UnderstandingHotelValuationTechniques

GiulianoGasparini
October2011
Objectives
Whydowedovaluations?
Wh h t l diff t f th l t t ? Whyhotelaredifferentfromanyotherrealestate?
Whatisvalue?
Understanding hotel valuation techniques Understandinghotelvaluationtechniques
Conclusion:whatisimportanttohaveinordertoproducea
goodhotelvaluation?
Conclusion
Whydowedovaluations?
Because:
i i th t k h k t d t d t th companiesinthestockexchangemarketneedtoupdatethe
valueoftheirassetseveryyear;
hotelownersmightbegoingtoabankto askforaloanoffering g g g g
thehotelascollateral;
hotelinvestorsmightbeinterestedinpurchasingaspecific
h t l hotel;
hotelownersmightbewillingtoselltheirhotel;
A company would like to merge with another company and Acompanywouldliketomergewithanothercompany and
needtounderstandhowmuchcapitaltheyarebringingthrough
theirassets;
Manyotherreasons
Whyhotelaredifferentfromanyotherreal
estate? estate?
We have always been told that Wehavealwaysbeentoldthat
thepriceofanhotelisequalto
thepriceoffivelittlegreen
houses
.ITISNOTTRUE!
Whyhotelaredifferentfromanyotherreal
estate? estate?
OFFICE = valued on m
2
basis OFFICE=valuedonm
2
basis
RENTEDONAm
2
BASIS
GENERATESCASHFLOWONAM
2
BASIS
RESIDENTIAL=valuedonm
2
basis
2
RENTEDONAm
2
BASIS
GENERATESCASHFLOWONAM
2
BASIS
Whyhotelaredifferentfromanyotherreal
estate? estate?
Hotelsarenotrentedonam
2
basis
astheydonotgeneratecashflowonam
2
basis
Whatisthebasisofhotelincomegeneration?
Yotel,LondonGatwick(UK)
BanfiCastle,Tuscany(Italy) WHotel,Barcelona(Spain)
Whyhotelaredifferentfromanyotherreal
estate? estate?
Hotelscashflowisgeneratedby:
Rooms
Food & Beverage
Gym / Spa / Health Centre
Minor Operating Department Minor Operating Department
Whatisavalue?
Open Market Value
Fair Value
Likely Future Value
Investment Value
Market Value
Residual Land Value Residual Land Value
Cal c ul at i on of Wor t h

Mortgage Landing Value
Whatisavalue?
Market Value is the estimated amount for which a
property should exchange on the date of valuation
between a willing buyer and a willing seller in an
arms-length transaction after proper marketing
wherein the parties had each acted knowledgeably,
prudently and without compulsion.
IVSC 1

Hotelvaluationtechniques
Fun
10,000Rule
Basic
EBITDAmultiplier
Yield
Expert
ReplacementCost
SalesComparables onaperroombasis
NetPresentValueoffuturecashflows
Hotelvaluationtechniques
Fun
10,000Rule
Takethepriceofatinofcoke
fromthehotelminibarand
multiply it for 10 000 multiplyitfor10,000
Example
k Cokeprice=4Euro
Hotelvalue=40,000Europer
room room
Hotelvaluationtechniques
Example p
Cokeprice=4Euro
Hotelvalue=40,000Europerroom
Limitations
P i f k i i i b d i i h Priceofcokeinminibardonotincreaseinthesamewayas
hotelcashflows(imaginea3staranda5starhotel)
This methodology does not take into consideration any Thismethodologydoesnottakeintoconsiderationany
performanceresultsforthehotel.Ifthehotelismakingor
loosingmoney,roompriceisthesame.
! DONOTTAKEITTOOSERIOUSLY!
Hotelvaluationtechniques
Basic
EBITDAmultiplier
Yield
Hotelvaluationtechniques
Basic
EBITDAmultiplier p
Yield
TakehotelsEBITDAandmultiplyitbyamultiplierinaccordance
tohotelsmarket,position,location,pastperformances,etc
Example
EBITDA=2,000,000US$
Multiplier=12
HotelValue=24,000,000US$
Hotelvaluationtechniques
Basic
EBITDAmultiplier p
Yield
E l
TakehotelsEBITDAanddivideitbyyourexpectedyield
Example
EBITDA=1,000,000Euro
Expected level of yield= 7% Expectedlevelofyield 7%
HotelValue= =14,285,000
1,000,000
7%
Hotelvaluationtechniques
Expert
ReplacementCost
SalesComparables onaperroombasis
NetPresentValueoffuturecashflows
Hotelvaluationtechniques
Expert
ReplacementCost aidealaveragepurchaser,havinganaverage
levelofinformation,willverylikelybuyapropertyatamaximum
price that is equivalent to the cost of building a similar property pricethatisequivalenttothecostofbuildingasimilarproperty
thatfeaturesthesamelevelofutility
SalesComparables onaperroombasis
NetPresentValueoffuturecashflows
Hotelvaluationtechniques
Expert
ReplacementCost aidealaveragepurchaser,havinganaverage
levelofinformation,willverylikelybuyapropertyatamaximum
price equivalent to the cost of building a similar property that priceequivalenttothecostofbuildingasimilarpropertythat
featuresthesamelevelofutility
Example
Weneedmanyinformationsuchas:
Constructioncostperm
2
FF&E
Y f t ti Yearofconstruction

ReplacementCost
Past
Constructioncosts
Today
Constructioncosts
Laborcosts
FF&E

Laborcosts
FF&E

ReplacementCost
Past
Constructioncosts
Today
Constructioncosts
Laborcosts
FF&E

Laborcosts
FF&E

Technologyhasadvancedandnewbuildingtechniquesmakes
buildingtodaycheaperthanyesterday.
ReplacementCost
Past
Constructioncosts
Today
Constructioncosts
Laborcosts
FF&E

Laborcosts
FF&E

Laborcostshaschangeddrasticallyinthelast1020years.
Thisisevenmoredrasticindevelopingcountries. p g
ReplacementCost
Past
Constructioncosts
Today
Constructioncosts
Laborcosts
FF&E

Laborcosts
FF&E

Priceoffurnitureandfixinghasreduced
extensivelyinthelastdecade. y
ReplacementCost
Depreciation Depreciation
Past
Constructioncosts
Today
Constructioncosts
Laborcosts
FF&E

Laborcosts
FF&E

Aftertakingallthisintoaccountwestillhavetodiscountthe
resultbackintimetoreflectthatthehotelwearevaluing
isnotbrandnew(depreciation)
ReplacementCost
Depreciation Depreciation
Ifvaluationmethodologyisthis,howwouldyouvaluethese?
DunboyCastleResort,Cork(Ireland)
CiraganPalaceKempinski,Istanbul(Turkey)
LakePalaceHotel,Udaipur(India)
ReplacementCost limitations
Derivingahotelsvaluebycalculatingthecostofreplacingitand
deductinganallowanceforcumulativedepreciation g p
USES USES
Easytobeunderstood
Usefulfornewproperties
LIMITATIONS
Notalwayspossible,especiallyforhistoricalhotels
Doesnotreflectinvestorrationale
D i ti b h i l f ti l d/ t l Depreciationcanbephysical,functionaland/orexternal
Hotelvaluationtechniques
Expert
Replacement Cost ReplacementCost
SalesComparables onaperroombasis:apotentialstandard
buyer,featuringastandardlevelofinformation,willpurchasea
propertyatamaximumpriceequivalenttothesalepriceofa
similarpropertywiththesamelevelofutility
Net Present Value of future cash flows NetPresentValueoffuturecashflows
Hotelvaluationtechniques
Expert
Sales Comparables on a per room basis: a potential standard SalesComparables onaperroombasis:apotentialstandard
buyer,featuringastandardlevelofinformation,willpurchasea
propertyatamaximumpriceequivalenttothesalepriceofa
i il t ith th l l f tilit similarpropertywiththesamelevelofutility.
Example p
Wearewillingto
purchasetheHotel
Rit i P i RitzinParis
Category:5starluxury
161 rooms 161rooms
SaleComparables
Weinvestigatethemarkettofindwhichhotelhasbeensoldin
2010andatwhichprice:
HotelLutetia,5star
231rooms
Priceperroom=627,000
145,000,000Euro
RenaissanceArcdeTriomphe,5star p ,
118rooms
114,000,000Euro
Priceperroom=966,000
HoteldeCrillon,5starluxury
147 rooms 147rooms
250,000,000Euro
Priceperroom=1,700,000
SaleComparables
Consideringtheabove,howmuchwouldyoubewillingtopay?
HotelLutetia
627,000
RenaissanceArcdeTriomphe
966,000
HoteldeCrillon
1,700,000
SaleComparables
Consideringtheabove,howmuchwouldyoubewillingtopay?
Similarlocation
Similarcategoryandservice
Similarnumberofrooms
Roompricing(12
th
September):
Crillon: 680 Euro
HoteldeCrillon
1,700,000
Crillon:680Euro
Ritz:850Euro(25%higher)
Weshouldexpecttopaymore/lessthanHoteldeCrillon?
+25%=2,125,000perroom161rooms=342,125,000 , , p , ,
Pricerange:1,700,000 2,125,000
SalesComparable limitations
USES
Provides a range of values Providesarangeofvalues
Comparehotelscurrentlyforsaletoexistingpropertiesthathave
beenalreadysoldonthemarket(themarkethasbeentestedfor
theseslevelsofprices)
Givesanindicationofrealbuyersmotivation(marketdrivenprice)
LIMITATIONS
No hotel is truly comparable Nohotelistrulycomparable
Valueisdependentonbuyermotivation(whatifspecial
motivation?)
Economicenvironmentmaydiffer(location,time)
Reliablehotelsalesdatanotalwaysavailable
Hotelvaluationtechniques
Expert
Replacement Cost ReplacementCost
SalesComparables onaperroombasis
NetPresentValueoffuturecashflows:NetPresentValueof
futurecashflowsgeneratedbytheproperty
Hotelvaluationtechniques
Expert
Replacement Cost ReplacementCost
SalesComparables onaperroombasis
NetPresentValueoffuturecashflows:NetPresentValueof
futurecashflowsgeneratedbytheproperty
Conversionoftheanticipatedbenefitsofpropertyownership
(annualincome)intoanestimateofpresentvalue
Hotelvaluationtechniques
Property with trading potential, such as hotels, fuel
stations, restaurants, or the like, the Market Value
of which may include assets other than land and
buildings alone. These properties are commonly
sold in the market as operating assets and with
regard to their trading potential. Also called property
ith t di t ti l with trading potential.
IVSC GN 12, para 3.5

Hotelvaluationtechniques
NetPresentValueoffuturecashflows:NetPresentValueof
futurecashflowsgeneratedbytheproperty g y p p y
Thiscanbedonethroughthebasicmethodsexplained:
SingleCapRate
Multipliers
C i li i C h IncomeCapitalization DCFApproach
Hotelvaluationtechniques
NetPresentValueoffuturecashflows:NetPresentValueof
futurecashflowsgeneratedbytheproperty. g y p p y
Thiscanbedonethroughtheeasymethodsexplained:
SingleCapRate:derivingahotelsvaluebyapplyinga
capitalizationratetothehotelsnetincome
Multipliers Multipliers
IncomeCapitalization DCFApproach
SingleCapRate example
2010
N of rooms 100 N. of rooms 100
Hotel Occupancy 67%
Average Room Rate 130
Total Revenue 4,768,000
House Profit / GOP 2,335,000
Net Operating income / EBITDA 1,478,000
Capitalization Rate 9%
HotelValue:16,400,000
Valueperroom:164,000
SingleCapRate limitations
USES
Lead to quick results Leadtoquickresults
Usedcommonlyandwidelyunderstood
LIMITATIONS
Itisbasedonone(last)incomeyearonly
Donotreflectpropensityofincometoriseorfall
Notalwaysreliable(smallchangesinthecaprateproducelarge
effect on value) effectonvalue)
Hotelvaluationtechniques
NetPresentValueoffuturecashflows:NetPresentValueof
futurecashflowsgeneratedbytheproperty g y p p y
Thiscanbedonethroughtheeasymethodsexplained:
SingleCapRate
Multipliers:derivingahotelsvaluebyapplyingacapitalization
rate to an estimate of the hotels stabilized net income ratetoanestimateofthehotel sstabilizednetincome
IncomeCapitalization DCFApproach
Multiplier example
2010 2015
N of rooms 100 100 N. of rooms 100 100
Hotel Occupancy 67% 75%
Average Room Rate 130 155
Total Revenue 4,768,000 6,360,000
House Profit / GOP 2,335,000 3,180,000
Net Operating income / EBITDA 1,478,000 1,910,000
Capitalization Rate 9% 10%
Value
16,400,000
19,100,000
Value per Room
164,000
191,000
Multiplier limitations
USES
More comprehensive approach (take into account management Morecomprehensiveapproach(takeintoaccountmanagement
factors)
Reflectsthepossibilityofincometoriseorfall
Usedmoreandmoreoftenandunderstoodmoreandmore
widely
LIMITATIONS
The valuer needs more details regarding hotel operation and Thevaluerneedsmoredetailsregardinghoteloperationand
management
Thevaluerneedsabetterunderstatingofthemarketandthe
tradingpotentialoftheassetinthatmarket
Hotelvaluationtechniques
NetPresentValueoffuturecashflows:NetPresentValueof
futurecashflowsgeneratedbytheproperty g y p p y
SingleCapRate
Multipliers
IncomeCapitalization DCFApproach:derivingahotelsvalue
by applying an appropriate discount rate to a projection of the byapplyinganappropriatediscountratetoaprojectionofthe
hotelsestimatedfuturecashflow
IncomeCapitalization DCFApproach
Weassumeaholdingperiodof10years
Ineachyearweestimatethetradingpotentialoftheproperty
T i l A t
Ineachyearweestimatetheoperationalresultoftheproperty
Weassumeasaleattheendofyear10(TerminalAssetValue)
TerminalAsset
Value
$
EBITDAs
+
time
+
IncomeCapitalization DCFApproach
$
TerminalAsset
EBITDAs
Value
Years
0
10

IncomeCapitalization DCFApproach
$
TerminalAsset
EBITDAs
Value
Years
0
10

IncomeCapitalization DCFApproach
$
TerminalAsset
EBITDAs
Value
Years
0
10

IncomeCapitalization DCFApproach
$
TerminalAsset
Value
EBITDAs
10

Years
0
DiscountingFactor
IncomeCapitalization DiscountFactor
DISCOUNTFACTOR
Reflectthetimevalueofmoney
R fl h i k f h i Reflecttheriskoftheinvestment
WACC = Weighted Average Cost of Capital WACC=WeightedAverageCostofCapital
IncomeCapitalization Example
Year 1 2 3 4 5 6 7 8 9 10 Year 1 2 3 4 5 6 7 8 9 10
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
N.ofrooms 100 100 100 100 100 100 100 100 100 100
HotelOccupancy 67% 69% 71% 72% 72% 72% 72% 72% 72% 72%
AverageRoomRate 125 128 131 137 142 148 154 160 166 173
T l R 4 585 313 4 816 631 5 104 931 5 383 905 5 599 261 5 823 231 6 056 161 6 298 407 6 550 343 6 812 357 TotalRevenue 4.585.313 4.816.631 5.104.931 5.383.905 5.599.261 5.823.231 6.056.161 6.298.407 6.550.343 6.812.357
HouseProfit/GOP 2.246.803 2.360.149 2.501.416 2.638.113 2.743.638 2.853.383 2.967.519 3.086.219 3.209.668 3.338.055
NetOperatingincome/EBITDA 1.421.447 1.493.156 1.582.529 1.669.010 1.735.771 1.805.202 1.877.410 1.952.506 2.030.606 2.111.831
CapRate 9,0%
TerminalAssetValue 23.464.786
WACCCalculation
Cashflow 1.421.447 1.493.156 1.582.529 1.669.010 1.735.771 1.805.202 1.877.410 1.952.506 2.030.606 25.576.616
WACC 12,55%
V l 16 561 804
LTV 60%
Equity 40%
Interest 6%
EquityYield 22%
Value 16.561.804
say 16.600.000
WACC 12,55%
IncomeCapitalization limitations
USES
Providesabetteroverviewofthepropertystradingpotential
Reflectsavaluebasedonfutureandnotonpresentorpast
Takeintoaccountoperationsandmanagementcharacteristics
( ibili ) T k i k id h (Ol i (possibilityto)Takeintoaccountmarketwidechanges(Olympic,
Games,NewConferenceCentres,etc)
LIMITATIONS
Thevaluerneedstounderstandindepththemarketandthetrading
potential of the asset in that market potentialoftheassetinthatmarket
Thevaluerneedstounderstandindepththehotelspecificoperation
andmanagement
Thevaluerneedstobeexperiencedofthehospitalitysectorinorder
toestimateallcashflowsthatarethebasisofthevaluation
Valuationdatawishlist
Whatisimportanttohave:
Historicaldataforthelocalmarket
Historicaldataoftheproperty(Profit&LossStatements)
What is important to know: Whatisimportanttoknow:
understandingofthetradingpotentialofthemarket(demand
versussupply,newsupply)
Understatingoftradingpotentialoftheproperty(market
penetrationaprojectionsofmarketpenetration)
Understanding of the operational side in order to produce Understandingoftheoperationalsideinordertoproduce
representativecashflows
Understandingofthefinancialaspects(currentLTV,equityyield,
etc)andoftheriskconnectedtothisinvestment
Comparisonwithstockmarket
Twoapproachestovaluation: pp
IntrinsicValue:isdeterminedbythecashflowsyouexpect that
assettogenerateoveritslifeandhowuncertainyoufeelaboutthese
cashflows.Assetswithhighandstablecashflowsshouldworthmore
thanassetswithlowandvolatilecashflows.
RelativeValue:inrelativevaluationsassetsarevaluedbylooking
athowthemarketpricessimilarassets.Thus,determiningwhat topay
for a house you would look at what similar houses in the forahouse,youwouldlookatwhatsimilarhousesinthe
neighbourhoodsoldfor.
TheLittleBookofValuation AswathDamodaran
ProfessorofFinanceattheSternSchoolofBusinessatNewYorkUniversity
Comparisonwithstockmarket
Inintrinsicvaluationsthereare4piecesofinformationthatdeterminevalue:
1. Cashflowsformexistingassets;
2. Expectedgrowthinthesecashflows;
3 Discount rate; 3. Discountrate;
4. Thelengthoftime beforethebusinessbecomesmature.
TheLittleBookofValuation AswathDamodaran
ProfessorofFinanceattheSternSchoolofBusinessatNewYorkUniversity
Havewereachedourobjectives?
Whydoweneedhotelvaluations?
Wh h t l l ti diff t? Whyhotelvaluationsaredifferent?
WhatisValue
Valuation techniques: Valuationtechniques:
ReplacementCost
SalesComparables onaperroombasis p p
NetPresentValueoffuturecashflows
EBITDAmultiplier
Yield
10,000Rule
U d li i i f h l i h i Usesandlimitationsforeachvaluationtechnique
Whatisimportanttohavetoproducegoodvaluations?
Whatelsewouldbepartofthecourse?
WhicharetheKPIsforhotelvaluation?
Howisitpossibletovaluehotelunderdevelopment?
Howisitpossibletovaluehotelsthatarenotyetbuilt?
Howisitpossibletovaluehotelsthatareloosingmoney?
Howthevalueofhotelschangesthroughoutlifecycle?
EffectofaBrand:howdoesthevaluechangeifthehotelbecomes
branded? branded?
WhatisthedifferentbetweenMarketValueandLiquidation
Value?
WhataretherequirementsofRICSforvaluations?
Whobuyswhat?Whichistheperfectbuyerforwhichhotel?
How can we value a Resort? (Resort business models) HowcanwevalueaResort?(Resortbusinessmodels)

Contacts
GiulianoGasparini
ggasparini@faculty.ie.edu