were going to hold it for five years, that’s your plan. Follow your plan. Don’t stray from it.
“Make sure you know what you’re buying,” Nichols added. “Do your homework, make sure you know your markets and you know what brands you’re going to acquire. But have a plan.”
The plan must include education about local market conditions because while national averages are good to know, a hotel is only as valuable as its location allows it to be, panelists said.
“(Make) sure that the market you’re buying in that has supply … is steady—or if it’s not steady that you absolutely understand what’s coming in,” said Herb Warmbrodt, principal, HREC Investment Advisors. “It surprises me that some people still buy hotels and they don’t know that answer.”
And while it might sound basic, the successful recipe includes doing due diligence to ensure all the i’s are dotted and the t’s are crossed, speakers said.
“I believe it’s focusing on the amount of capital you’re putting into the deal and making sure it’s done right,” said Jeff Kolessar, SVP of-development at GF Management. “With the internet and (customer) review (sites), you’ve got to make sure you have the impact and the quality of that product, because if you don’t have that, (guests are) going to go to the guy next door, the newer property. You’ve got to make sure that you got enough money allocated to spend properly.”
Breslin said those basic elements can often ignored—and that damages a hotel’s overall value.
“I’m shocked people don’t spend enough time on the quality of the product and the age of the product,” he said. “They just think some paint is going to cover that. It’s the most underestimated (aspect) in valuations.”
Buyers also have to be certain to know the ramifications of industry trends that must be implemented in a post-deal renovation, said Doug Dreher, president & CEO of The Hotel Group.
“Related to the (capital expenditure) is displacement,” he said. “How big is the renovation, how big is the CapEx, especially when you’re talking about things such as converting to having only showers, which are the ‘in’ thing and kind of long overdue in our business. That’s a high disruptor, especially if you’re running mid- to high-70s (occupancy rate), you’re going to have some significant displacement. There’s no way around it. You can manage the construction as tight as you want, but that’s a big factor.”
Those kinds of details are just as important to sellers, Warmbrodt said.
“It’s important to have the (property-improvement plan) early if you’re considering going to market, if you’re considering monetizing your asset,” he said. “That way you can absolutely avoid any big surprises, because there will be surprises.”
The panelists agreed that if an owner is even thinking about selling an asset, now might be the best time to do it.
“It’s probably better today than it might be in a year or two just with new supply and some of the things out there,” Dreher said. “It’s certainly a good time if you are thinking of selling to just sell.”
“If your renovations are done and you have a property that’s still in the uptick … that’s an opportunity that somebody’s going to take a flyer on,” Kolessar added. “There are still buyers out there.”