When
assessing the Value of an Hotel we face an increasing complexity due
to new legal structures among the various components of the Hotel
business, including the Real Estate owner, the company managing the
Hotel and the International chain that applies its label and its
marketing support. This short articles deals with the splitting of
the Hotel Value as a consequence of new legal structures among these
players. Cesare Carbonchi reports from Milan, Italy.
One
hotel, three owners
We
are often involved in assessing the yearly performance and updating
the current market value of an Hotel on behalf of International
operators and real estate investment funds. We analyse the market
trend, we prepare an economic model tailored to the specific
situation and we analyse current performance and potential
improvements. Planning includes full economic and financial
projection for the Hotel that we use as a basis for the Hotel
financial control and for the hotel valuation.
Finally
we get to the “split” issue: the potential economic value of the
Hotel as a whole is often split between the value of the Real Estate
and the value of the company that manages the hotel, as these may be
separated entities. The split clearly derives from the type of
contract signed between the entity that owns the Real Estate and the
entity that manages the Hotel: the higher the rent is, the higher the
value assigned to the Real Estate portion and the lower assigned to
the Hotel management portion.
In
recent deals the situation is getting more complicated as we have a
third entity: the large international hotel chain. Thanks to its
well-known hotel brand, the international hotel chain enters into a
marketing agreement with the hotel management to provide
international reservation system, hotel management skills, financial
control and system support. For these services the entity that
manages the hotel pays the chain a remuneration based on a fixed
amount plus a percentage based on sales and operating profit of the
Hotel, with a vast case of different economic and contractual
structures.
Going
back to splitting the Hotel performance and value, we are therefore
facing a complex structure. We deal with three entities that to some
extend are all the “owner” of the same Hotel.
How
do we assess the performance and the value?
The
performance for the Real Estate investor is typically valued in the
long term as we would expect some yearly cash performance after all
taxes have been paid plus a long term asset capitalisation. The Hotel
Valuation assigned to the Real Estate investor may be calculated as
the NPV of the stream of cash flow deriving from the rent, taking
into account operating expenses related to the Real estate, taxes,
leverage plus a relevant portion as Terminal Value. Leverage and cost
of debt is the key element to manage.
The
performance for the hotel management company is typically valued on
the short to medium term. Accurate monthly financial control is the
key element: performance may change for minimum details such as what
breakfast is served or the way room cleaning headcount is managed
during week-ends. Hotel management and valuation is based on cash
performance. Value may be calculated as the NPV of the FCF of the
Hotel business, net of the rent paid to the Real estate owner and net
of the cost of services paid to the Hotel chain.
We
may also calculate the hotel performance and its value to the
International hotel chain. It may be calculated as the NPV of the
stream of services net of the additional costs that would be incurred
to produce them. What is interesting to note is that this third piece
of value is not totally visible, as it is not that easy to assess
what the real value of the service is. The accounting principles used
to value the goodwill associated to affiliated hotels may be
different among large operators chains and may not be easy to read in
their financial reports.
The
conclusion
As
a conclusion, today's Hotel management requires a complex economic
and contractual structures that imply different financial control
systems and financial valuations. The more complex the corporate and
contractual structure is, the more attention we must pay in assessing
what the economic and financial performance really is besides the
usual RevPar and GopPar indicators. When coming to value assessment,
we must estimate not only what the Hotel performance and value is
but also to whom it really belongs.
Cesare
Carbonchi