You're looking for a hotel acquisition. You've identified some target criteria;
- States
or markets of interest
- Limited,
Select, or Full service
- Possible
brands
- Price
limit
- Number
of rooms, etc.
You may also have in mind target parameters such as cap
rate, price per key or a room revenue multiplier that fit the product and
market.
However, I'd say it's also important to match your skillset
and capacity with the opportunity. Not
only financial capacity, but the time required from you and your team to
acquire, execute your strategy, and operate the hotel. A performing hotel with steady revenue and
strong profits may only need a standard PIP, or none at all in rare cases, to
stay at the top of its market segment and improve guest reviews and drive ADR.
This type of investment offers predictable returns on investment and is lower
risk for the owner, as well as the lender. However, for the well performing
hotel, the buyer may pay a higher price per key and revenue multiplier, in
keeping with the lower risk. Is that the
right investment for you?
An example of this kind of asset is the Holiday Inn Express
Limerick, Pennsylvania which I sold for $7,225,000. in 2012, when the industry
was just recovering from the lean years. At the time of the sale, the hotel was
only 2 years old and was achieving well over 100% RevPAR penetration of its
competitive set, and revenues were still climbing although a new Hampton was
being built nearby. The buyer was an experienced business person, but this was
their first hotel acquisition in the U.S.
The hotel sold for $101,760 per key, which most buyers found to be a
higher price per key than they could accept in a smaller suburban market, yet
it was just 3.46 times room revenue, and sold at a high cap rate. It was a good match of the opportunity to the
experience level of the buyer, and he also retained the existing successful
experienced G.M., which was a good decision.
The sale was a win-win for both buyer and seller.
More experienced hotel operators with the time and resources
for a turn-around re-positioning opportunity may look for a hotel that is
under-performing in its market, and likely in need of a major renovation PIP
and/ or re-branding. There’s greater risk but also greater potential profits,
IF the buyer can execute the re-positioning as planned.
The Comfort Inn Fort Mill, South Carolina was in
receivership, then bankruptcy court when MBA Hotel Brokers sold it, and it
needed major repairs and capital improvements. The buyer was a hotel industry
veteran with past experience overhauling mismanaged and under-performing hotels.
The sale price per key was $21,895, but the PIP was estimated to exceed
$1,000,000. While this experienced
operator was successful in bringing the capital needed to do the big PIP, and
had the skill set necessary to organize the renovations needed and get them
done in a timely fashion, we have seen some other buyers who have not been
successful at this for multiple reasons. Other than uncontrollable changes in the local
market, often in these cases the buyer assumes they can get the capital to do
the big PIP later, or just puts it off, and eventually letting a hotel decline
by not keeping up with PIP requirements, competition with new hotels, and
market expectations, leads to a loss of business and failure to compete, with
ever declining RevPAR.
Finding the right investment for you will be a match of your
desires and your capacity, financial and otherwise, and the skill set of all of
the buyer's players, partners, management company, professional advisers, etc.,
with the opportunity of the hotel. Most hotels have room to improve performance
in some way, it’s just a matter of scale and risk. So it's not only “What's in
your wallet?”, but what's in your skill set and the new ownership's level of
commitment to the success of the acquisition that matters. If you are buying a hotel with partners,
matching partner expectations, capital, and skill sets, with the project and
keeping everyone working together with the same goal in mind from the beginning
to exit, is critical to the success of the hotel investment. There are hotel investment opportunities in
every phase of the industry and economic cycles. Finding the opportunities that fit is the
ongoing challenge everyone faces.
Honestly assessing the limitations of your access to capital, skills,
focus and determination, as well as market limitations, before you begin a
hotel investment search is the most important recommendation I could make.
Till next time;
Charlie Fritsch
