How Hotel Valuations Drive Planning and Profitability
By Amy King
For hoteliers looking to drive profitability and make informed decisions about their property, understanding the value of their hotel is essential. Hotel valuation not only provides a clear picture of a property’s financial health but also uncovers opportunities for growth and improvement.
Hoteliers can leverage valuation insight to optimize their operations, enhance asset performance, and position their property more competitively in the market to maximize its worth.
The Value of Valuation
Simply put, hotel valuation is the value of the asset. The key component in a hotel valuation is to determine what the hotel is worth so hoteliers can make critical financial decisions regarding the property’s future.
“Without a professional valuation, hoteliers could be leaving money on the table if they are missing unlocked opportunity in their area,” said Tulsee Nathu, first vice president of investments at Marcus and Millichap, a Silver Industry Partner. “A complimentary valuation shows how you can extract that from the property including repositioning opportunities.”
There are many reasons why hotel owners should have a valuation. Whether buying, selling, or holding, a valuation helps owners make important decisions. But the most common reason to have a valuation is when hoteliers are looking to sell, refinance, or move into higher brands. The valuation allows them to free up capital and multiply their assets.
“If you’re buying, you need to know the value so you don’t overpay,” said Carol Gallegos, president of Gallegos and Associates. “Owners can determine what their exit strategy is. They aren’t going to own it forever, so they need to have valuations every year or two.”
A valuation is also key to understanding the hotel’s value to the investment plan, which helps owners know if they must increase the value – and to what amount – while working through the business plan. With strain from lenders, hotel valuations provide options if a business plan cannot be done, and owners can get a better understanding of their options with lenders.
“Requesting a broker opinion of value or valuation is increasing in activity and a regular part of business, especially as more pressure builds with lenders, bank regulators, brand requirements for property improvement plans, and the overall performance of loans,” said Sameer Nair, senior vice president of equity asset management at Peachtree Group, an AAHOA Allied Member.
“Valuations provide a snapshot in time to help owners decide their action plan with an asset, how much to work with the lender, and to find other avenues to improve values.”
Three Approaches to Valuation
Valuation methods can vary depending on circumstance, but ultimately, there are three key valuation methods: Income approach, sales comparison approach, and cost replacement.
Evaluators may choose to use one or a combination, and they can be adjusted. Evaluators turn to some methods more than others – for example, an evaluator may choose to use all three methods, then lean more on the tactic that suits the current market.
The income method, or capitalization method, is tried and tested because it comes down to cash flow. It evaluates the income as it relates to the business at its current worth, then looks at future income and expenses to determine a return on investment, or ROI. Hotels are a business with real estate attached, so in a buyer’s mind, the business aspect of a hotel often determines its value.
“The advantage of the capitalization approach is that you know what your income and expenses are and if you can pay the bills,” said Gallegos. “You have a good financial analysis in a broker opinion of value, which is the document I use. It mirrors an appraisal but not as in depth. Appraisers call me to get this information.”
In the residential industry, evaluators most often turn to the sales comparison method, or market method, which looks at what has been sold in the area and provides seller information. Hoteliers can use this method to see if they are priced over, below, or right at what the market can bear. But the approach comes with a major drawback if the market is not selling.
“Over the past several years transactions were limited,” said Nair. “Transactions are down 26 percent on volume compared to year end 2019. That can make using the sales approach for valuation challenging, especially if there are distressed or certain nuances to sales.”
To determine what it would cost to build the property back to its current condition, evaluators use the replacement cost method. Instead of focusing on income or market sales to determine value, they look at a hotel’s physical assets. However, the replacement cost method does not factor in a hotel’s ability – or lack thereof – to generate revenue.
The Factors that Influence Valuation
A lot can influence a hotel’s valuation, including cash flows, margins, operational efficiencies, cap rates, net operating income (NOI), price per key, technology, brand requirements, market penetration, and hotel condition. Of these, operational efficiency, technology, branding, and market conditions pull the greatest weight in valuation.
“Operational efficiencies are essential to valuation improvements,” said Nair. “Operations improve cash flow and ROI. Revenue improvement helps facilitate operational efficiencies. Technologies and vendors play a vital part in helping with lowering fees, taxes, insurance, and utilities, amongst other expenses.”
Technology’s impact on hotel valuation is tied to operational efficiency. Many operational costs are fixed, monthly costs, like property taxes, insurance, and debt service. But when looking to control other costs, technology can be a game changer. With technology, hotel owners can reduce staffing costs while simultaneously improving the guest experience. Take an artificial intelligence-powered concierge – it can help hotel owners save on payroll at the front desk by allowing guests to check in and unlock doors through an app.
“It is important to keep up now because guests expect certain technology,” said Nathu. “Lifestyle brands have been better about being fully integrated. It is a value-add to have real-time needs. Higher price point hotels are expected to have better technology compared to economical hotels, and it’s reflected in their trade value.”
And when it comes to branding, being part of a well-known brand or franchise plays a significant role in valuation. Hoteliers will burden the expenses, requirements, and fees associated with being a franchisee in anticipation that franchises bring business to the asset, especially among loyalty members.
“Buyers will pay more for a brand because of loyalties and rewards programs,” said Gallegos. “Buyers feel confident that a certain brand will only be in a good area and have amenities they expect.”
Lenders also favor franchises because of brand recognition and proven success.
“There are higher regards for larger chains, and we see the pricing for it,” said Nathu. “My family has a legacy 100+ independent that has propelled us into the brands. That independent we now cannot sell for the same value had it been flagged. Simply put, history shows a proven track record for globally recognized brands; lenders trust and are more comfortable with a major franchise backing it.”
Market conditions can make or break a hotel valuation, too. They can go up, down, or remain stable, so it is important to look at where the market has the potential to go. Right now, the rise of lifestyle and experiential hotels; policies enacted by the new administration; and community housing projects are greatly impacting market conditions.
- It’s about the experience. While regular hotels make up most of the market – and they’re here to stay – lifestyle and experiential hotels have the highest trade value. “Lifestyle and experiential hotels are all the rage right now,” Nathu said. “Consumers are willing to pay more for the experience.”
- Politics push the market. For better or for worse, politics influence market relevancy. “Politics and tariffs are alienating many people and countries,” said Gallegos. While that negatively impacts international travel, people are again traveling domestically, which will help hotels – if hotel owners stay on top of customer trends and adjust their strategies. “It’s important for owners to find other means of filling their hotels,” Nair said. “It is getting tougher to maintain expense margins, and NOI could decrease if they are not able to pivot.”
- Transforming hotels into housing. Public entities are increasingly purchasing hotels and converting them to housing. Municipalities often overpay for hotels, which skews the value of hotels in the area. “The cap rate for multifamily is more attractive than hotel cap rates,” said Nathu. “Developers will buy a hotel for the lower hotel price point, then refurbish it to unlock the multifamily value.”
Proactivity Pays Off
A valuation – along with a strategic blend of actions – can unlock the full value of a hotel and maximize its worth. To achieve this, hoteliers can:
- Work with an asset manager.
- Leverage technology to improve revenue and focus on dynamic pricing.
- Utilize a mix of business adjustments.
- Conduct audits.
- Hire consultants and vendors to focus on revenue management, taxes, utilities, and staffing.
- Follow property improvement plans.
But one major method to unlock value is to get back to the basics – have the right people in the right positions, provide clean and safe rooms, maintain curb appeal, offer good service, and dive into existing services.
Hoteliers have options when it comes to the available resources that help unlock value.
“As brokers we are a big part of it,” said Gallegos. “We talk to other buyers, sellers, lenders, and appraisers every day, so we are informed. I encourage hoteliers to do the same. Talk to your brokers, lenders, and industry experts. Make friends with the cluster of hotels in your area.”
Staying connected with AAHOA and networking within the industry is another great way to discover how others find value in their hotels.
“There is plenty of information out there if you take the time to learn what’s going on,” said Nathu. “There are ways to save money, but you won’t know unless you talk to others. You need to be proactive for your investment.”
Image: Miha Creative/stock.adobe.com
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