I don’t know if you are buying a hotel, if you are selling one or if you are just considering either, but one of the biggest questions you will face is how do you value it? And this article will help you answer it in 60 seconds or less by using simple guidelines and rules of thumb that absolutely anyone can easily understand.
Before we start it’s important to keep in mind the guidelines we will be discussing here are just that: guidelines. They should not be considered foolproof rules but tools to easily determine a price range for hotel valuations.
Essentially, there are three broad approaches to Hotel Valuations:
1.Income Capitalization Approach: The value of an income-producing property is determined by the “present worth of future benefits” or a multiple of its net return. Within this approach, there are several techniques and considerations which we will not consider in this article as we want to concentrate on “quick and dirty” approaches.
2.Cost Approach: Mostly useful in determining if it’s better to buy or to build. This approach is not heavily favored because it does not consider income or economic factors, just the cost of buying an existing property vs building one.
3.Sales Comparison Approach: Is the most useful for our purposes here. It focuses on determining ranges and pricing momentum based on prior sales of comparable hotels.
Rules of Thumb for Valuing Hotels in 60 seconds or less
Room-Rate Multiplier
ADR or Average Daily Rate is one of the better known KPIs (Key Performance Indicators) of the hotel industry and this rule of thumb essentially assigns a worth of 1,000 times the ADR per room, or if you are familiar with the RevPAR (Revenue per Available Room) it also sets the value at 3.5 to 4.5 times the annual room revenues (RevPAR x # of Rooms x 3.5-4.5).
Value = ADR x 1,000 x Number of Rooms
An example would be if we had a hotel charging on average €140 per room/per night and a total of 35 rooms, that hotel would be worth roughly €4,900,000.
RevPAR is calculated by multiplying the ADR by the Occupancy % or by dividing the hotel’s total room revenues by the number of rooms. Both of these are hard to know before engaging in direct conversation with a prospect (if looking to buy) and thus defeat the purpose of a 60 second valuation. However, if you don’t have a ready-made database of hotel transactions and/or KPIs that includes your target (which is highly unlikely) then, fortunately, companies like Christie & Co publish free general reports with KPI’s for the industry which can serve as benchmarks.
The glaring omissions of using a RevPAR multiple to value hotels are that it does not take into account CPOR (cost per occupied room) or revenues generated outside of rooms such as restaurants, events, parking, spa, etc. But if you have more than 60 seconds then you could calculate the ARPAR (Adjusted Revenue per Average Room) which takes both costs and additional revenues into account. Moreover, if you have the time or access to these you should just go all the way and do a proper Income Capitalization Approach.
The Bottle/Can Soda Multiplier
This is a fun one and very “exact” rule of thumb. Each room is worth 100,000 times the price of a bottle/can of soda either in the in-room minibars or in the dispensing machines of the hotel in question.
Value = Bottle/Can Price x 100,000 x Number of Rooms
Using our previous example and assuming €1.5 per soda, then the hotel is worth roughly €5,250,000 which isn’t too far from our first prediction. Unfortunately, in-room minibars are disappearing as they are a constant headache for hotels and not really a guest priority.
Also, it’s a pretty whacky approach to rely on. More than anything, it’s a curiosity that does have a small degree of correlation when it comes to hotel valuations.
Price Per Room Sales Comparison
In a simple world, you’d be able to compare the sale/purchase of the hotel in question to a previous sale with the exact same conditions. However, since we live in a complicated one, we must simplify as much as possible and when it comes to hotels, we must break it down to rooms typically.
This technique allows you to compare apples to oranges (sort of) by breaking down historical hotel sales to a per room basis making possible the ‘unfair’ comparison of a 100 room hotel sale to a 35 room hotel sale, for example. Essentially all you need to do is divide the total sales price by the number of rooms to arrive at a PPR (Price Per Room) value.
PPR = Sale Price/Number of Rooms
An example would be if you were considering buying the 35 hotel we have been discussing and you know/discover that 6 months prior, just a few blocks away a much larger 100 room hotel sold for €14,500,000. This boils down to €145,000 PPR, so a 35 room hotel should be around €5,075,000.
If you have ever shopped around for an apartment or even to rent one you might remember how easy it was to determine the market value. Especially if we are talking about a high rise with many virtually identical options. If several with similar, if not identical, conditions were selling/renting for one price you would not pay more for another without a specific reason as to why it's above the market ask. The same applies to hotels but since rarely two are similar this is a very general approach that essentially considers nothing but historical sales price divided by the number of rooms. This allows as close a scenario as possible to the above mentioned apartment hunt when it comes to hotels.
The downside of this approach is that it assumes that all rooms are created equal, not considering very important factors such as the revenue each room generates, the quality of the construction and FF&E (Furniture, Fixtures & Equipment), something as subtle as the underlying incentives of that previous purchase, or a political event, such as Brexit or anything that does have an effect on the market at the time the comparable transaction was/is taking place.
Putting it all together
If you were really considering our ‘imagined’ example hotel to either purchase or price to sell, then the best starting point would be to quickly calculate all three approaches giving us three different values of 1) €4,900,000 2)€5,250,000 & 3)€5,075,000 so unless the asking price (in case of buying) or expectation (to sell) is nearby or under these values, we should move on and consider other options. In this case, the 60-second valuation will have served its purpose - naturally, there are many other more precise methods to consider if it turns out the transaction warrants further analysis.
If you have further questions or specific scenarios that don't quite fit these methods such as really small boutique hotels/B&Bs or unique hotels, feel free to reach out to me and I'll do my best to point out how to adapt these rules of thumb calculations to your situation.
Works consulted for writing this article:
deRoos, Jan, and Rushmore, Stephen. "Hotel Valuation Techniques"
Korobkin, Alexey. "Hotel Valuation Techniques"
https://www.hospitalitynet.org/opinion/4050645.html
