Understanding Hotel Valuation: Insights and Examples

Subjective Real Estate Valuation G. JASON GODDARD

Chapter 7 Outline Chapter Highlights Hotels the Fifth Food Group Hotel Service Quality Hotels and their Guests Hotel valuation subjectivity Upstart Challenges to Hotels

Chapter Definitions Average Daily Rental (ADR) Rate: average rental rates per day at a hotel. GOPPAR: Gross operating profit per available room for a hotel. Replacement reserve: An amount set aside from net operating income to pay for the eventual wearing out of short-lived assets. RevPAR: Revenue per available room in a hotel. SERVQUAL: Service quality measures for a hotel.

Hotels: The Fifth Food Group How much for a coke? Rule of 100,000 Is there a flag? What kind of hotel is this? RevPar ADR X Occupancy Rate STR Reports for benchmarking

RevPar Demystified Hotel valuation is difficult as only slight changes in basic revenue assumptions can lead to large differences in value. Revenue Per Available Room (RevPar) is equal to: Occupancy rate X Average Daily Rental Rate (ADR) Occupancy rate: Number of room nights sold Potential room rentals Potential room rentals: Number of rooms X days in year hotel is open

RevPAR Example Number of Rooms: 1,000 Average Daily Rental Rate: $90 Average Occupancy Rate: 75% Total Room Revenue: 1000 rooms x $90/room x 75% occupancy x 365 days in the year = $24,638M RevPar: $90 ADR x 75% occupancy = $67.50

Hotels via the Income Approach Conversion of ADR to RevPAR

Hotels via the Income Approach Total Revenue for 50 Room Hotel

Hotels via the Income Approach Variable Expenses for 50 Room Hotel

Hotels via the Income Approach Safe Rate 3.00% Number of Rooms 50 Replacement Reserve Estimator Item Cost 35,000 $ 257,500 $ $ $ 50,000 $ 25,000 $ 75,000 $ Eco Life Sinking Fund Factor 10 15 5 5 5 5 10 Reserves 3,053 $ 13,845 $ 1,413 $ $ 9,418 $ 4,709 $ 6,542 $ Fa ade maintenance Shingle roofing replacement Common area carpeting Common furnishings Room carpeting Room vinyl flooring AC/Heat Replacements $0.0872 $0.0538 $0.1884 $0.1884 $0.1884 $0.1884 $0.0872 7,500 5,000 942 Total Replacement Reserves 455,000 $ 39,921 $ 798.43 $ Per Unit Replacement Reserve Estimator

Hotels via the Income Approach Fixed Expenses Insurance RE & Personal Taxes Total Fixed Expenses Net Operating Income Cap Rate Estimated Value $ $ $ $ 44,910 24,950 69,860 349,300 4.50% 2.50% 85.00% 35.00% 8.50% 4,110,000 $ Calculation of NOI and Hotel Value

Hotels via the Income Approach Sensitivity Analysis in Hotel Valuation

Hotels Service Quality Common Hotel Segmentations

Hotels Service Quality Tangibility Responsiveness Security Reliability Competence Credibility Courtesy Understanding Access Communication Lodging Quality Index (LQI) Service Quality Dimensions

Hotel Matching Game!

Hotel Valuation Subjectivity Example of Hotel Seasonality and RevPAR Impact January $ February $ March $ April May June July 1,395 150.00 90.0% 1,550 August 1,395 150.00 90.0% 1,550 Sept 1,050 140.00 70.0% 1,500 Oct Nov Dec Totals Rooms Sold ADR Occupancy % Rooms Available RevPAR 310 350 465 $ 825 $ 930 $ 1,275 140.00 85.0% 1,500 $ $ $ 100.00 45.0% 1,550 698 $ 600 $ 388 $ 9,680 112.92 53.0% 18,250 90.00 20.0% 1,550 90.00 25.0% 1,400 95.00 30.0% 1,550 100.00 55.0% 1,500 110.00 60.0% 1,550 $ 95.00 40.0% 1,500 95.00 25.0% 1,550 $ 18.00 $ 22.50 $ 28.50 $ 55.00 $ 66.00 $ 119.00 $ 135.00 $ 135.00 $ 98.00 $ 45.00 $ 38.00 $ 23.75 $ 59.89 Hotel Room Demand Seasonality and RevPAR Impact

Hotel Valuation Subjectivity Normal 365 365,000 70% 100 70 % Decline 365 365,000 67% 95 63 % Change Number of Rooms Number of Days in Period Number of Rooms Available/Year Occupancy Average Daily Rental Rate RevPar 1,000 1,000 -5% -5% -10% Revenues Rooms Food and Beverage Other Departments Total Revenue % 67% 20% 13% 100% 2,555,000 750,000 500,000 3,805,000 2,305,888 727,500 485,000 3,518,388 -10% -3% -3% -8% Departmental Expenses Rooms Food and Beverage Other Departments Total Departmental Expenses Total Undistributed Expenses Gross Operating Profit GOPPAR 638,750 487,500 250,000 1,376,250 900,000 1,528,750 25% 65% 50% 36% 24% 40% 622,590 472,875 242,500 1,337,965 900,000 1,280,423 -3% -3% -3% -3% 0% -16% -16% 4.19 3.51 GOPPAR Model

Upstart Challenges to Hotels Rental Property Technology Applications Rental Homes online Air BnB and other similar online vacation rental sites Tiny Homes Not real estate unless permanently affixed to ground Once affixed comparable rentals may be difficult given small size relative to rents charged

Chapter 7 Questions Questions for Discussion Itemize factors that differentiate hotel valuation from other commercial properties. Describe the different types of hotels relative to the different types of consumers that serve as customers. Explain the difference between RevPAR and GOPPAR and highlight the elements of uncertainty in estimating each for a given year. Describe different situations where the seasonality of hotel demand is a large and small concern for different hotel properties. Elaborate on the replacement reserve, how it is calculated and how the anticipated expenses differ from traditional repairs and maintenance expenses.

Chapter 7 Questions Questions for Discussion Discuss the lodging quality index framework and how each component can contribute to the success of a hotel property. Discuss the primary areas of value subjectivity for hotels that were outlined in the chapter. How might these uncertainties best be addressed during the hotel valuation process? Research hotel brands and franchise agreements and outline the top brands in the current environment. Describe how technology has contributed to the increased success of rental homes in eroding hotel market share. Outline the trajectory of the tiny home movement and offer thoughts on the future success of this inchoate challenge to the dominance of hotels.

Chapter 7 Market Vignette Questions for Discussion Based on the information provided in the case, estimate the value of the hotel under the normal times scenario as well as for the summer months scenario. What is the value of the hotel using the rule of 100,000? What additional questions would you have for the hotel owner and employee? What should the appraiser do with the information about the occupancy drop and bank loan payment deferrals? How might your valuation change if three months of revenue is taken out of the analysis? Since the pandemic is an outlier event, what other mechanism could the appraiser utilize to account for the drop in occupancy without adversely impacting the value of the property?