6 factors to determine your hotel’s worth
6 factors to determine your hotel’s worth
28 OCTOBER 2016 8:25 AM

Industry experts recently addressed several key factors, from market supply to taxes, that go a long way in dictating a hotel's worth.

PHOENIX—The true worth of a hotel, of course, takes into account a multitude of different things, both inside and outside of the hotel industry. So, it’s no easy task for even a panel of experts to answer unequivocally the question “What is your hotel really worth?”

Still, that’s just what panelists attempted to do during the “What is your hotel really worth?” breakout session at last month’s Lodging Conference. The session delved into many topics involving valuations. Here are six takeaways:

  • For more on what hotel buyers and sellers can do to ensure success, click here.

The panelists:

  • Paul Breslin, managing director, Horwath HTL
  • Douglas Dreher, president & CEO, The Hotel Group
  • Jeffrey Kolessar, SVP of development, GF Management
  • Peter L. Nichols, national director, national hospitality group, Marcus & Millichap
  • Herb Warmbrodt, principal, HREC Investment Advisors

Kolessar: “Anybody that’s going to buy hotels is going to order a trend report to see where the new supply’s coming, (and) go to the local township to see if there’s any permits pending out there.”

Dreher: “When you go into look at buying a property, new supply can be a real killer. You’re putting it in your model but it’s really hard to underwrite, and a lot of them are really, really good products. Some of them are double-branded, so it’s not just a Courtyard but let’s add a Residence Inn. It’s not 120 (rooms)—it’s now double that. When you start putting that in your model and future (net operating income), it becomes a pretty big factor.”

Dreher: “The all-in cost with the PIP … It’s amazing how they’ve grown over the past several years, both with the brands’ standards increasing and just with the cost to complete them is increasing.”

Warmbrodt: “It’s very important from an owner’s perspective that’s considering selling an asset to get the product improvement plan from the franchisor. Don’t wait for a surprise 90 days or 120 days down the road. The PIP is going to be what it is, and I see so many people say ‘well, we’ve got a great relationship, we can negotiate it down or we can get some waivers.’ You don’t know that anymore. You absolutely don’t. Spend the money, get the PIP. That way we really can value your hotel.”

Dreher: “So many sellers don’t order PIPs, and on the buy side, you’re looking at a lot of potential acquisition. So the team only has so much time. We have a team of two basically, and you don’t have time to really look at them often. So if there’s not a PIP in the data room for us you might just move on.”

Nichols: “The buyer owns the PIP—he doesn’t have to share it. Now you’re stuck. The PIP’s been done; now you’ve got to go pay $5,000 more to have it done again. It’s just crazy for such a small amount of money; get the PIP done.”

Breslin: “Just because there’s a PIP doesn’t mean that’s all you should do. You may have to have a strategy on what is going to be your solution to add value. And you might want to do that at the time you’re doing the PIP.”

Nichols: “It depends market by market as well. If you’re doing a PIP in Chicago and you’re doing a PIP in Omaha, Nebraska, you might as well mark up your capital expenditure by 10, 15% just because of the cost of labor and the cost of product.”

Paul Breslin (left), of Horwath HTL, makes a point about industry consolidation as Peter Nichols of Marcus & Millichap listens during the “What is your hotel really worth?” breakout session at last month’s Lodging Conference. (Photo: Jeff Higley)

Dreher: “The soft brands that are part of a major system, be it Marriott, Hilton or others that are in power-branded distribution systems, absolutely can add value because they’re part of a family of brands. The loyalty program, just the distribution systems are significant, and being part of the family of brands as an enterprise adds value when you sell. Branding’s essential. It can have a huge impact.”

Warmbrodt: “Here’s a great example—the old Holiday Inn boxes. Great locations, 300-plus rooms, 50,000 square feet of meeting space, and (InterContinental Hotels Group) just didn’t want it anymore. … It has a tremendous impact if you have to down flag. It can be substantial money—$2 million, $3 million depending on the project.”

Breslin: “The brand adds a tremendous value for the property for several reasons. It’s not just the distribution channel and the discount on the (online travel agencies). It really adds a tremendous value in the sense that, for many owners, they need the discipline and the standards and keeping that quality.”

Nichols: “Not only does it impact the direct value of the hotel, but when somebody comes in and picks up the flag and builds the new hotel with your old flag on it, how’s that going to impact you from a performance standpoint? And then the second thing about flag is also making sure that you have the right flag for the box. You’ve got to make sure that you know the limitations of the box and not try to overdo, or to up-brand, something that shouldn’t be up-branded.”

Nichols: “I always want to know, when I’m looking at and trying to value a property, why is that demand generator in this marketplace? And … whoever that 900-pound gorilla is in the market, if they leave, what replaces it? … What’s going to happen in that market? If I own a hotel in that market, what do I do? Where does that business get replaced, and how do I recover from that?”

Warmbrodt: “We’ve been working in particularly Texas, in the Shale areas, in the Permian Basin and south of San Antonio, the refinery areas … those markets have really gotten hammered. You can see beginning in 2012 when these projects were doing absolutely phenomenal. A good example: (A midscale extended-stay property) running almost $2 million in revenue in 2012, a year and a half later it was running a million. Without a doubt, that’s having adverse effects on values. It has a very adverse effect because people are not sure that (the price of) oil is going to increase yet. At the end of the day, you can’t buy something that’s not making any money and pay cash for it and not know when it’s going to turn around and be profitable.”

Dreher: “We have properties in Alaska and one in Montana, and it’s not just the oil prices and commodities, it’s also how that affects state government travel. In Alaska, it’s a huge chunk of the state government budget, 80%. So government travel is down, and they have the permit there so you’re not getting the local travel. It’s kind of a triple storm.”

Kolessar: “I’ve seen numbers on hotels in those oil markets that revenues are off 50% to 70%. … Talking to lenders that were lending on those hotel deals in ’12 and ’13, they felt safe because they’re underwriting deals that are 16 debt yield or 17 debt yield and underwriting at 20% drop in NOI. Well the NOI has now dropped 50%.”

Dreher: “Real estate taxes are going up in a huge, huge way. …. Real estate tax is just a real battle, and they’re always slow to catch up to demand going down.”

Kolessar: “If you’re buying a hotel on the upswing, you better factor in an increase in those taxes; don’t just look at the (trailing 12) or the prior year numbers. We bought a hotel two years ago, and Orange County (Florida) decided to just come in and (raise taxes) right across the board. You end up fighting it …. but you have to spend the time and money to do it.”

Nichols: “Negotiate and fight the tax fight before you do your PIP because if they come in and do the appraisal after you’ve done your PIP you’ve just added X amount of value to your property. When you buy a hotel and you’re going in to negotiate with that municipality, do it based on the purchase price, not the all-in cost of your total project.”

Dreher: “(Values) could be (affected), certainly, with the most recent big one, with ‘Marrwood’ (Marriott International’s acquisition of Starwood Hotels & Resorts closed in September). If you are an existing Marriott owner/operator in a market and now all of a sudden there’s a Sheraton, you’re viewing that Sheraton in your comp set with a different lens. They’re playing in your sandbox a bit. So, yeah, it can absolutely have an impact and will. There have been a lot of Starwood properties on the market leading up to this, could just be buyers trying to get fortuitous with timing, selling with the future part of Marriott as potential.”

Breslin: “Whenever you have consolidation of that magnitude, it takes away choices and leverage negotiations when you’re trying to negotiate franchise. It also has the potential of more fees and stricter costs, and that’s always a fear. That will lower your value because if you pay more cost, then you have less (net operating income). Now if they get better … and if they’re going to do a better job of negotiating stronger with OTAs and lower those fees, that could be a very good thing (for values).”

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