In Hotel Valuation practise, we are used to apply few simple and powerful tools such as Price multiples based on common industry data such as RevPar (Revenues Per Available Room), GopPar (Gross Operating Profit Per Available Room), NoiPar (Net Operating Income Per Available Room). As advisor in this industry we also deal with Price per Room in different cities, an easy way to summarise in one single data a more complex set of Price multiples.
There are however two issues that strongly limit this preliminary Hotel Valuation approach: rents and Hotel Capex.
The Hotel rent (or lease) tends to be an strong amount today due to two factors. One: the raise in Real Estate values, which in year 2009 are now finally decreasing but are still much higher in real terms then years ago. Two: the additional reward based on the Hotel economic performance that the Real estate owner demands over the base rent. Rent is therefore becoming an increasing percentage of the Hotel Revenues. As a result, the Hotel Valuation based on RevPar and GopPar which are earnings values computed prior to deducting the value of the rent might be misleading: two Hotel with the same RevPar and GopPar but very different Rent clearly have very different values as the amount of the Rent dramatically reduces the final value of NoiPar. We therefore have to consider Net Operating Profit as the only reasonable P&L figure in a high rent environment.
In addition, should we apply Hotel Valuation technique to existing assets rather than to an Hotel that has to be built yet (which is clearly the most common case), we have to consider that Hotel Capex for renewal and non recurring Maintenance might be a relevant figure in our Free Cash Flow projections.
From a legal viewpoint one might suggest that this additional Hotel Capex is often to be paid by the Real Estate owner and not by the Hotel manager: however we cannot avoid investigating about the amount of Hotel Capex and who will really pay for it. As Advisor in this industry we noticed that the amount of Hotel Capex related to the renewal of important and fashionable premises located in town centre in major European cities might be very relevant with a strong impact on FCF.
The easy way to deal with additional Hotel Capex is to prepare a “after Capex” Hotel Valuation (i.e. an Hotel Valuation as if Capex was already incurred) and then deduct the Capex amount from the “after Capex” Hotel Valuation to obtain an “as-it-is” Hotel Valuation. We consider this technique a dangerous approximation because in the Hotel industry the final Capex is often higher than the budgeted Capex for various reasons: the long timing to prepare an appropriate architectural and technical plan, obtaining all licences, complete works in the centre of a major city; the additional cost of the partial or even total closure of the hotel, plus the cost of financing. That’s why we strongly suggest our clients to rely upon FCF Hotel Valuation technique and leaving Price Multiples as a way to calculate the terminal value only.
In conclusion, today’s Hotel Valuation technique merges deep industry knowledge with Financial forecasting capability and tends to leave the simple RevPar multiple approach.