One of the unique aspects of hotels is that in addition to being a real estate asset, they are also operating businesses. The daily performance of each moving part of a hotel directly impacts asset value. Unlike other assets that have long-term tenants, hotel operations is a nuanced science combining revenue management, expense management, and people management – both of team members and hotel guests. Every one of these factors impacts the bottom line and therefore asset value. Let’s use the following hypothetical example to dive in a little deeper:
|Metric||Year 0||Year 1||Variance ($)||Variance (%)|
|EBITDA less Capex Reserve||$1,412,000||$1,575,000||$163,000||11.5%|
Total revenue increased through diligent revenue management and a potential uptick in rates in the area. Although expenses increased with increased revenue as is common in hotels, careful expense management brought a considerable amount of the increased revenue to the bottom line. Whether or not you maintain a capex reserve, all lenders and brokers will value your hotel assuming a 4% of total revenue capex reserve exists as this is the industry standard. Reducing EBITDA by the capex reserves results in the amount to which the cap rate is applied to arrive at your hotel’s value.
If you’re thinking that this year-over-year asset value increase is too good to be true, over a twelve-month period we increased revenue at a limited service hotel by over $300,000 or 7.6%. EBITDA increased over the same period by over $165,000 or 12.5%. When ownership entered into contract to sell the asset, they did so based on this increased performance. Asset value over the twelve-month period increased by $2.5 million or 12.4%. And because cap rates came down during the twelve-month period, asset value increased even more.
The challenge for many hotel owners is to determine if their operations are maximizing asset value. Although a sale may not be on the horizon, ownership may seek to pull equity out of a hotel to expand business operations or purchase other assets. Increased operations performance is the key to achieving the top asset value. If you are questioning operations at your hotel, then you may be leaving even more money on the table than you realize.