Valuation Guide: Hotels

Valuation Guide: Hotels

Industry Description

The hotel and lodging industry (SIC 7011 and NAICS 721110)  includes a variety of properties that offer short-term lodging.

[1]  The properties range from five-star hotels to recreational vehicle parks.  Within the United States, the industry includes 51,214 properties of 15 or more rooms. [2]  The industry generated $137.5 billion dollars in sales during 2011, up from $127.7 billion in 2010, the largest percentage increase in the past ten years.[3] The hotel and lodging industry is dominated by a handful of large hotel chains and has become increasingly price competitive due to easy rate comparison offered through travel websites[3]

Industry Trends

Hotels continue to search for ways to remain viable in the face of a sluggish economy and increasing competition.  Recent trends include:

  1. Online bookings continue to rise
    Online bookings have been steadily increasing for several years and are projected to continue increasing.  Currently, around 50% of all travel bookings are completed online.[3] Hotels are searching for ways to encourage consumers to book sales directly through the hotel’s website rather than through third parties where price competition is greater.   However, the prominence of agencies and online bookings remains strong as 95% of hotels use third party websites to book rooms.[4]
  2. Apps for mobile booking are increasingly popular
    Mobile bookings are growing rapidly as smart phones and tablets become widely used.  In 2012, bookings through mobile devices accounted for 9% of online travel bookings and roughly 16% of travel research occurred on mobile devices.[5] This is expected to grow rapidly and nearly double by 2016 for both mobile bookings and travel research.[5] Hotels are investing in websites that are compatible with mobile devices, whereas currently only about 23% of hotels offer smart phone applications.[4]
  3. Social media is catching the industry’s attention
    With the popularity of user-review websites such as TripAdvisor, hotels are starting to monitor their social media presence and to ensure a positive online image.  An industry-wide survey finds 83% of hotels use social media for marketing and 33% of hotels have at least one staff member dedicated to managing social media.[6]
  4. Hotels are still “going Green”
    A hotel that is able to market itself as a “Green Hotel” may attract customers who value this trait.  Obtaining third-party certification as a Green Hotel is becoming an important step in marketing such an image.  Travelocity, a popular website for booking a hotel, offers a directory which allows a consumer to limit a room search to only Green Hotels.[7]  The green trend appears to be widespread with 75% of properties using linen/towel reuse and implementing water saving programs.[7]
  5. Hotels are revamping the lobby
    The hotel lobby is going through a transformation in many hotels, becoming a more sociable space.  Lobbies are introducing new interior designs that are vibrant and modern and are offering free WIFI and charging stations for cell phones.[8]  These new lobby features are meant to create a more home-like feel where guests can get snacks, check email, and watch TV in a social setting instead of alone in their rooms.  Some hotel lobbies go further with trendy cocktail and coffee bars and iPhone docking stations.[9]

Summary of Valuation Approaches

Hotel values can be calculated as net operating income (NOI) divided by the capitalization rate.  The value of the hotel is inversely related to the capitalization rate (the higher the rate, the lower the valuation and the lower the rate, the higher the valuation, holding NOI constant).  Historically, industry-wide capitalization rates have generally ranged between 6% and 9%.  But in 2010 cap rates reached as low as 4.2% before rebounding somewhat to 5.8% in 2011, according to HVS – San Francisco.[10] The following chart shows cap rates based on historical NOI and cap rates based on first year projected NOI since 2000.1

 

While average cap rates for the entire industry are often cited, the appropriate cap rate for a particular hotel can differ significantly from industry averages. Some factors that may cause notable differences in the capitalization rate for a particular hotel include variations in:

  1. Hotel classification (e.g. full service, select and extended-stay, limited service)
  2. Average daily room rates (ADR)
  3. Revenue per available room (RevPAR)
  4. Occupancy percentage
  5. Geographic location
  6. Age of property
  7. Property condition
  8. Amount of financial leverage

The hotel’s level of capital investment (the hotel could be an operator only)

To illustrate the wide differences in cap rates that can occur as a result of differences among these characteristics, an HVS report indicates that in 2011 full service hotels had a cap rate of 5.6% while limited service hotels had a cap rate of 9.4%.  This represents a massive range of appraisal values when applied to hotels of the same NOI.

Besides capitalization rates, market multiples may also provide reliable indications of value.  Market multiples can be derived from the price of stock and other financial metrics for publicly traded hotels and from acquisition prices and related financial metrics of privately held hotels.  Care should be given to select multiples from hotels that share similarities with the hotel being valued. 

Key Lodging Performance Metrics

The following are performance metrics that hotels use to compare their performance against that of other hotels:[11]

  1. Average daily rate (ADR)
  2. Revenue per available room (RevPAR)
  3. Occupancy rate
  4. Net operating income (NOI)

Each hotel may also consider more customized or hotel-specific performance indicators such as the following:[12]

  1. System size: number of hotels operating under a given brand
  2. Development pipeline: number of contracts in place for development of 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

Financial Trends

The hotel industry still has not fully recovered from the recession that officially began in December 2007 and officially ended in 2009.  The broader economy remains sluggish and continues to limit spending on luxuries such as travel and tourism.  The following charts capture key hotel performance measures from 2007 through 2011.  In each case, the 2011 performance measure is below that of 2007.

Availability of Publicly Traded Guideline Hotels

Several hotel and lodging companies are publicly traded, offering the potential for reliance on multiples from companies with readily accessible and audited financial data.  The appropriateness of relying on metrics from any particular public company depends on a variety of factors that concern the similarities between the public company and the subject company being valued.  The following table summarizes several of the major publicly traded hotels and some related financial metrics:

Market Cap

Price/Earnings

2011 Revenue

2011 Operating Income

Marriott International (NYSE:MAR)

$11.11 billion

22.5

$12.3 billion

$508 million

Hyatt Hotels Corporation (NYSE:H)

$5.9 billion

48.1

$2.2 billion

$135 million

Starwood Hotels & Resorts (NYSE:HOT)

$10.5 billion

18.6

$5.6 billion

$630 million

Wynn Resorts, Limited (NASDAQ:WyNN)

$11.2 billion

21.4

$5.3 billion

$1,008 million

InterContinental Hotels Group PLC (NASDAQ: IHG)

$7.3 billion

12.9

$1.8 billion

$594 million

(Table updated November 2012; Source: Google Finance)

Availability of Guideline Transactions

Many privately held hotels are bought and sold, allowing for the possibility of reliance on valuation multiples from privately held companies.  One database records 28 hotel transactions over the five year period, July 1, 2007 through June 30, 2012.[13]  These transactions show the following ranges and averages:

  1. Total deal values ranged from $30,000 to $153.5 million.
  2. Market value of invested capital (MVIC) to Net Sales ranged from 0.2 to 9.93 times with a median of 2.7.
  3. MVIC to gross profit ranged from .27 to 12 times with a median of 4.7.
  4. MVIC to earnings before interest, taxes, depreciation and amortization (EBITDA) ranged from 0.59 to 35.52 with a median of 10.39.

These wide ranging deal values and market multiples may not be informative for valuating any particular hotel.  As with selecting publicly traded guideline companies, care should be given to select private transactions that share similarities with the subject company.  The financial metrics of a potential guideline transaction should be compared with those of the subject.  Additionally, economic conditions for the industry can vary widely over time making timing of a transaction relevant.

Industry Organizations & Publications

Some organizations that publish helpful information regarding the hotel and lodging industry include:

  1. American Hotel and Lodging Association, ahla.com, organization that represents industry interests, offers educational resources and networking opportunities.
  2. International Hotel and Restaurant Association, ir-ra.com, worldwide organization that represents approximately 50 brands of hotels and restaurants, represents industry interests.
  3. Lodging Magazine, lodgingmagazine.com, industry news source.
  4. Hotel and Motel Management, hotelmanagement.net, industry news source.

 

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

 


[1] NAICS.com

[2] American Hotel & Lodging Association, Lodging Industry Profile

[3] Hotelmarketing.com

[4] American Hotel & Lodging Association 2012 Lodging Survey

[5] eMarketer.com

[6] American Hotel & Lodging Association 2012 Lodging Survey

[7] Cornell University School of Hotel Administration Hotel Yearbook 2012

[8] Hotelogix.com

[9] Nola.com

[10] HVS, Hotel Transaction Activity Slows, Cap Rates Rise, Suzanne Mellen

[11] “Developing the Full picture on Hotel Industry Averages”, By Kate Walsh PhD

[12] InterContinental Hotels Group

[13] Based on a November 2012 search of Pratt’s Stats, available through bvmarketdata.com

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