IE Hotel Valuation Techniques October 2011

UnderstandingHotelValuationTechniques
GiulianoGasparini
October2011
Objectives
Whydowedovaluations?
Wh h t l
Whyhotelaredifferentfromanyotherrealestate?
diff
tf
th
l t t ?
Whatisvalue?
Understanding hotel valuation techniques
Understandinghotelvaluationtechniques
Conclusion:whatisimportanttohaveinordertoproducea
goodhotelvaluation?
Conclusion
Whydowedovaluations?
Because:
companiesinthestockexchangemarketneedtoupdatethe
i i th t k
h
k t
dt
d t th
valueoftheirassetseveryyear;
hotelownersmightbegoingtoabankto
g
g g
askforaloanoffering
g
thehotelascollateral;
hotelinvestorsmightbeinterestedinpurchasingaspecific
h t l
hotel;
hotelownersmightbewillingtoselltheirhotel;
Acompanywouldliketomergewithanothercompany
A company would like to merge with another company and
and
needtounderstandhowmuchcapitaltheyarebringingthrough
theirassets;
Manyotherreasons
Whyhotelaredifferentfromanyotherreal
estate?
Wehavealwaysbeentoldthat
We
have always been told that
thepriceofanhotelisequalto
thepriceoffivelittlegreen
houses
.ITISNOTTRUE!
estate?
OFFICE=valuedonm
OFFICE
= valued on m2 basis
RENTEDONAm2 BASIS
GENERATESCASHFLOWONAM2 BASIS
RESIDENTIAL=valuedonm2 basis
RENTEDONAm2 BASIS
GENERATESCASHFLOWONAM2 BASIS
estate?
Hotelsarenotrentedonam2 basis
astheydonotgeneratecashflowonam2 basis
Whatisthebasisofhotelincomegeneration?
Yotel,LondonGatwick(UK)
BanfiCastle,Tuscany(Italy)
WHotel,Barcelona(Spain)
estate?
Hotelscashflowisgeneratedby:
Rooms
Food & Beverage
Gym / Spa / Health Centre
Minor Operating Department
Whatisavalue?
Open Market Value
Likely Future Value
Fair Value
Investment Value
Market Value
Residual Land Value
Calculation of Worth
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
Fun
10,000Rule
Takethepriceofatinofcoke
fromthehotelminibarand
multiply it for 10 000
multiplyitfor10,000
Example
Cokeprice=4Euro
k
Hotelvalue=40,000Europer
room
Example
p
Cokeprice=4Euro
Hotelvalue=40,000Europerroom
Limitations
Priceofcokeinminibardonotincreaseinthesamewayas
Pi
f k i
i ib d
i
i h
hotelcashflows(imaginea3staranda5starhotel)
Thismethodologydoesnottakeintoconsiderationany
This methodology does not take into consideration any
performanceresultsforthehotel.Ifthehotelismakingor
loosingmoney,roompriceisthesame.
DONOTTAKEITTOOSERIOUSLY!!
Basic
EBITDAmultiplier
Yield
Basic
EBITDAmultiplier
p
Yield
TakehotelsEBITDAandmultiplyitbyamultiplierinaccordance
tohotelsmarket,position,location,pastperformances,etc
Example
EBITDA=2,000,000US$
Multiplier=12
HotelValue=24,000,000US$
Basic
EBITDAmultiplier
p
Yield
TakehotelsEBITDAanddivideitbyyourexpectedyield
EExample
l
EBITDA=1,000,000Euro
Expectedlevelofyield
Expected level of yield=7%
7%
HotelValue=
1,000,000
7%
=14,285,000
Expert
ReplacementCost
Expert
ReplacementCost aidealaveragepurchaser,havinganaverage
levelofinformation,willverylikelybuyapropertyatamaximum
price that is equivalent to the cost of building a similar property
pricethatisequivalenttothecostofbuildingasimilarproperty
thatfeaturesthesamelevelofutility
Expert
ReplacementCost aidealaveragepurchaser,havinganaverage
levelofinformation,willverylikelybuyapropertyatamaximum
price equivalent to the cost of building a similar property that
priceequivalenttothecostofbuildingasimilarpropertythat
featuresthesamelevelofutility
Example
Weneedmanyinformationsuchas:
Constructioncostperm2
FF&E
Yearofconstruction
Y
f
t ti

ReplacementCost
Past
Constructioncosts
Laborcosts
FF&E
Today
Constructioncosts
Laborcosts
FF&E
ReplacementCost
Past
Constructioncosts
Laborcosts
FF&E
Today
Constructioncosts
Laborcosts
FF&E
Technologyhasadvancedandnewbuildingtechniquesmakes
buildingtodaycheaperthanyesterday.
ReplacementCost
Past
Today
Constructioncosts
Laborcosts
FF&E
Constructioncosts
Laborcosts
FF&E
Laborcostshaschangeddrasticallyinthelast1020years.
Thisisevenmoredrasticindevelopingcountries.
p g
ReplacementCost
Past
Today
Constructioncosts
Laborcosts
FF&E
Constructioncosts
Laborcosts
FF&E
Priceoffurnitureandfixinghasreduced
extensivelyinthelastdecade.
y
ReplacementCost
Depreciation
Past
Constructioncosts
Laborcosts
FF&E
Today
Constructioncosts
Laborcosts
FF&E
Aftertakingallthisintoaccountwestillhavetodiscountthe
resultbackintimetoreflectthatthehotelwearevaluing
isnotbrandnew(depreciation)
ReplacementCost
Depreciation
Ifvaluationmethodologyisthis,howwouldyouvaluethese?
DunboyCastleResort,Cork(Ireland)
CiraganPalaceKempinski,Istanbul(Turkey)
LakePalaceHotel,Udaipur(India)
ReplacementCost limitations
Derivingahotelsvaluebycalculatingthecostofreplacingitand
deductinganallowanceforcumulativedepreciation
g
p
USES
Easytobeunderstood
Usefulfornewproperties
LIMITATIONS
Notalwayspossible,especiallyforhistoricalhotels
Doesnotreflectinvestorrationale
Depreciationcanbephysical,functionaland/orexternal
D
i ti
b h i l f ti
l d/
t
l
Expert
ReplacementCost
Replacement Cost
SalesComparables onaperroombasis:apotentialstandard
buyer,featuringastandardlevelofinformation,willpurchasea
propertyatamaximumpriceequivalenttothesalepriceofa
similarpropertywiththesamelevelofutility
Net Present Value of future cash flows
Expert
SalesComparables
Sales Comparables onaperroombasis:apotentialstandard
on a per room basis: a potential standard
buyer,featuringastandardlevelofinformation,willpurchasea
propertyatamaximumpriceequivalenttothesalepriceofa
similarpropertywiththesamelevelofutility.
i il
t ith th
l l f tilit
Example
p
Wearewillingto
purchasetheHotel
Rit i P i
RitzinParis
Category:5starluxury
161rooms
161 rooms
SaleComparables
Weinvestigatethemarkettofindwhichhotelhasbeensoldin
2010andatwhichprice:
HotelLutetia,5star
231rooms
Priceperroom=627,000
145,000,000Euro
RenaissanceArcdeTriomphe,5star
p ,
118rooms
Priceperroom=966,000
114,000,000Euro
HoteldeCrillon,5starluxury
147rooms
147 rooms
Priceperroom=1,700,000
250,000,000Euro
SaleComparables
Consideringtheabove,howmuchwouldyoubewillingtopay?
HotelLutetia
627,000
RenaissanceArcdeTriomphe
966,000
HoteldeCrillon
1,700,000
SaleComparables
Consideringtheabove,howmuchwouldyoubewillingtopay?
HoteldeCrillon
1,700,000
Similarlocation
Similarcategoryandservice
Similarnumberofrooms
Roompricing(12th September):
Crillon:680Euro
Crillon: 680 Euro
Ritz:850Euro(25%higher)
Weshouldexpecttopaymore/lessthanHoteldeCrillon?
,
,
p
,
,
+25%=2,125,000perroom161rooms=342,125,000
Pricerange:1,700,000 2,125,000
SalesComparable limitations
USES
Providesarangeofvalues
Provides a range of values
Comparehotelscurrentlyforsaletoexistingpropertiesthathave
beenalreadysoldonthemarket(themarkethasbeentestedfor
theseslevelsofprices)
Givesanindicationofrealbuyersmotivation(marketdrivenprice)
LIMITATIONS
Nohotelistrulycomparable
No hotel is truly comparable
Valueisdependentonbuyermotivation(whatifspecial
motivation?)
Economicenvironmentmaydiffer(location,time)
Reliablehotelsalesdatanotalwaysavailable
Expert
ReplacementCost
Replacement Cost
NetPresentValueoffuturecashflows:NetPresentValueof
futurecashflowsgeneratedbytheproperty
Expert
ReplacementCost
Replacement Cost
Conversionoftheanticipatedbenefitsofpropertyownership
(annualincome)intoanestimateofpresentvalue
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
with
ith ttrading
di potential.
t ti l
IVSC GN 12, para 3.5
g
y
p p y
Thiscanbedonethroughthebasicmethodsexplained:
SingleCapRate
Multipliers
IncomeCapitalization
C i li i
DCFApproach
C
h
futurecashflowsgeneratedbytheproperty.
g
y
p p y
Thiscanbedonethroughtheeasymethodsexplained:
SingleCapRate:derivingahotelsvaluebyapplyinga
capitalizationratetothehotelsnetincome
Multipliers
IncomeCapitalization DCFApproach
SingleCapRate example
2010
N of rooms
N.
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
HotelValue:16,400,000
Valueperroom:164,000
9%
SingleCapRate limitations
USES
Leadtoquickresults
Lead to quick results
Usedcommonlyandwidelyunderstood
LIMITATIONS
Itisbasedonone(last)incomeyearonly
Donotreflectpropensityofincometoriseorfall
Notalwaysreliable(smallchangesinthecaprateproducelarge
effect on value)
effectonvalue)
g
y
p p y
Thiscanbedonethroughtheeasymethodsexplained:
SingleCapRate
Multipliers:derivingahotelsvaluebyapplyingacapitalization
rate to an estimate of the hotelssstabilizednetincome
ratetoanestimateofthehotel
stabilized net income
Multiplier example
2010
2015
N of rooms
N.
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
9%
10%
Capitalization Rate
Value
Value per Room
16,400,000
19,100,000
164,000
191,000
Multiplier limitations
USES
Morecomprehensiveapproach(takeintoaccountmanagement
More comprehensive approach (take into account management
factors)
Reflectsthepossibilityofincometoriseorfall
Usedmoreandmoreoftenandunderstoodmoreandmore
widely
LIMITATIONS
Thevaluerneedsmoredetailsregardinghoteloperationand
The valuer needs more details regarding hotel operation and
management
Thevaluerneedsabetterunderstatingofthemarketandthe
tradingpotentialoftheassetinthatmarket
g
y
p p y
SingleCapRate
Multipliers
IncomeCapitalization DCFApproach:derivingahotelsvalue
by applying an appropriate discount rate to a projection of the
byapplyinganappropriatediscountratetoaprojectionofthe
hotelsestimatedfuturecashflow
Weassumeaholdingperiodof10years
Ineachyearweestimatethetradingpotentialoftheproperty
Ineachyearweestimatetheoperationalresultoftheproperty
Weassumeasaleattheendofyear10(TerminalAssetValue)
TTerminalAsset
i lA t
Value
EBITDAs
time
TerminalAsset
Value
EBITDAs
10
Years
TerminalAsset
Value
EBITDAs
10
Years
TerminalAsset
Value
EBITDAs
10
Years
TerminalAsset
Value
EBITDAs
DiscountingFactor
10
Years
IncomeCapitalization DiscountFactor
DISCOUNTFACTOR
Reflectthetimevalueofmoney
Reflecttheriskoftheinvestment
R fl
h ik f h i
WACC = Weighted Average Cost of Capital

WACC=WeightedAverageCostofCapital
IncomeCapitalization Example
Year
1
2011
100
67%
125
N.ofrooms
HotelOccupancy
AverageRoomRate
TTotalRevenue
lR
HouseProfit/GOP
NetOperatingincome/EBITDA
2
2012
100
69%
128
3
2013
100
71%
131
4
2014
100
72%
137
5
2015
100
72%
142
6
2016
100
72%
148
7
2017
100
72%
154
8
2018
100
72%
160
9
2019
100
72%
166
10
2020
100
72%
173
4.585.313
4 585 313 4.816.631
4 816 631 5.104.931
5 104 931 5.383.905
5 383 905 5.599.261
5 599 261 5.823.231
5 823 231 6.056.161
6 056 161 6.298.407
6 298 407 6.550.343
6 550 343 6.812.357
6 812 357
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
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
TerminalAssetValue
9,0%
23.464.786
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
Value
16.561.804
16 561 804
say
16.600.000
WACCCalculation
LTV
Equity
60%
40%
Interest
EquityYield
6%
22%
WACC
12,55%
IncomeCapitalization limitations
USES
Providesabetteroverviewofthepropertystradingpotential
Reflectsavaluebasedonfutureandnotonpresentorpast
Takeintoaccountoperationsandmanagementcharacteristics
(possibilityto)Takeintoaccountmarketwidechanges(Olympic,
(
ibili
)T k i
k
id h
(Ol
i
Games,NewConferenceCentres,etc)
LIMITATIONS
Thevaluerneedstounderstandindepththemarketandthetrading
potential of the asset in that market
potentialoftheassetinthatmarket
Thevaluerneedstounderstandindepththehotelspecificoperation
andmanagement
Thevaluerneedstobeexperiencedofthehospitalitysectorinorder
toestimateallcashflowsthatarethebasisofthevaluation
Valuationdatawishlist
Whatisimportanttohave:
Historicaldataforthelocalmarket
Historicaldataoftheproperty(Profit&LossStatements)
Whatisimportanttoknow:
What
is important to know:
understandingofthetradingpotentialofthemarket(demand
versussupply,newsupply)
Understatingoftradingpotentialoftheproperty(market
penetrationaprojectionsofmarketpenetration)
Understandingoftheoperationalsideinordertoproduce
Understanding of the operational side in order to produce
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.
2.
3
3.
4.
Cashflowsformexistingassets;
Expectedgrowthinthesecashflows;
Discount rate;
Discountrate;
Thelengthoftime beforethebusinessbecomesmature.
TheLittleBookofValuation AswathDamodaran
ProfessorofFinanceattheSternSchoolofBusinessatNewYorkUniversity
Havewereachedourobjectives?
Whydoweneedhotelvaluations?
Wh h t l l ti
Whyhotelvaluationsaredifferent?
diff
t?
WhatisValue
Valuation techniques:
Valuationtechniques:
ReplacementCost
SalesComparables
p
onaperroombasis
p
EBITDAmultiplier
Yield
10,000Rule
U
Usesandlimitationsforeachvaluationtechnique
d li i i
f
h l i
h i
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

IE Hotel Valuation Techniques October 2011

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UnderstandingHotelValuationTechniques

Gym / Spa / Health Centre

Minor Operating Department

Likely Future Value

Mortgage Landing Value

Market Value is the estimated amount for which a

Property with trading potential, such as hotels, fuel

IVSC GN 12, para 3.5

Average Room Rate

House Profit / GOP

Net Operating income / EBITDA

Average Room Rate

House Profit / GOP

Net Operating income / EBITDA

WACC = Weighted Average Cost of Capital

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