HOTEL TRANSACTIONS IN 2017 slackened off a bit as buyers and sellers had difficulty agreeing on price, say industry experts. In tandem with the slowdown of sales of existing assets in top markets, new hotels are coming online this year, shifting investors’ search to lower-tiered hotels in secondary and tertiary markets.
You can read in-depth about the current state of hotels sales in the cover story in Asian Hospitality’s February issue, which features Pracrea Inc., a software developer and owner of AQQire, an online hotel sales site. The company charted about $16 billion in hotel sales volume in 2017, about 10 percent less than in 2016, said Tarun Patel, COO of Pracrea. A big reason for that is the wide – sometimes unreasonable – spread between the asking price and what a buyer is willing to pay.
Marcus & Millichap’s research shows hotel transactions in upper chain scales slowed in 2017 while lower-tiered assets, including economy, “garnered significant investor attention,” said Helen Zaver, first vice president of investments and senior director.
The midscale sector has taken on a new shine with owners repositioning existing hotels to compete in the segment or building newly branded properties. “The middle market still has a lot of opportunity and value add, but many people don’t realize it,” said Dave Shah, CEO of Pineapple Capital Group in Panama City, Florida. The hotel asset market is divided into two top-selling categories: exterior corridor and interior corridor, he said. “They don’t compete with each other in value.”
Getting the right price for your hotel depends on a number of factors, but top of the list is how the business is managed. Rate is not rising in tandem with demand, but experts anticipate the skittishness will wear off in the coming months and asset values will increase as a result.
The primary factor in getting the right price for your hotel is “is the hotel’s ability to produce income for the owner,” said Daniel McCoy, managing director and senior partner at HVS.
If you’re looking to acquire a hotel, it’s important to review historical income levels to help you in assessing potential for profitability, he said.
A hotel’s earning potential is impacted by several factors: age and condition of property, the local competitive market and stability of demand. “Consideration is also given to broader regional and national investment trends such as how active is the transaction market and the financing available,” McCoy said. “A market’s transaction history is a significant component of value trends. And, because no one pays all cash, a large part of the asset’s value comes from the ability to attract financing.”
HVS often encounters cases when a seller has overvalued the hotel. “The sales strategy depends a lot on the owner’s circumstances,” McCoy said. “For example, the owner might have a loan coming due and needs to refinance or sell.” The owner also might be willing to wait for a buyer willing to pay the asking price. McCoy advises sellers to put themselves in the buyer’s shoes and detach emotionally from the hotel. “Sellers focus on the past and what they paid to acquire the hotel and how much they have invested in the property. But the buyer is only concerned about the future and whether the hotel will produce stable income.
“Most of the owners we work with are also potential buyers, so you should look at your own asset as if you were going to purchase it.”
In some cases, sellers come to realize the hotel’s market value is not where it needs to be. “There are some things the owner can do to maximize value,” McCoy said. “The basic one is to make sure financial records are in order so the prospective buyer gets a clear picture of how the hotel’s business performs. The clearer the picture the better.”
The records should include revenue and expenses so the buyer can identify opportunities to grow the business. “We do a lot of appraisals where the revenue don’t match up with the other business metrics,” McCoy said. When that happens, the seller ends up with a discount on what the buyer is willing to pay.
When planning to position a hotel for the sales market, the owner should do what it takes to maximize revenue and limit expenses to make the profit and loss over the past six to 12 months look as positive as possible. “If you renovate or make improvements to the business, wait up to 12 months before putting it on the market so the business gets a bump from improvements,” advised McCoy.
Another critical step in improving business is looking for opportunities to increase room rates. Besides exclusive opportunities such as an event or seasonal demand, managing yield year ’round goes a long way in propping up the P&L and increasing the value of the hotel asset.
“In yield management, the goal is to maximize revenue from a fixed, time-limited resource,” said Lily Mockerman, founder and CEO of Total Customized Revenue Management in Phoenix, Arizona.
This year, U.S. hotels are at record occupancy. So owners and operators need to manage rate to make more money, Mockerman said.
To start, Mockerman advised that managers look at raising the BAR. “It all starts with the BAR – the walk-up rate or the best flexible rate. This is where most operators fall short in pushing rate,” she said. “Keep it competitive, but all rate works off the BAR. You can discount percentages on other offers or look at different channels that lower rate when occupancy is strong.”
Revenue management goes beyond RevPAR. While it’s a popular metric, Mockerman said owners need to pay attention to GRO PAR or gross operating profit per available room. The metric subtracts from room revenue the cost of doing business. “It will show you that if you are willing to sacrifice rate, it will hurt your business in the end,” Mockerman said.
Being smart about rate is critical in maintaining the value of a hotel asset, she said. “It even impacts guest perception.” If room rate is pushed too low, prospective customers may think something is wrong and won’t book.
Mockerman said she has seen hotels use discount programs such as Groupon or Living Social to attract new business by charging rates way below their chain scale segments. “I can understand it if you’re trying to spread the word about a new hotel,” she said, “but a Westin has no business offering $79 a night.”
Total Customized Revenue Management, which can work with any PMS, offers strategic reviews or “deep dives” into a hotel’s revenue management practices “to understand what they are currently doing and how the system is set up. Then we put out an action plan, a road map, to help a hotel increase rate and the value of asset. We have done this for underperforming properties and for those that want a revenue boost.”
Mockerman said when a hotel gets serious about pushing rate, it takes at least 30 days to see measurable results. When a new rate strategy is deployed, most of the hotel’s business is already on the books.
“Rate management has to be an ongoing practice,” Mockerman said. “Hotel rooms are perishable inventory. You can’t resell a room for a day that has already passed.”