Jay Litt is principal of The Litt Group, which is focused on
hotel project management and consulting. He previously
served as executive vice president at Waramaug Hospitality
Asset Management in Boca Raton, Florida, and as executive
vice president of operations for Wyndham International and
Interstate Hotels. Over the past 45 years, Litt has overseen
large portfolios involving three- and four-star hotels and
world-class luxury resorts. Reach him at (561) 988-0451 or
Hotels Are in a Class of Their Own
Value-add properties can offer buyers a competitive advantage in the market
By Jay Litt
Hotels are among of the oldest forms of real estate. Before office buildings, before multifamily projects, there were inns and hotels, dating back to Roman times.
People have and will always travel — for vacation,
for work and to visit family. As a commercial mortgage
broker, it makes business sense to understand this
market and the financing opportunities it affords.
Attaining that understanding, however, requires
grasping how hotels create value and why they are so
different from other real estate classes.
Hotels have 365 daily accounting periods. They close
their books every night. Every new day is another
accounting period, another opportunity to sell that
room and earn revenue.
Room rates change on a daily basis. Most other
classes of real estate have a monthly rate and those
rates do not typically change for a fixed period. By
contrast, with hotels, when there is demand for rooms,
they can increase their rates to yield higher revenues.
This makes hotel revenue streams very different from
the cash flows of other property sectors.
Hotels also have other revenue sources beyond renting out rooms. Full-service hotels, for example, have
entertainment, food and beverage revenues that can
include catering and restaurant services; spa, golf and
other recreation revenues; parking and more.
The ability to adjust pricing as needed is an edge
a hotel has over other types of real estate. Nothing
is set in stone. This creates opportunities to exceed
expectations based on prudent management and
REVPAR is an industry term meaning “revenue per
available room.” If you have a 100-room hotel property,
you have, in one year, 36,500 available rooms. If
the total annual room revenue for the property is $5
million, then the REVPAR — $5 million divided by the
rooms available annually — is $136.98.
This makes math easier, given most of the reports
commercial mortgage brokers and lenders see are
based on REVPAR. Among the reports most used by
the industry to assess REVPAR and other hotel information is the Smith Travel Research Report (STR). The
report provides market-specific benchmarking and
analytics data for the hotel industry, which is critical to
understanding the value of a hotel.
Let’s say a 200-room hotel has a REVPAR of $100.
In that case, the annual room revenue would be $7.3
million. A 30 percent margin for net operating income,
from property income, produces income of about
$2.2 million. If the property’s capitalization rate is 10
percent (NOI divided by current market value), then the
property is worth $21.2 million. Let’s assume the property is in poor repair and needs capital to be revived. The
purchase price, then, is low as such.
The STR report shows the market where the hotel
operates has a benchmark REVPAR of $130. So, the
borrower presents a capital plan to renovate the
property, with the goal of making the hotel more competitive so it can reach the benchmark REVPAR.
Attaining full market potential, then, would add about
$2.2 million of additional revenue to the hotel’s balance
sheet. At the same NOI margin of 30 percent, that would
produce an annual income bump of $657,000. With a
10 percent cap rate, this boosts the property’s value by
more than $6.5 million. It’s easy this way to see the
“value add” that a renovation can produce.
Over the past seven years since the last downturn in
the hotel sector abated, very few full-service properties
have been built. Many existing hotels also need renovation. Now might be a prudent time for savvy
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