4 Myths on Selling a Hotel

Myth # 1: The higher I price my hotel, the more money I will get for it

Unlike what some hotel owners may believe, the advertised list price is not independent of revenue and other hotel valuation factors, and it is NOT the case that if you ask more, you will end up with more.  Asking too high of a price relative to gross revenue and net operating incomes will simply mean hotel buyers will ignore the offering.  The negotiation process is not a set compromise between two values. In today's world of freely available information to compare investment options, every hotel buyer comes fully informed. Buyers consider room revenue, net operating income, price per key, age, condition, market factors, and PIP costs, when they evaluate potential hotel investments. Depending on factors such as brand, condition, and most importantly location, any particular buyer will determine what revenue multiplier and capitalization rate they are willing to pay for any particular hotel acquisition. For example, a Holiday Inn Express close in to a major metropolitan area may be able to command a price 4 times the room revenue. The market is willing to pay more for this product because of its location, age, and condition relative to a PIP.  Meanwhile, older hotels in smaller markets, and lesser performing brands, may not get any more than 2 times revenue, sometimes even less.

Myth # 2: I don’t need to lower the price, just bring me offers

Buyers aren’t even interested in looking at hotel that is listed too far over a reasonable revenue multiple or cap rate. The thinking is that ‘it is a waste of time to deal with it because the seller is unrealistic’. When a seller says they will consider a price that is dramatically lower than the asking price, say $1,000,000 less than an asking price of $4,000,000, but won’t lower the asking price, they are greatly reducing the potential level of interest in their hotel.

Myth # 3: I can always reduce the price later

Pricing a hotel too high at the first marketing of the hotel, wastes the opportunity of initial interest that normally would be there when a hotel is first placed on the market. The longer a hotel is on the market the less interest it receives, even when the price is reduced. If the price keeps falling in small increments, then even when the price aligns with performance of the hotel, if it's been on the market too long, buyers are fatigued by it. Buyers also may assume that something must be wrong with the hotel if it has been on the market for a year or more.

Myth # 4: The ‘right’ buyer will pay my price

While it's true that different potential investors will have different motivations for acquiring specific assets, in today's world it is extremely unlikely to see a huge difference in price from different buyers as long as the hotel is fully marketed by us, or a competent hotel brokerage firm.  The larger price differential we see today is the price a very experienced and financially strong buyer may offer on a hotel, versus what a lesser qualified buyer, who is just qualified enough, may pay.  In some sales however, it serves the seller's interest better to work with the more qualified buyer, when certainty of the sale closing timely is important.  Even though the buyer with more cash down and greater experience and capabilities may pay less, sometimes reducing the risks of a transaction falling apart are more important than the price difference that a less qualified buyer may pay.

More Hotel Seller Myths later ----

- Charlie Fritsch

New Supply Growth Impacts Projections

The Hotel Data Conference was held last week in Nashville TN, hosted by STR (formerly Smith Travel Research) and Hotel News Now.  As reported by HNN Newswire, STR and Tourism Economics forecast a slowdown of growth for the lodging industry. 

Hotel Data Conference by Kerry Woo Photography

          2016

For total-year 2016, the U.S. hotel industry is predicted to report flat occupancy at 65.5%, a 3.2% rise in average daily rate to US $124.12 and a 3.2% increase in revenue per available room to US $81.26. 

“Rate will be the driver of RevPAR growth this year,” said Amanda Hite, STR’s president and CEO, during the conference’s opening general session. 

Among the Chain Scale segments, the Independent segment is expected to see the largest year-over-year increases in occupancy (+0.4%) and RevPAR (+3.6%). In ADR, the largest increases are expected to come in the Economy (+3.3%) and Independent (+3.3%) segments. 

2017
For 2017, STR and Tourism Economics project the U.S. hotel industry to report a slight decrease in occupancy (-0.3% to 65.2%) but increases in ADR (+3.1% to US$127.99) and RevPAR (+2.8% to US$83.51). Also in 2017, supply (+2.0) is expected to outpace demand (+1.6%) for the first time since 2009.

http://www.hotelnewsnow.com/Articles/70505/STR-TE-revise-US-forecast-slower-growth-expected

Supply growth outpacing demand growth is certainly an indicator of the looming supply growth impact on existing hotels, or even on new hotels that are part of the new supply.   Leaders in the hotel industry at the Hotel Data conference noted their concerns about new supply. 

I, personally, don't think anyone in the hotel industry expects hotel developers to maintain such an altruistic view that they would consider what is best for the industry and the local hoteliers before beginning a hotel project. However, I would expect developers to protect their own investment by having a feasibility study done prior to launching into a hotel development project.  Yet, there have been many hotels built without a feasibility study.  Some have been fortunate, others have not.  While predicting the future is dicey, never the less, having a feasibility study done, and researching all of the facts available as much as possible before beginning a new hotel project, is only prudent.

Feasibility Study expert Ed Xanders, of Interim Hospitality Consultants, has this simple rule of thumb that relies on occupancy of the local comp set as reported in a STR report:

40% occupancy: hotels are losing money

50% occupancy: break even

60% occupancy: making money, you can buy a new car!

70% occupancy: profitable, you can buy a new car for your spouse!

80% occupancy:  time to build another hotel in the market

Ed Xanders notes that these occupancy percentage guidelines have to be tempered by the pipeline of new hotels coming in the local market under construction or in planning ahead of your project.  That, and judging changes in demand, and selection of the comp set requires deep experience, which is why developers use Interim Hospitality Consultants, or another feasibility study expert prior to beginning a new project.  Ed and I also discussed the fact that new hotels of strong brands certainly do take market share from older hotels, and therein lies the judgement call of whether a new hotel will be able to drive 80% occupancy in a market that is doing 62%. 

Hilton Starts Development on 10 Tru Hotels by Hotel Management News Room

If compiling a feasibility study that can reliably be used to guide one's decision on development of a new hotel is challenging, judging the impact of a new hotel on existing hotels is even more challenging.

Appraiser's I've spoken with have given up doing impact studies. ‘Risky business that is sure to have someone unhappy with your results’ is what they say.  While quantifying the impact of new hotels on the revenue of existing hotels is a difficult guess, that impact is felt in almost all cases unless the demand increase locally offsets the increased supply.  That has been happening in the last few years in many larger markets as the economy and travel increased.  However, if 'A rising tide lifts all boats', then it could also be said that the tide going out will lower all boats. And when the tide goes out, all the new boats in the market may sink the old boats. 

I know I have stretched this analogy, but if you are worried about the impact of new hotels coming in your local market, consider all of your options now, before the tide changes!  Get all of the available information to help make a decision to hold or exit.  Some of that information will be a hotel sale comparable report.  To get a free hotel sale comparable report, and review your hotels potential sale value, contact one of MBA Hotel Brokers experienced hotel brokers. 

If you are interested in having a feasibility study done, you can check out Ed Xander's company website for Interim Hotel Consultants at: http://www.interimhospitality.com/feasibilitystudies.html

3 Reports Every Hotel Owner Should Utilize

Occasionally a hotel owner will say to me that they rarely even look at the STR, (STR, ie, Smith Travel Research) report which shows ADR, Occupancy, and RevPAR data for the last week to 4 weeks, and the monthly report which goes back for 12 months at least.  Also useful are the franchise ranking report, and the Medallia report of guest satisfaction ranking. Not reviewing this data regularly is a missed opportunity to study your market performance and your hotel's performance, regardless of the size of your hotel, or the size of your market. Doing this can yield actionable knowledge that can help you improve your hotel's performance and maximize revenue.

If your franchise provides STR reports, take advantage of this data. Look at both the weekly and monthly STAR reports to keep your fingers on the pulse of the market occupancy, average daily rate, and revenue per available room. Use the information to answer questions like, are you maintaining market share? Review your pricing, did you overprice or underprice rooms in the last period? If you overpriced rooms, did your occupancy or RevPAR suffer as a result? Or conversely, if ADR was steady but occupancy was up or down, were there any groups, conferences or large events at your hotel or the competitors? Did you miss an opportunity to drive higher rates when you were 100% occupied?

One reason owner’s may not use the STR Report is that they don’t feel that it is an accurate reflection of their market penetration. Usually this is because the hotels used in the competitive set are not true competitors.  So, change the competitive set. STR allows hoteliers to customize their competitive set, with some limitations.  Most brands also will allow you to get 2 STR reports with 2 different comp sets if you are willing to pay a little extra each month.  This can be very worthwhile for some hotels. Choose the hotels that are similar size, age, and chain scale, or those closest geographically.

STR Reports are always scrutinized by buyers before making an acquisition. It’s an important indicator of market demand and supply changes, the hotel’s relative performance, and the opportunity that a buyer may be able to take advantage of through significant improvements or even a brand change, that will allow the hotel to capture greater market share. By monitoring these reports, you can make adjustments and improve performance, maximizing revenue now and maximize value whenever you decide to sell the hotel.

Another report to review is the franchise brand ranking reports, which are published monthly. Use this report to compare your hotel to other hotels in the same brand. How does your customer satisfaction compare? How are you doing in your region? Use this information to discover the categories where your hotel could improve on it's relative performance. If cleanliness is bringing you down, then work with the housekeeping department to improve guest cleanliness ratings. The goal, of course, is to always try to be best in your region or at least to be improving.

Your franchised hotel probably also gets a Medallia report. Based on guest satisfaction surveys, the Medallia report will provide insight into different areas of the guest experience. For example, the speed of check-in, staff friendliness, comfort of the bed, etc. Medallia also provides trend analysis and a tool emphasizing frequency of common keywords. 

Use your franchise reputation management portal, if available, to link to all third party online travel agencies, social media, and other sites so that you can manage your online reputation from one central location. If your franchise does not have a built in reputation management portal, keep a list of all sites where your hotel is listed to check manually. Create alerts, so you get notifications when there are new reviews, such as on TripAdvisor, Yelp, and Facebook. For sites without alerts, try to check twice weekly, if not more. Maintain your online reputation by responding, courteously, to all reviews. Take action based on reviews to make improvements in guest experiences. For example, friendliness or cleanliness can be addressed with re-training, or avoid long check-in lines by anticipating check-ins and having adequate staff on hand. 80% of travelers now look at a hotel online before booking. If your property had bad reviews, or worse – bad reviews without any management comments or explanations, then you are at risk for a decrease in business.

In the service business of hospitality, utilizing the information provided by these reports will inform better management decisions to improve guest satisfaction and property performance.  In the next Blog, we'll discuss some simple revenue management techniques and data.

‘Till Next Time,

Charlie Fritsch 

P&Ls: Put Garbage In, Get Garbage Out

As a broker, the quality of the profit and loss statements, and quality of the record keeping in general are an asset whenever you decide to exit a hotel investment. First of all, it should go without saying that only the revenue that is shown on the statements is used in any valuation of the hotel.

The old adage, “garbage in, garbage out” applies to a P&L statement. As a broker, to help you get the most return on investment, we want the opposite. Put in quality data, to get quality intelligence out.

The level of detail in the P&L helps to identify any add backs to the net operating income. Keep records of all capital items purchased and note whether the capital expenditure item was expensed, i.e. written off 100% in one year. These expenses are added back to the net income, as well as any other one time unusual expenses. Other items that are added back are owner compensation, and of course depreciation, amortization, and interest on all debt that the hotel is paying. Any expense that is added back can be used to increase the value of the hotel in a capitalization rate valuation, and bring a higher price at the sale.

Having expense line items, such as utilities, broken down into specific line items, like gas, electric, auto fuel, phone, cable, internet, etc. are important in identifying any expenses that may be able to be reduced in the future. For example, the electricity expense, could possibly be reduced by replacing old inefficient equipment, like guest PTAC units, with new, more energy efficient equipment that will save energy and might even generate energy tax credits.

Breaking down labor is also important to help a buyer and/or lender understand the hotel operations and possibly identify opportunities for the buyer to reduces expenses in different departments, i.e. maintenance, sales, or administration.

As a hotel owner, more detail in your profit and loss statements provides the basis for well-informed decisions in operating your hotel efficiently. The bonus is that when you go to sell, the buyer and buyer’s lender can make confident conjectures for future performance and net operating income, getting you the most for your asset.   

If you are interested in a hotel valuation, request one from our website here.

'Till Next Time,

Charlie Fritsch

5 More Money Saving Accounting Features for Hotels

Accounting should be able to provide a hotel owner reliable insight into the operations and financial well-being of their business.  Insightful reports must be available without delay all the time to all key personnel without the owner or others waiting for their accountant to get around to creating the reports.  To operate your hospitality business efficiently, here are some more features available in a good accounting program:

1. Strong Security – With a web-based accounting program you want to know that your data is secure. Data should be kept only on the server and there should be added security measures like encrypted communications and database encryption. Also, advanced security features within the software should allow you to control when and where your staff access the system. Your accounting software should also have the ability to let you assign specific roles and limitations to deny or grant access to individual line item accounts and processes. This specificity of control allows you to delegate more efficiently without compromising confidential information.  You control who sees what.

2. Drill Down Reporting – Have you ever been reviewing past profit and loss statements, and seen an unusually high expense? If you have to go track down invoices, you’re wasting your time. Look for a program that has drill down reporting. ‘Drill down’ means you can easily click on one journal entry and it seamlessly opens another inquiry screen until the original line item entry and even the document is revealed, and you can see who made the entry, or who approved it if it's approved.  Perhaps there was a large party which required extra supplies for that time period. With drill down report, you can accelerate your decision-making with quick access to past information and provide insights into future needs. 

3. General Ledger Consolidation – You can integrate financial reports across multiple hotels, still keeping separate books, to get consolidated financial reports. Use these reports to get an overview of your entire portfolio's performance in any period, or one grouping of hotels, with support for multiple ledgers. Also, it’s a great tool to compare hotel sets within your portfolio. To do this, maintain the three C's, same Chart of Accounts, same Calendar year, same Currency, at the hotels to be rolled up into consolidated reports.

4. Advanced Financial Reporting –Programs with advanced financial reporting offer integrated reporting tools which are customizable so you can design financial statements that are tailored to your hotel(s) and create multiple budgets for different scenarios. Take advantage of built in financial reports which provide year-over-year comparison and budgets versus actuals, or show expenses as PAR or POR, for a deeper understanding of operations. 

5. Integrations – Consolidate the tools you use to manage your business more efficiently with other products which integrate with certain web-based accounting programs. For instance, manage employ functions with an employee portal. Other simplifying integrations available include Accounts Payable Automation, Microsoft Office 365 and Power BI, to list a few. 

We will be hosting a free live webinar on how to get more from your hotel accounting on Tuesday August 2^nd. I hope you join us for this educational event focused on improving hotel accounting efficiencies. Register at http://mbahotels.com/?page=webinar_register

What are your thoughts on or frustrations with your current hotel accounting program?  Are you looking for a better solution?  I’d love to hear from you. Email me at Charlie@mbahotels.com.

‘Till Next Time,

Charlie Fritsch

www.mbahotels.com

5 Money Saving Measures Available with a Hotel Accounting Software Upgrade

In my 20 years of experience in the hospitality industry, primarily as a hotel real estate broker, I have seen thousands of hotel profit and loss statements. Over these years many successful hotel owners have grown their portfolio from one or two hotels, to 10, 20, or 100 hotels. One challenge of this growth of a hotel portfolio is that certain systems and ways of operating one or two hotels become dysfunctional or obsolete as an ownership or management company is managing 5 or more hotels, even if they are limited service hotels.  Full service hotel operators of even just one full service hotel may benefit from upgrading their accounting.  Almost all hotels have had their front office software updated in the last 5 years, so why would you still operate with the same old PC based or even web based accounting programs that have not kept up with the fast paced advances of the latest technology.

Here are Five Ways to Profit More by Upgrading Your Hotel Accounting:

1. Use the three C’s: Calendar, Currency, and Chart of Accounts 
   The main advantage of using the same Calendar year, Currency, and Chart of Accounts across your hotel portfolio is that the books can be easily consolidated with a more sophisticated accounting software. A thorough profit and loss statement for the portfolio can indicate the financial health of the portfolio as a whole. Individual hotels can also be compared side by side; this is especially useful with hotels of the same brand or brand family to spot increases in supply cost or sliding performance. The Uniform System of Accounts for the Lodging Industry, Eleventh Edition, is an excellent resource for sticking to clear, consistent, and thorough chart of accounts.  For the growing hotel portfolio, having consolidation points of P&Ls can provide new actionable intelligence that you miss out on with old school separate accounting of each hotel. 


2. Put In More Detail for More Profitable Decision Making 
   Use detailed line item income and expense categories in order to better understand the health of the business cash flow. The deeper analysis of expenses gives you information to make cost saving adjustments. The result is better budgeting, more control of your expenses, and in the end, more profits. For example, by more accurately predicting the hotel’s needs, you can try to source the best deals for the busy season, but not overspend on inventory in the low season.  Limited service hotel operators may lump payroll costs into one-line item.  Breaking payroll out by department, and tracking unemployment insurance, worker’s compensation insurance, and all other payroll costs separately is also necessary to control those costs.


3. Use Efficiency and Automation to Save Time and get Paid Faster 
   A robust accounting platform has built in automation of processes to save the organizations most valuable people's time. Use these advancements to control payables and receivables with more accuracy, have faster turnaround on invoices, and get paid sooner on direct billed accounts. Manage payables more efficiently with new software and specialized service providers of automated AP processing, that can reduce your AP processing costs by 60%, while still giving you absolute control over what gets paid and when.  Meanwhile the improved efficiency means your employees can get more done in less time, reducing payroll costs, and allowing them to attend to guests needs and other more important jobs that drive revenue.


4. Your Books Should Be Accessible Anywhere
    Accounting software that requires manual backup on a hard drive is at risk to theft, destruction, corruption, or loss. But the real advantage of a cloud based (online) accounting platform, is that it is accessible anywhere, allowing key personnel to be informed at all times. The responsibility of the security and backups falls to the service provider. 


5.  Delegate to Your Employees 
   Take advantage of accounting software that includes fine-tuned user level security settings in order to delegate very specific tasks to lower level employees, like a night auditor, while keeping sensitive information inaccessible to them.  With this feature, owners and management companies can have night auditors or front desk staff enter receivables or do other specific tasks, without seeing or accessing sensitive information like profit and loss statements or specific account information.

You may be thinking, “Right, but I can't afford such a sophisticated accounting system!”  That's where you would be wrong.  You may also say a sophisticated system like this will be too difficult for me or my people to learn.  However, new training methods like YouTube videos and Universal Search and Help guides make learning a new system easy, and are also available with at least one new hotel accounting platform that YOU CAN AFFORD, and YOU CAN'T AFFORD NOT TO TAKE ADVANTAGE OF. 

Exactly what that system is will be revealed in our Upcoming Webinar on Tuesday August 2nd. Stay tuned for that announcement

Till Next Time,

Charlie Fritsch

www.MBAHotels.com

When 'Git It Done' Applies to a Transfer PIP

As a hotel broker, one point of contention I see in many deals is the arrival of the franchise property improvement plan, a.k.a. the PIP. Hotel franchise companies often take advantage of the license transfer to require more extensive renovations than is required of the seller to continue with the flag. Franchise companies know that hotel buyers can obtain financing to cover larger renovations included in the acquisition loan. In fact, for the buyer, financing the PIP in the new mortgage is indeed the best way to finance the cost of a PIP.

However, a large transfer PIP can come as a surprise to both buyer and seller, especially if the seller had no outstanding PIP list items. The contract sale price is negotiated with an expectation of the cost of franchise required renovations in mind. When a PIP arrives larger and costlier than expected, it can disrupt the deal. If the actual PIP is significantly higher than the expected cost of the PIP, the contract price may be re-negotiated as a result.

It is sometimes possible to negotiate or delay certain PIP items with the franchisor. While for various reasons, the seller and/or buyer may consider this strategy, it is usually in the new owner’s interest to renovate the hotel and complete the PIP as soon as possible after closing.

While a hotel may be performing well at purchase, delaying improvements may jeopardize current market share or future growth. Meanwhile a renovated, updated hotel can usually drive rate and occupancy. The goal with any renovation is to make back what was spent and more, adding to the overall ROI. Increased revenue, and renovations also increase the value of a hotel. Franchise required PIP items usually do just that, although sometimes there are simply brand standard items that don't really add to the guest experience, but simply distinguish the brand from other. Those kinds of PIP items are prime targets for owners to negotiate or delay, whereas all renovations that improve the guest experience and satisfaction, should be accepted and done with enthusiasm.

One advantage of SBA 7A and SBA 504 loans is that they can include PIP and renovation funds in the mortgage. So it's my advice to buyers to not begrudge the PIP, and include PIP costs and funds for any non PIP renovations required in the acquisition financing when possible, and 'git it done'.    

If you like my blog, please share it with friends and colleagues. 

'Til Next Time,

Charlie Fritsch

www.mbahotels.com