Industry Description
The hotel and lodging industry (SIC 7011 and NAICS 721110) includes a variety of properties that offer short-term lodging. Industry Trends Hotels continue to search for ways to remain viable in the face of a sluggish economy and increasing competition. Recent trends include: 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: 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] Each hotel may also consider more customized or hotel-specific performance indicators such as the following:[12] 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 $11.11 billion 22.5 $12.3 billion $508 million $5.9 billion 48.1 $2.2 billion $135 million $10.5 billion 18.6 $5.6 billion $630 million $11.2 billion 21.4 $5.3 billion $1,008 million $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: 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: 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
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]
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]
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]
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]
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]
Marriott International (NYSE:MAR)
Hyatt Hotels Corporation (NYSE:H)
Starwood Hotels & Resorts (NYSE:HOT)
Wynn Resorts, Limited (NASDAQ:WyNN)
InterContinental Hotels Group PLC (NASDAQ: IHG)