Hotel Valuation model/methods
How would you perform a valuation on a hotel. especially in comparison to traditional multifamily.
I guess my biggest question is how do you project rent when it changes so often?
anyone have a model or link to a model they can share?
I don't work in RE but wouldn't you just take an occupancy rate assumption along with your room rate assumption? I don't think there's any wizardry to it.
Look at historical occupancy trends and use that. Look at historical income on a monthly basis.
Hotels don't have "rent", they have ADR and Occupancy and combined they equal RevPar. Hotels can be valued in two ways, one is cap rate which is pretty much the universal method for valuing real estate in general and the other is a multiple of room revenue.
ADR, occupancy to arrive at RevPAR (room revenue). Include other revenue such as food & beverage. Subtract departmental expenses, usually as % of their revenue, to arrive at gross profit. Then subtract out operating expenses to get NOI. Historical financials, local trends, or reports like STR.
I guess my real questions is how to come up with an adr for the forward year when it can change nightly, monthly, seasonally etc? as well when the occupancy changes so frequently. is it primarily based off of historicals or do/can you actually model out the rooms for the year?
P&L is projected annually and should be cut up monthly for modeling purposes. Revenues and variable expenses should be modeled for seasonality adjustments. You take the T12 #s and use that for seasonality percentages. Not complicated
I don't have a model to share but here's a good go by should you have time. https://www.hvs.com/content/Bookstore/HotelValuationTechniques.pdf
Also remember that if the Hotel has "Trump" plastered on it that you add $1 billion to its value. Pretty elementary concept but I figured it was worth reminding everyone.
4% FF&E (above the line) is also pretty standard. After your FF&E reserve cap that NOI. Also, be very careful with CapEx.
My honest opinion on hotels is that unless it is an absolute no brainer, total home run, then don't do it. If at any time you think yourself "wow this is a little thin" run. This applies to both debt and equity. Point is you better know what you're doing the market is less liquid and mistakes are magnified.
As mentioned above, you use estimated occupancy levels and ADRs to derive your revenue #'s However that growth(or decline) will largely depend on the market and more macro economic conditions outside of your control. The real "art" in hotel valuation and identifying good opportunities stems from insight on whether operating margins can be improved upon acquisition and modeling proper disposition factors, namely credit to the next buyer for PIPs
Hotel / Restaraunt Valuation (Originally Posted: 01/16/2013)
I'm working on a case study and came across the the scenario below which I'm having trouble figuring out?
There's a mixed use property comprised of a hotel that is operated by a full-service hotel management company and a retail space that's occupied by a high-end name brand restaurant which is being operated by the brand's management co. The owner of the property has no lease in place with the restaurant operator but entered into a joint-venture with them to own 50% of the operation and therefore entitled to 50% of the income - also has a management agreement in place with them.
Upon exit, how would you value the property? The hotel's simple - but w/ regard to the restaurant, the value wouldn't be in the real estate (retail space) but in the restaurant operation. Would a potential buyer just look at the whole, whereby the owner's share of food & beverage income is part of the hotel income? Would the restaurant be valued as a separate component? - If so how do you even value a restaurant operation?
Thanks for the help
Well, I would figure out the current value of the retail space if emptied and/or rented at market tomorrow because its your safe number. Restaurants are very risky, and it makes them very volatile in terms of pricing.
However, if you have to know: I would also look into the restaurant's key money. The hotel technically owns the license, equipment and 50% of the inventory (I assume the restaurant payed for that, but you are being paid 50% of the return on that inventory). If the restaurant went bust the next day, what could you rent or liquidate that spot for? This is basically your book value.
Now that you have the physical assets valued, find out what the expected market return rate for a restaurant is in the area. If the typical restaurant business yields 15%/year in the area, and the average NOI for the restaurant is $900k/year (Your NOI is $450k/year). Your cashflow is then worth $3 million on the market (depending on the quality of the restaurant and how well it's doing compared to similar restaurants in the area of course). The restaurant's cashflow would trade at a premium if it's a hot spot that has 2 Michelin stars and celebrity guests every day. Anyways, this is your market value.
I haven't slept in 2 days, so double check this for me.
The wording of the question is a bit confusing.
Just to clarify, the owner does not lease the hotel to the management company, right? Getting to the value of the hotel wouldn’t be difficult; but there is often “business value” arguments that come into play with the management company and the value that comes from the “flag” (La Quinta may attract more people than Roadside Inn).
As far as the restaurant goes, there are two different values you should look at. The first is the, “going concern” value, which is basically a risk adjusted business valuation of the current restaurants income stream. So you should ask yourself, are you trying to value the JV’s interests or are you trying to value the building and land it sits on?
In order to determine what the real estate value is, you should build a fee simple proforma using market assumptions. Think of it this way, if the current restaurant vacated; how much could the owner get in rent from the new party? Basically, build a proforma using all market assumptions (RR, vacancy, pass-throughs, op-ex, and reserves) and capitalize the NOI with a market rate.
I already ran an analysis on the retail space: (market rent PSF for comparable retail x LSF) - So that's the safe number - and assumes a tenant is in place. The empty box would sell for considerably less. The issue is - under this scenario the total rent income would be peanuts compared to what 50% of the restaurant income would be (albiet a riskier income stream dependent on operations of this particular restaurant). In this scenario the restauranteur is willing to agree to such because 1) of the prime location, 2) owner is paying for 90% of the restaurant build-out (including equip/ff&e), and 3) it allows the operator to operate under a budget free of a lease expense.
So sbd5057 - would a 15% cap rate (if we're looking at it in that manner and not from a business valuation perspective) be conventional? What could the expected expected ROR/Cap Rate be for say a local burger joint compared to a 5-star celebrity chef/celebrity clientele spot (the subject restaurant would be the latter). I'll have to do my own research on it per the area.
To REValuation's question - no, the owner just hires a global brand/operator to manage the property - long-term management agreement - operator just collects base/incentive fees. To you second point, i attempted to outline the intent in my first paragraph. Essentially I assume you'd want to value the JV interest since the rent income would be substantially less than 50% of operational income based on the restaurant's performance in other cities. I guess in a liquidity event you'd sell the 50% interest and the real estate would go along with it? Or perhaps the restauranteur is essentially buying half of the real estate?
A comment I was about to post got wiped out.
The restaurants 0% of the retail property. It owns the inventory (and you own theoretically 50% of the inventory).
The cap rate method is the best method for this. In simplest terms, you are valuing cash flow (and that's it). Provide a proper capitalization rate and you have your value. Since there are lower risks to default (since no lease or debt), the cashflow would be valued at a premium to similar investments in the area.
I have no clue what a local burger joint should be expected to return unless I knew the area. The difference between this restaurant and a local burger joint is that the burger joing probably has a fixed cost of business above just inventory and salaries.
The JV may not necessarily be better than a lease because of profit sharing clauses that would most likely be attached to said lease. Hopefully the hotel requires a minimum level of performance from the restaurant or they have a potentially horrible deal compared to a lease.
If you have the information I think it would be valuable to look at number of customers per day/quarter/year and revenue/customer, ebitda/customer on top of your traditional valuation methods.
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