Industry Guides

Appraising Hotels

Summary of Valuation Approaches

Capitalization rates are primarily used when valuing hotels. This approach utilizes net operating income (NOI) divided by the capitalization rate to turn a hotel's income stream into its value. Historic capitalization rates for the hotel industry are approximately 6-9%.1 Recent evidence indicates that these historical capitalization rates are increasing from historical levels.2 While 6-9% is what the hotel industry experienced historically, there is much disparity within this range and often capitalization rates fall outside these stated amounts. Some factors that cause a wide disparity of capitalization rates include:

  1. Average daily room rates (ADR)
  2. Revenue per available room (RevPAR)
  3. Occupancy percentage
  4. Geographic location
  5. Type of hotel classification
  6. Age of property
  7. Condition of property
  8. Financial leverage
In addition to capitalization rates, market multiples are also considered good indications of value. Market multiples are derived from the sale of publicly traded hotel company stock and acquisitions of private hotel companies.

Description of the Industry

The hotel and lodging industry (SIC 7011 and NAICS 721110 3) includes a variety of properties ranging from five-star hotels to recreational vehicle parks. Within the United States, the industry includes 48,062 different properties and 4,476,191 guestrooms.4 The industry also has $139.4 billion dollars in sales and its public companies comprise approximately $15 billion dollars of market capitalization in 2007.5 The hotel and lodging industry is dominated by a handful of large hotel chains and has become increasingly price competitive due to the easy access of online rates and booking.6 Some of the major companies in the hotel industry include:
  1. Marriott International Inc.
  2. Global Hyatt Corporation
  3. Starwood Hotels and Resorts
  4. Hilton Hotels Corporation
  5. Best Western International Hotels
  6. Wynn Resorts, Limited

Industry Trends

The hotel and lodging industry continues to evolve in the face of difficult economic times and steep competition. There are several trends that the hotel industry experienced during 2008. The following trends should continue into 2009.
  1. Hotels are going "Green"
    In today’s marketplace, an environmentally friendly hotel can actually cut costs and increase revenue. Consumer surveys indicate that people are increasingly making “green” choices in the products and services that they purchase. A hotel that is able to market itself as a “Green Hotel” attracts new customers who value this trait. In addition, overhead costs such as electricity, garbage, and water can be reduced by switching to green alternatives.
  2. Guest customization packages
    Many hotels are starting programs that allow guests to choose a variety of options to customize their stay. These options are quite diverse and range from the type of pillow a customer prefers to providing gel eye masks and other spa type products in their room when they arrive. Many of these customization packages charge a small fee for these extra items or services, which will likely increase revenues on top of promoting customer satisfaction. The objective of these programs is to improve customer satisfaction which will hopefully result in a lifelong and dedicated customer.
  3. Spa services
    Hotels are continuing to improve their spa services, or are looking to offer spa services if they are not already equipped with one. Recent surveys have shown a boost in spa revenues across hotels. 7

Key Lodging Performance Metrics

The following are performance metrics that hotels use to benchmark their performance to others in the industry: 8
  1. Average daily rate (ADR)
  2. Revenue per available room (RevPAR)
  3. Occupancy rate
  4. Net Operating Income (NOI)
Each hotel may also employ more customized or hotel-specific performance indicators such as the following: 9
  1. System Size - number of hotels operating under their brand name
  2. Development pipeline - how many contracts for future hotels
  3. Reservation channel revenue - revenue received from call centers, websites, and other advertisement guided revenue
  4. Club Rewards revenue - revenue generated by rewards program members

Benchmark Statistics

The US hotel industry had the following statistics from 2007 through 2008 based on facts from the American Hotel and Lodging Association.

The hotel industry experiences a high degree of leverage due to the large amount of physical assets that can be used by lenders to secure loans. The average debt to equity ratio for this industry ranges from 1.25 to 2.00 times. Loan to value ratios have continued to fall in the current economic environment and are currently 65-75%. 10

Industry Organizations and Publications

Some organizations that publish helpful information include:

  1. American Hotel and Lodging Association
  2. International Hotel and Restaurant Association
  3. Lodging Magazine
  4. Hotel and Motel Management

Availability of Publicly Traded Guideline Firms

There are approximately 38 publicly traded hotel companies in the U.S. hotel industry. As of 1/21/09, the hotel industries public companies have an average P/E ratio of 12.5 and an average price to free cash flow value of 55.4. Sales values for these 38 companies range from $11 million to $14.4 billion dollars. Market capitalization ranges from $80,000 to $16.6 billion.

The top five publicly traded hotel and lodging companies ranked by sales are:

  1. Loews Corp.
  2. Carnival Corp.
  3. Marriott International Inc
  4. MGM Mirage Inc
  5. Starwood Hotels Resorts

Availability of Purchase Transactions

The size of private hotel companies that were bought and sold recently varies greatly, both in terms of their sales, and the purchase price paid for the companies. From 2000 to 2008, the ratio of:

  1. Market value of invested capital (MVIC) to Net Sales ranged from 0.5 to 3 times
  2. MVIC to earnings before interest, taxes and depreciation (EBITDA) ranged from 5 to 10 times.

This range of market multiples is too variant to be useful without further analysis. A proper value for the company that is being assessed should be based on the performance of the subject enterprise, compared to the performance of others in the same industry. Industry economic conditions also vary at different times, which affect hotels as investment opportunities.

Fulcrum Inquiry performs business appraisals for hotels, and other businesses.

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1 Korpacz Investment Survey- PWC
2 What’s happening to hotel cap rates, values and financing?” By: Jim Butler
3 Hotels and Lodging Industry Research Guide
4 American Hotel and Lodging Association
5 Yahoo Finance
6 U.S. Bureau of Labor Statistics
7 Hotel and Lodging Association
8 "Developing the Full picture on Hotel Industry Averages”, By Kate Walsh PhD
9 InterContinental Hotels Group
10 "Hotel Investments; The Magic, Curse of Leverage”, By: Stephen Rushmore